Sunset Market Commentary – Forex Action


US investors returned to the trading desks after the long weekend (Memorial Day Holiday). US Treasuries started weak, make up for yesterday’s Bund losses while paying attention to hawkish comments from Fed Waller (+50 basis points in every meeting this year) and a WSJ op-ed from US President Biden. The latter has drawn up a three-pillar inflation-fighting plan which he will exceptionally discuss with FOMC Governor Powell and US Treasury Secretary and former Fed Chairman Yellen. Biden is making it clear that the first line of defense and primary responsibility for controlling inflation rests with the Fed. Fighting inflation is the main economic challenge right now, with the Fed and the government ready to pay an economic price if necessary. A final contributor to core bond weakness is Rise in Brent to $124/b, the highest level since 2012 except for a brief period in early March. The Chinese economic reopening (demand side) and the European oil embargo against Russia (supply side) are at stake. From a technical point of view, the US 10-year yield largely tested the 2.71% support (April 2027 formation weak and potential double top cleavage) last week. A downside break did not occur, adding to the weakness in Treasuries. US investors aren’t worried that this week’s leading green releases are starting to show signs of weakness. US yields add 6.8 basis points (2 years) to 9.9 basis points (10 years) from Friday’s close, with the belly of the curve underperforming the wings. German Bunds caught a very brief bid early in the European session, but quickly returned to sell mode. German rates increase from 2.7 basis points (30 years) to 7.2 basis points (5 years). The feared acceleration in EMU inflation occurred in May with prices rising 0.8% M/M (vs. 0.6% M/M in April and vs. 0.6% consensus ) to 8.1% year-on-year (EMU record against 7.8% consensus). Core underlying inflation rose from 3.5% over one year to 3.8% over one year. The available details/sub-categories almost all set highs in EMU: from services inflation (3.5% YoY from 3.3% YoY) to food, alcohol and tobacco (7.5% over one year from 6.3% over one year) to the non-energy goods industry (4.2% over 12 months compared to 3.8% over 12 months). The impression of inflation once again emphasizes the need for the ECB to start its normalization policy quickly and not to look back once the process has actually begun. Italian (+6 bps), Portuguese (+3 bps) and Spanish (+3 bps) vs. Germany 10-year rate spreads are widening today. The pace of bond liquidation is again having an impact on risk sentiment. The main European stock exchanges are losing more than 1% at the moment. Risk sentiment, underperforming US Treasury and failure to clear first resistance at EUR/USD 1.0758/1.0806 all contributed to today’s drop in yield in the currency pair . EUR/USD is changing hands just below 1.07 at the moment. EUR/GBP remains stable in the low zone of 0.85.

News headlines

The Canadian economy grew by 3.1% q/q annualized in Q1 against 5.2% expected. Continued solid growth supported by strong private consumption, business investment and inventory accumulation. A sharp decline in exports, partly due to production disruptions due to Covid and maintenance in the vast oil sector, was only partially offset by weak imports. Today’s reading is in line with the Bank of Canada’s April forecast (2.8% q/q yr). The BoC should therefore raise its rates another 50 basis points to 1.5% tomorrow. Market expectations are for another such move in July with speculation for September as well. The loonie loses against a higher dollar today. USD/CAD rises to 1.268.

The Hungarian central bank raised its key rates by 50 basis points to 5.90% today. In the policy statement, the MNB said strong growth in early 2022 will likely lead slow down in the coming quarters due to weak external demand. Inflation, already at 9.5% (10.3% even in the core), should increase in the coming months. This warrants further tightening. But there is a slight change in the wording with the MNB we no longer speak of “increased” fundamental inflation risks. It also assigned itself the “essential task of setting an optimal level of interest rates that ensures the sustainable achievement of the inflation target”, suggesting more moderate tightening may be appropriate to find this level. The Hungarian forint is losing slightly at EUR/HUF 395 although losses have already been taken before the political decision. Hungarian swap yields add 5 to 7 basis points to the curve.

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