The combination of stable Federal Reserve expectations, sliding US bond yields, and resurgent risk appetite is providing fundamental support for the 'Goldilocks trade' disrupted by the early February volatility shock, says Saxo head of FX strategy John J Hardy.
"We see the dollar rally fading on the return of risk sentiment, and Friday's Fed report was received by markets as dovish due to an apparent lack of concern regarding labour shortages," adds Saxo's FX head.
The broadly bullish environment saw Asian shares follow Friday's markets higher overnight, reports Saxo bank head of equity strategy Peter Garnry, with the Nikkei 225 rising by 1.4% and the Hang Seng index up by 1%.
"We also saw a rally in Chinese shares with the automotive sector leading the pack, but we remain structurally negative automakers given the late-stage economic cycle," says Garnry.
One continued outperformer into today's European bell is the Japanese yen, which is supported by flows, the fall in core bond yields, as well as what Hardy terms a general reassessment of the currency's value.
"We could even see USDJPY at 100 [if present trends continue]," Hardy says.
One of this week's major events in light of the above is newly minted Fed chair Jerome Powell's Congressional address, with Saxo fixed income specialist Althea Spinozzi noting that a hawkish outing could have interesting knock-on effects in US yields.
"Last week we saw the 10-year yield rise to 2.95% Wednesday before closing Friday at 2.87%," says Spinozzi, although Garnry cautions that markets may have reassessed the risk posed to equities by rising yields as kicking in at 3.5% rather than the much-discussed 3% level.
Finally, Spinozzi reports that the March 4 Italian election could easily wind up producing an inconclusive result given fractious coalitions and general volatility; if this proves the case, says Spinozzi, Italian yields could see a 20-30 basis point jump.
Today sees European Central Bank president Mario Draghi speaking at 14:00 GMT and new Fed board member Quarles out at 20:15 GMT.
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.