Do not fight the central bank
|Today's morning note
The German IFO index rose to 99.2, the highest in 2 years which confirms the EU recovery theme. Meanwhile, US Consumer Confidence fell to 117.2 as expectations pulled back. This shows how the US is further along with the recovery and maybe past the peak in its data.
Furthermore, comments from Fed Vice Richard Clarida highlighting that the recent 4.2% CPI print was surprisingly higher than the Fed’s expectations and that they may be at a point where they can begin to discuss scaling back the pace of asset purchases pushed benchmark yields on US Treasuries to 1.55 and the US Dollar to a 4-year low, with gold prices topping $1900 in early session today, as traders continue to believe that inflation remains the single biggest threat, and there is no better hedge against inflation than gold.
There will be a lot of focus on tapering at the upcoming FOMC meeting on June 15-16.
USDCNH back above 6.4000 this morning but the China fix was in line which will encourage the market to sell USDCNH as PBOC clearly not pushing back too hard against Yuan strength yet. PBOC supporting USDCNH is likely to lead to USD selling in G10 on London open as we saw yesterday.
We are approaching month-end and with a holiday in the US on Monday most month-end flows are likely to executed Thursday and Friday. We could see some value date month-end USD demand today.
Plenty of EURUSD will have been bought through 1.2245 and 50 yesterday as the previous high and barrier levels were broken. EUR likely to be lower through the June 10th ECB meeting as the market expectations for PEPP tapering are too high given Lagarde’s comments last week. Difficult to be short EURUSD with USDCNH under pressure so better to play this theme in the crosses. EURNZD has topped out above 1.7000 a few times.
ECB could prove similar to the Fed in showing a willingness to look through temporary inflation spikes and to continue supporting the early stages of the recovery. It has proved wise to listen to Powell rather than the more hawkish members such as Kaplan. It may also prove wise to listen to what Lagarde is telling us.
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