The dollar’s slide yesterday was surely partly a function of sterling surge, which seemed to be more a function of short covering that a belief that a UK election and the likely larger Tory majority will change the economic dynamics in the six-month to two-year time frame. On the margins, if sterling can hold above its 200-day moving average, it may on the margins soften some of the inflation pressure created last year’s devaluation. However, the past inflationary impulses do not appear to have peaked. Chancellor of the Exchequer Hammond will offer a new budget, which is needed in any event after his proposal regarding the tax for national insurance for self-employed was summarily rejected.
The other major development is the decline in US rates, which is going well beyond what most imagined. First, consider expectations for Fed policy. No one really put much stock in a hike in May, but the odds of a June hike have fallen sharply. As recently as April 7, Bloomberg estimated that the June Fed funds contract was discounting a little more than a 55% chance of a hike. Now it is below 40%. The CME’s model has the odds near 42%, but was higher than Bloomberg. The two-year note is the most sensitive part of the coupon curve to Fed expectations. It yield fell from 1.30% in late March to 1.16% yesterday. We suspect the pendulum has swung too far away from a June hike. Today’s Beige Book, however, likely has little bearing.
Second, consider the 10-year yield. The yield peaked the day before the Fed hiked in the middle of last month near 2.63%. Yesterday if fell to nearly 2.16%. There seems to be two main drivers. The first in response to the less than hawkish hike and was similar to the profit-taking seen after the December 2016 hike. The other part seems to be a combination of safe haven and the downgrading the odds of the Trump Administration’s economic program. Many observers see the double top in yields above 2.60% and the violation of the neckline around 2.30%. However, the value of the technical pattern is the future projection, which in this case would be near 2.0%. While referring to the pattern, many draw away from the conclusion. Is 2.0% 10-year US yield a realistic possibility?
The US dollar is firmer against the major currencies today as it consolidates against sterling and the euro. The yen, which had been the star performer did not make new highs yesterday as did sterling and the euro. The dollar is trying to carve out a shelf ahead of JPY108, but it needs to resurface above JPY110 strengthen the base. The euro is a quarter cent range. A break of $1.0680 is needed to signal anything of importance, otherwise short-term operators will look for $1.0780-$1.08. Sterling is finding bids ahead of $1.28, and technical potential extends toward $1.30. The dollar-bloc currencies continue to underperform.
(on way to Ohio on business today and will speak at the Columbus CFA at lunch)