FX Update: JPY surge the big new surprise.
The move in Fed rate expectations in the wake of the FOMC meeting has largely stuck and continues to support the US dollar, while the interesting new twist is a sudden surge in the Japanese yen, one that has little to do with Bank of Japan meeting overnight and probably far more to do with long US yields coming down sharply despite the focus on the hawkish Fed surprise.
No country for tightening, but captions tell a different story
Inflation is returning to be an influential factor in the Federal Reserve's monetary policy decisions. Thus, an interest rate hike will likely happen as early as this year, regardless of job numbers. However, US treasury yields will continue to trade rangebound between 1.50% to 1.70% until the central bank doesn't engage more actively in tapering talks. US yields will continue to be capped by rotation and the excessive liquidity in money markets. Expect the yield curve 2s10s and especially the 5s30s to continue to bear-flatten as inflationary pressures and interest rate hikes will be concentrated on the front part of the yield curve.
Podcast: Consensus macro positions getting poked with a very sharp stick?
Today we note the significant further developments on the back of Wednesday's FOMC meeting, with new twists in the US yield curve after the knee-jerk reaction, a suddenly supercharged JPY and commodities reeling amidst USD strength, all suggesting that major consensus macro trades are in "pain mode" here. A look at FX, commodities and some sharp shifts in equity market internals and more on the call. Today's pod with Peter Garnry on equities, Ole Hansen on commodities and John J. Hardy hosting and on FX.
Market Quick Take - June 18, 2021
Equities leaped back higher yesterday as long US treasuries likewise rallied hard on a powerful flattening of the US yield curve, as the market continued to bring forward the timing of the first Fed rate hike after the FOMC meeting jolted those expectations. Elsewhere, the USD remains firm, but a sharp rally in the JPY is trying to steal the spotlight in FX, while commodities were generally lower.
FX Update: The Fed has kicked off a tightening cycle.
While the signals from the FOMC meeting last night were in some way mild, the strong market reaction suggests that the market was overinvested in the Fed position that inflation would prove transitory. That suggests that we could get a larger repositioning that continues to take the US dollar higher for now. Elsewhere, watching whether small signs of JPY resilience are worth noting in the crosses.