Home Fearing the Fed tapering

EUR: Both German labour market data and CPI are expected today.   Inflation is seen nudging higher to 1.3%, whilst the unemployment rate should hold steady at 6.9%.   Euro will be sensitive to any signs of a deterioration in labour market conditions in Germany.

CAD: Last Bank of Canada rate decision before current Governor Carney moves to head up the Bank of England. No change in rates anticipated, but focus will be on any changes in the statement to more explicitly link future policy with developments in the economy. The sense is that the incoming governor Poloz will be more tolerant of a weaker currency.   A more dovish statement could well see USDCAD push towards the 1.05 area.

GBP: BoE’s Bean speaks in London at 09:30 GMT. He’s not been voting for further QE this year, so risk is seen as relatively low.

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The dollar was in the ascendency yesterday as the market once again became fearful that the Fed would be considering tapering the amount of monthly bond purchases as early as its meeting next month. The yield on the 2 year US bond has surged to above 0.30%, a level not seen on a sustained basis since October of last year.

The yield on the 10 year bond has increased to levels last seen in March of last year, having risen by 50bp so far this month.   In this firmer dollar environment, it’s a question of ranking the losers and once again the Aussie has proven most vulnerable overnight, breaking below last year’s low of 0.9582 as the currency that has benefited most from the global recovery and low global rates (via carry trades) adjusts to the new reality.

The sense is that we are seeing a shift for the dollar. After all, the US was where the credit crisis first kicked off (back in 2007/8), they’ve thrown more than most at solving it, many are betting they will emerge with a sustainable recovery earlier than most.   The dollar is starting to price this in a more aggressive fashion.

Latest FX News                    

JPY:  Retail sales data was firmer than expected, rising 0.7% in April, although note that this does follow after a 1.5% fall in the previous month. Little impact on the yen, which was marginally firmer vs. the US dollar in Asia trade.

AUD: Through last year’s low at 0.9582 and once again coming under sustained selling pressure during the Asia session. The Aussie is where a lot of long-term leveraged longs still remain and thus is proving the most vulnerable in a generally firmer US dollar environment.

EUR: One of the members of the ECB Council has voiced concerns over a negative deposit rate. It was more encouraging words from ECB President Draghi earlier this month towards penalising banks that deposit money back at the ECB that pushed the euro lower. See how to trade the US pending home sales with EUR/USD.

GBP: Sterling not that far from a re-test below the 1.50 area on GBPUSD. There were 4 closes below this level in March before sterling staged a fairly strong rebound. This time it’s a firmer dollar story, with sterling having managed to outperform the AUD, NZD, CHF, JPY and CAD through the month so far.

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