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Inflation Alert

Published 05/12/2021, 01:15 AM
Updated 07/09/2023, 06:31 AM

by Adam Button

The tech wreck made way for the Dow to join the selloff, after reusrging inflation signs lifted yields at the expense of NASDAQ and bond prices (higher yields). But yesterday's pro-cyclicals rotation died down, dragging the Dow and S&P 500 by 1.5% and 0.9% respectively, while USD lost most of its ground gained earlier.

Metals are also making a bounce, ahead of today's crucial US CPI release. The big miss in nonfarm payrolls on Friday led to some soul searching in markets but little in terms of a lasting move. Sterling surged on Monday after a middling mandate for Scottish independence. Subscribers made +300 pips in GBP/USD

Dow 30 Daily And Weekly Chart

Whether a higher than expectec CPI helps the USD, will depend on the follow-up in US bond yields. But what's many are ignoring is that rising supply-driven inflation does not move in a vaccum. Do you think inflation will remain muted in Europe? 

Was the soft jobs report a game-changer? The trade on Friday was that it meant rates would stay lower for longer, or would at least give the Fed some leeway to try out it's patient approach to normalizing. On Monday though, the mood was more that it was a one-off report and that the dozens of other inputs of better growth are more relevant. That led to a big unwind in the stock and yield moves.

The US dollar though hardly bounced. A particularly large move came in cable, which jumped more than 150 pips to the highest since February. Some of that was technical as a series of March/April highs gave way but the tipping point was the Scottish election. The Queen's speech also helped boost GBP via improved political prospects for PM Johnson, following Labour's horrid showing in last week's local elections.  

The SNP and pro-indepenced Greens together got enough votes for a majority but it wasn't a resounding win and will independence polls flagging and better growth on the way, the market clearly took the impression that no referendum is coming soon. Combine that with ongoing UK vaccinations and reopenings and there isn't much in the way of a return to the Feb high of 1.4242 and potentially to back to 2017 levels.

CFTC Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

EUR +85K vs +81K prior

GBP +20K vs +29 prior

JPY -41K vs -49K prior

CHF 0K vs -1K prior

CAD +26K vs +16K prior

AUD +1K vs -1K prior

NZD +9K vs +7K prior

Specs are beginning to buy into the Canadian dollar rally and that's no surprise given the positive backdrop in commodities and acceleration in Canada's vaccine rollout. Friday's Canadian employment report was on the soft side but lockdown measures should begin to ease this month and then it will be clear sailing. The report prompted Ashraf to trigger longs in GBP/CAD on Friday.

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