Inflation dynamics and Central Bank policy to shape the Dollar’s outlook – Month in Review: May 2023
Macroeconomic Environment Review
In May, the US Dollar performed strongly, with the US Dollar Index rising by 2.8%, marking its second rebound this year. This indicates a shift from a bearish trend to a more range-bound market for the USD, as the DXY traded between 101 and 105. The overall trading pattern of the USD this year, combined with the varied performance of individual currencies, suggests the absence of a dominant theme in the FX markets. However, there are signs that cyclical trends are changing, which could impact all currencies.
The economic recovery from the COVID-19 pandemic and uncertainties surrounding the Ukraine war are still evident, but that recovery is primarily driven by the services sector. Manufacturing activity and sentiment, on the other hand, appear to be more subdued. Recent manufacturing surveys for May indicate overall stability, but the underlying details are less encouraging, with declining new orders and rising inventories. Additionally, a majority of countries are reporting contractionary manufacturing conditions, despite the initial support provided by China’s reopening. This softening sentiment in manufacturing reflects the effects of monetary tightening and worsening business operating conditions. While a severe global recession is not expected, the weakening manufacturing conditions are likely to gradually offset the strength of the services sector. Among major economies, the Euro-area and its neighboring countries are facing the greatest challenges, while Japan shows potential for outperformance, and the United States falls somewhere in between.
Another notable shift is in inflation dynamics. Previously, the US led the disinflation trend, while the Euro area lagged behind. However, the Euro area is now catching up, while the US experiences persistently tight labor market conditions, making further progress in disinflation more difficult. Although these growth and inflation shifts are not yet drastic, they are likely to impact central bank policies. The European Central Bank is expected to raise interest rates by 25 basis points in June, but there is a high possibility of a pause thereafter. Conversely, the Federal Reserve is expected to pause its rate hikes in June, with a potential indication of further hikes in either July or September.
Monthly Performance Review
During the month of May 2023, AENAON Syncro Strategies generated the following total returns net of fees:
Across the spectrum of our benchmark indices, our strategies’ performance during May was quite positive. As a comparison, the US S&P 500 equities index gained 0.25%, the Barclay Hedge Fund Index posted a -0.85% decline, the Barclay CTA Index added 0.18% while the other benchmark indices can be seen on the chart below.
Chart 1: Monthly Performance vs. Benchmark Indices – April 2023
Charts 2, 3 and 4: Inception-to-Date Performance vs. Benchmark Indices
You can always review our updated factsheets at the following Fundpeak links, with monthly performance updates and statistics since inception:
