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Weekly FX Commentary May 4, 2021: Strong US spending data temporarily supports the USD

Strong US spending data temporarily supports the USD

After losing ground against most currencies over the last few weeks, the US dollar regained strength last Friday, driven by higher-than-expected US personal income (+21.1% MoM in March; vs consensus: +20.3%; previous: -7%) and personal spending (+4.2% MoM in March; vs consensus: +4.1%; previous: -1%), as most Americans received stimulus checks under the American Rescue Plan Act. The greenback was also supported by Q1 GDP growth figures, which indicated a slightly faster-than-expected recovery at +6.4% QoQ annualized (vs consensus: +6.1%; previous: +4.3%).

On the other hand, the Fed’s announcements earlier last week did not surprise the markets as Fed Chair Jerome Powell reiterated that their low interest rate policy and bond purchase program would remain unchanged for the time being and until “substantial further progress” is made towards a full economic recovery. Powell also mentioned that any near-term increase in inflation would likely be “transitory”.

Among major currencies, the Japanese yen weakened the most against the US dollar over the last 7 days (-1.3%) as the US 10-year Treasury yield went from 1.57% to 1.60%. By contrast, the commodity-linked Canadian dollar appreciated the most against the US dollar (+1.7%) thanks to a rise in oil prices as WTI gained 4% in one week.

China’s National Bureau of Statistics (NBS) released slightly lower-than-expected Purchasing Managers’ Index (PMI) data for April last Friday with a Manufacturing PMI reading of 51.1 (vs consensus: 51.8; previous: 51.9) and a Non-manufacturing PMI reading of 54.9 (vs consensus: 56.1; previous 56.3). However, PMI figures remain in expansionary territory as China continues to enjoy a strong economic recovery. As such, the announcement had no material impact on the Chinese currency.

The Week Ahead

US April nonfarm payrolls (consensus: 925k; vs previous: 916k) and unemployment rate (consensus: 5.8%; vs previous: 6.0%) will be announced on Friday. This will be a good indicator of how strongly the US economy is recovering. Better-than-expected results would likely increase the upward pressure on US Treasury yields and supports the USD.

US March trade balance, announced later today, is also to be watched (consensus: -$74.5bn; vs previous: -$71.1bn). A larger-than-expected deficit would support exporter currencies relative to the US dollar, like the euro.