A dismal US 30-year TIPS auction is weighing on dollar demand as the sagging bid to cover ratio of 2.31 is signalling dwindling investor appetite as inflationary headwinds build. The dollar is lower because no one wants to own US bonds despite the higher yield, knowing the inflationary headwinds will push yields higher and bond prices lower.
The market remains nonplussed by the breakdown of FX/interest rate correlations and the debate still rages concerning Wednesday dollar sell-off. I think it's time to throw textbook economics out the window as well as the so-called interest rate pivot point. G-10 yield differentials are so tiny that traders could care less about differentials as they become increasingly focused on the future outlook of the expanding US deficits and in particular the budget deficit.
Another hot inflation reading as PPI showed a substantial gain but provided no bounce to the buck. When real money is taking the dollar to the woodshed and traders are reluctant to own greenbacks in any way shape or form, it matters little what the Feds are doing or yields for that matter. And by all indications, we could be in the early stages of protracted dollar sell-off.
Equity Markets
Equity investors are in a happy spot as US stock markets carved out their fifth consecutive day of gains. Despite a midday swoon, markets roared back as investors view the uptick in inflation as non-threatening and remain in buy on dip mode as last week's equity meltdown looks more and more like an illogical outlier.
Oil Markets
After the decent bounce on the back of the weaker dollar and Khalid al-Falih suggesting no imminent demise of OPEC and non-member compliance, it's not surprising that the markets are becoming a bit more position-sensitive heading into the weekend. The weaker US dollar has been a significant component driving market sentiment, and with the dollar entering oversold territory at weeks end, we could see short dollar position pared which could negatively impact inter-day oil prices.
Frankly, given the evolving vital narratives surrounding OPEC compliance vs. shale output, I expect the WTI whipsaw to be as active next week as it was this week. But given the overly bearish outlook for the greenback, we may have printed a short-term floor and dips will remain supported.
Gold Markets
There was very little follow through on the much hotter than expected US PPI print which convinced investors to book some profits after gold rallied hard the previous session. While the weaker USD is underpinning gold prices, the short dollar speculators are a bit overextend, suggesting the market could pare back US short dollar risk which may temper topside expectations for gold prices today. Medium-term bullish conviction remains intact given the higher US inflation profile and weaker USD narrative.
Crypto Markets
Bitcoin buyers were back en masse chasing the dream as the fear of missing out propelled BTC above 10,000. It appears the recent wave of regulatory worries has been tempered as the massive South Korean market could roar back to life as rumours are circulating that Seoul is looking at licencing several exchanges adding a level of credibility and shoring up severely dented investor confidence.
Currency Markets
The Japanese Yen
Talking about FOMO, is there anyone who is not short USD/JPY? Of course, “the crowded trade theory” did cross my mind overnight for a second or two, as USD/JPY powered back to 106.80 overnight on the Wakatabe headline, before pressing the sell button again. Dovish or not, the market cares little about centeral bank policy these days while looking for any and all opportunities to hammer the dollar mercilessly. With very little chance of intervention at these levels, the JPY bulls should continue to have their way near-term. But short-term speculators are a bit stretched, so now is not the time to get greedy. Let’s see what fortunes next week brings.
The Euro
It looks like the grind higher is back in fashion, and the upticks have been relentless over the past 24 hours. But unlike the recent test of 1.25, positioning is much lighter so we could punch higher as traders continue to moan over not buying the dips to the low 1.22’s.
Powerful bullish signals are falling on deaf ears as investors are far and few between due to Chinese Lunar New Year. Quite frankly it’s not worth paying the holiday liquidity premiums to put on risk. Very little offshore interest today so expect the market to remain quiet.