Head of FX Strategy
Summary: Very strong US data since last week, including the highest ever ISM Services survey reading yesterday, suggests the rolling removal of Covid restrictions is unleashing a surge in US economic activity. And yet US treasuries, particularly at the longest end of the curve, have largely shrugged off the development, which has helped drive a consolidation back to the weak side in the US dollar. The turn is not yet forceful enough, however, to signal the all-clear for USD bears.
FX Trading focus: Another hot US data point, but the US dollar dipped.
It is fairly easy to sketch the rough outlines of a narrative that explains the strength in US data of late, including last week’s enormous jump in the monthly consumer confidence survey, a strong 900k+ surge in the official nonfarm payrolls and then yesterday’s cherry-on-top, a record March ISM Services survey reading of 63.7 (which included a record New Orders sub-index of 67.2 to boot). It’s all about the stimulus combined with the emergence from Covid lockdowns.
The reaction in markets is another matter, and here the narrative is trickier to conjure up, particularly in the Treasury market. The over-the-top, strongest ever pace of improvement in the us services sector, as represented by that ISM Services survey jump, merely elicited a shrug of the shoulders at the longest end of the yield curve, while a jump in yields in the “belly” of the US yield curve faded yesterday after a go near 100 basis points for the 5-year treasury benchmark.
What’s the story there? Sell the rumor, buy the fact? Or is the flattening of the longer end of the yield curve more an expression of that anticipation that the pace of improvement may not get any better than it is at present and that the key question will be whether there is any further ability for the economy to surge in the wake of the sugar high of the latest round of stimulus checks and the last few rounds of acceleration as the last areas fully emerge from Covid restrictions in the coming few months. The intent with the next round of stimulus, the political signals suggest, will be offset with new taxes.
In any case, the combination of strong risk sentiment on these numbers together with no new upside pressure on yields has helped the US dollar weaker. For the US dollar to get weaker still, we need an extension of this environment, or for the real yields elsewhere (and likely the nominal as well) to pick up more sharply in relative terms.
Chart: EURUSD
The EURUSD consolidation was quite sharp yesterday, and there is some cause for euro bulls to take heart now that the Euro is more attractively valued and that indicators like the Eurocoin growth indicator noted below suggest very powerful recovery building in Europe, the terrible failures of the vaccine rollout effort notwithstanding. Imagine where Europe may end up in relative terms to the US as the vaccine effort catches up, even if with a multi-month lag. The downside risk for the Euro does remain if we get another round of US yield rises – particularly real yield rises, without any improvement in the Euro-US real yield spread. But only a proper souring of the forward outlook or a nasty global deleveraging would seem able to push the euro below perhaps 1.1600-1.1500, and we’ll be on the lookout for a bullish reversal at any time. At the moment, we would need a solid pull-back toward 1.2000 to neutralize this latest sell-off wave, a bit of a steep wall to climb.
Odds and ends
Keeping it tight in China. As we noted on this morning’s Saxo Market Call, one story that spooked markets overnight even after a strong US session for equities yesterday was the story that China has asked banks to curtail credit for the rest of the year, a move centered especially on keeping house prices orderly. China faces an interesting dilemma, as it wants to switch to a more balanced economy with a higher consumption component, but at the same time is eyeing the python of its production sector set to swallow another very large pig of a US stimulus bill.
The RBA meeting a bit of a yawn, but…housing! The RBA did indicate it might shorten the horizon of its yield curve control later this year by not rolling forward the Australia Government Bond that it uses to keep the target at 10 basis points (currently the April 2024 bond). But housing has garnered increasing attention and may come up very prominently in this Friday’s Financial Stability Review from the RBA after price gains saw a record leap in March. The wording on housing in the RBA statement was more pointed: “Given the environment of rising house prices and low interest rates, the bank will be monitoring trends in housing borrowing carefully….It is important that lending standards are maintained.” AUD longs will cast a nervous eye on what happened in New Zealand, where the Ardern government administered a huge tax broadside against housing speculation, likely to be followed with new macroprudential measures from the RBNZ in due course, now that housing prices are another leg of its mandate.
Yellen speaks in favour of global tax minima for corporations – no implications now but this is a story worth watching as an important signal for financial markets.
The Eurocoin growth indicator, a quarter-on-quarter growth indicator, released monthly, maintained by the Banca d’Italia, has risen to 1.36%, the highest reading in its history and suggesting the strongest growth measure ever registered by this indicator since 1999, far above the post GFC high of 0.76 posted in early 2018.
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