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.

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15


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