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Holiday Overview: The State of Play

Holiday Overview: The State of Play

FX:  The dollar traded mostly higher last week.  I suspect more near-term gains, but I am less convinced than I was a week ago.  Given the FOMC minutes and more recent commentary from Fed officials, I suspect the market is exaggerating the chances of two cuts this year.  That had been my leaning too, but I think the recent resilience of the labor market and sticky inflation has shifted the views at the Fed.  The futures market is pricing in a little more than a 37% chance of a second cut.  That is down from 76% on May 17.   There is room for further adjustment.  The dollar traded above JPY157 for the first time since May 1.  The market is likely to turn more cautious as JPY158 is approached.   The euro peaked on May 16, slightly shy of $1.09.  It fell to nearly $1.0810 last week.  The daily momentum indicators are turning lower. A break of the $1.0785 area would lend credence to a top being in place.  Sterling reached a two-month high near $1.2760 on a softer CPI report, which saw the market push out the expected first cut to November.   Despite the softer May flash PMI and a large decline April retail sales (-.23%), sterling recovered almost back to the week’s high ahead of the weekend.  Prime Minister Sunak called national election on July 4.  The Tories are expected to lose handily after being office for around 14 years.  The US dollar frayed support near CAD1.36 last week and recovered to almost CAD1.3750 before selling off before the weekend to slightly below CAD1.3660.

Rates:  The US two-year yield bottomed in mid-May around 4.70%.  It reached near 4.96% last week.  The high for the year was set at the end of April near 5.05%.  The US 10-year yield bottomed near 4.30% in mid-May and reached 4.50% last week to test the 20-day moving average.  This month’s high was near 4.69%, and the high for the year was seen on April 25 near 4.74%.  The US 2–10-year yield curve became more inverted last week.  The 2-year yield is about 45 bp higher than the 10-year and that is the largest premium (most inversion) this year.  Yields in Europe and Asia rose.  The 10-year JGB yield rose above 1.0% for the first time in a dozen year. Japan’s 30-year yield rose to almost 2.2%.  The last time it was seen was in 2011.  Since the middle of April, the US 10-year premium over Germany has fallen from 218 bp to about 185 bp last week, a two-month low.   The US two-year premium peaked in mid-April near 205 bp.  It fell to about 183 bp in mid-May.   Note that the market is pulling back from its aggressive outlook for the ECB.  Earlier this month, the market had been hovering around discounting three ECB rate cuts this year. It as scaled back to two cuts and about a one-in-three chance of a third cut.  


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Marc Chandler
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.
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