Something in the Air
A risk-on session overnight ahead of tonight's FOMC meeting as WTI bounced higher sparked by Saudi Arabia pledging to cut oil exports further while an array of encouraging earnings reports and better-than-expected economic data has lifted equity markets and bond yields overnight.
And indeed headlines that the Republican Senate had enough votes to open the health care vote has rekindled some optimism for the greenback.
But the waves of bond selling across fixed income which saw the US 10-year touch 2.34% suggesting the market, or at least some, are having a look at the reflation trade again has tongues wagging this morning.
On currency markets, all eyes are on the FOMC meeting, but dealers will be occupied with the month end rebalancing act. As for the FOMC, while we can never really tell what they have up their sleeve. Latest chatter suggests they may tip their hat to September as the starting date for reducing the balance sheet.
However, on the inflation front, the real question is how to spin four consecutive misses on CPI. The September date has been communicated already so the greenback should not get much of a rise from that, but it will be the inflation language where a possible dovish skew will emerge.
While it has not set off any alarm bells yet, Yellen has voiced concerns over “ somewhat rich” asset prices. Given that overarching asset prices could harbinger a degree of financial instability into the calculus, it could also strengthen the argument to keep tightening policy. If the FOMC drives this home tonight, we could see some interesting price action.
Euro
Some unusual price action overnight saw the euro initially rally to 1.1712 but it fell after the USD sprang back to life when US bond yields took off. Some interesting battle lines being drawn on both fixed income and the USD. We may see the eventual winner play out in the EURUSD trade.
Japanese Yen
Buoyant risk appetite and rising 10-year bond yields have us within shooting distance of the physiological 112 level. Not much to say here as the 10-year US bond yield correlation to USDJPY holds true once again.
Australian Dollar
Commodity currencies continue to be buoyant in a weak dollar/low vol market, but some dents in the armor forming as the USD was showing some vitality overnight. With the domestic CPI and Governor Lowe taking to the airwaves via a speech at the Anika Foundation luncheon later this morning, the market will remain on hold. But given the surging Aussie dollar complicates the post mining boom economic rebalancing act, one could only expect Governor Lowe to lean against the current market view.