Following Thursday’s sharp rebound, risk assets have remained supported in the first half of Friday’s session with the DAX touching a new all-time highs and US indices rising. Crude oil rebounded, and the safe-haven Japanese yen sold off as traders unwound their bearish bets opened earlier in the week. Treasury yields advanced following a few days of weakness, potentially resuming their longer-term uptrend. The US dollar softened against most currencies except the safe haven Japanese yen and Swiss franc, underscoring Friday’s risk-on sentiment. But this comes on the back a sizeable rally for the Dollar Index, and sharp sell-off for crude oil and a few other risk assets. So, I wouldn’t be surprised if the greenback resumed higher, which could then weigh on some buck-denominated assets, while the wider financial markets could be hit by bearish sentiment.
On Friday, sentiment was positive in part because of US President Joe Biden doubling his goal for vaccinations in the US, raising hopes that the world’s largest economy will recover quicker. This helped to offset some concerns that had weighed on sentiment earlier in the week. But there is always the risk we may see some of the volatility return as we transition to the US session and look forward to the final week of the first quarter.
While confidence grows about the pace of US economic recovery, there will be plenty of reasons why investors might proceed with caution. These include Europe’s slow progress on vaccinations where the virus has been rising sharply again, as well as ongoing disputes over supply of Covid vaccines and concerns over China’s relations with the West.
The immediate risk facing some markets – most importantly crude oil – is the traffic block on the Suez Canal. If the situation gets resolved at the weekend, then expect oil prices to drop back as supply concerns ease.
Due to the persistent demand worries and recent drop in oil prices, some analysts are expecting that the OPEC+ will roll over their current supply curbs into May at their meeting on Thursday April 1. If so, this should provide some support for oil prices.
Meanwhile the next big catalyst for the dollar is the monthly nonfarm jobs report, due for publication on Friday, 2nd April. We will also have important PMI data from China and elsewhere during the week, as well as the latest Eurozone inflation numbers in mid-week.
As we are heading into the last week of the month and first quarter, expect some window dressing. But a holiday-shortened week (with Europe as well as a few other countries observing Good Friday), trading volumes could be lighter. Meanwhile daylight-saving time shift for Europe at the weekend means we will be back to 5 hours behind New York again.
Dollar’s breakout key risk for markets
Now with the Dollar Index making higher highs and higher lows, this is potentially bad news for buck-denominated assets like metals and crude oil. The DXY broke its bear trend and on Thursday and moved above the 200-day average:
Source: ThinkMarkets and TradingView.com
While it weakened slightly on Friday, for as long as the breakout above 92.50ish holds, the path of least resistance would remain to the upside. We will only turn bearish on the dollar if it creates a key reversal pattern or goes back and breaks below its most recent low at 91.30.
Economic calendar highlights
: US Consumer Confidence (CB) and speeches by FOMC members Quarles and Williams