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14 May 2021

FX Daily: Rotating from growth to value

2Q21 was always going to be the quarter where financial markets would do battle with inflation. And here we are. The ongoing spike in inflation is also encouraging a rotation out of growth stocks, such as Big Tech, and into value. The current question is whether this shift is an orderly or disorderly one. FX markets will have to tread gingerly

USD: Handle with care

We are pleased to see that the dollar did not enjoy too much follow-through buying after Wednesday's above-consensus US CPI. And some stability in equity markets certainly played a role here. But we are a little concerned that 2Q's battle with inflation may mean that the rotation from growth to value investing may see some more vulnerability in US Big Tech.

Here higher inflation is taking its toll on the expected value of real future earnings here. Growth stocks, such as Big Tech, are valued more off future earnings growth and the rotation from growth to value stocks is already evident in this year's performance, where the S&P 500 is up nearly 10% versus Nasdaq's 2%. The challenge for financial markets will be whether this is an orderly or disorderly rotation - e.g. whether Big Tech just under-performs or brings the overall market lower.

We certainly think FX markets should keep a close watch on Big Tech right now, where any sharp correction can reverse recent trends, such as weaker $/Commodity pairs. For today, the focus will be on US April Retail Sales and Industrial Production numbers, plus consumer sentiment for May. Retail sales should remain strong after the bumper rise in March. We'll also get another perspective on inflation expectations from the University of Michigan survey. Here 5-10 year inflation expectations are running at 2.7%. We are core $ bears but would like to see DXY quickly breaking back below the 90.45/55 area.

EUR: Focus on the April ECB minutes

EUR/USD has held up reasonably well, which has allowed some of our high conviction views, such as CZK out-performance, to make good progress. For today, we will get to see the minutes of the April 21-22nd ECB meeting. As you will recall, this was a relatively quiet meeting, where the ECB was not drawn on its PEPP buying plans for 3Q21. We doubt the ECB would want to offer any more clarity on this in its minutes - but any hints that some tapering could be on the table might offer some marginal support to the EUR.

Elsewhere, the PLN is enjoying some strength and EUR/PLN is testing the April lows. Helping this move is a less dovish NBP and what is being read as a benign ruling from the Polish Supreme Court on the FX mortgage issue. Today sees Polish 1Q GDP readings and a final April CPI reading. Any upside surprises here could strengthen the PLN rally.

GBP: So far, so good

GBP is largely holding onto recent gains and progress on the Indian variant of the virus is yet to have any impact. Yet this needs to be watched. EUR/GBP did reject levels down at 0.8560 earlier this week quite strongly and we tend to favour more consolidation for the time being. Just linking to our earlier point, in the bigger picture we do think GBP will derive benefit from the shift from growth to value investing in equity markets, where US markets are dominated by tech, but the UK has bigger weights to value stocks such as financials and energy.

AUD: Iron Ore slump suggests caution

After surging 10% on Monday, Iron Ore is now falling 10% today. Driving this move seems to be the intervention of Chinese policymakers, wary that a surge in commodity prices could undermine the recovery. Here, officials have raised margins and imposed fees on steel trading and made it clear that speculators will be frowned upon. The synchronised recovery in global demand suggests the rally in commodities is an enduring one. But for the short term, corrective forces are at play - which could take its toll on the AUD - a key exporter of iron ore. Failure of AUD/USD to regain the 0.7740/50 area today, warns of some potentially sharper corrective losses under 0.7675/85.

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