The repercussions from the Federal Open Market Committee's latest meeting continue around global financial markets. The initial interpretation that this was a hawkish pivot was debated upside and down last week, but investors seem to echo the view that best suits their needs.
And Fed policy uncertainty suggests volatility will be higher through the summer than might have been expected just a week ago and that US economic data points, particularly around labour and inflation prints, could continue to joggle markets through the summer. That is never a good position for traders to be in and means there will be gains for some and pain for others.
On Friday, the US 10y yield soared above 1.52% for no apparent reason, even though markets were unimpressed by the PCE core hitting the expected 3.4%.
Overall, from Tuesday onwards, it has felt like investors were giving up on their more robust dollar views and were instead shifting to the positive risk and carry trades once again -- albeit with little conviction. However, the latest bond market price action might build on the current level of policy uncertainty.
There has been a two-way interest in USDCAD since last week's FOMC meeting, and after the correction higher, it has been a slow grind lower ever since. The long positioning in CAD, similar to AUD, still feels somewhat stretched, so other than the USD giving back some of the recent gains, this move lower in USDCAD does not feel significant. Ahead of the June payroll data, we cut our short USDCAD entered on Monday, June 21 (Trade of the Week) until some more Fed policy dust settles.
Speaking of which, the focus of this week's economic calendar will shift back to the data – namely, the June employment report. Following relatively tepid prints over the past couple of months, the street expects the pace of hiring to improve modestly. Of course, I still think it will take at least a +850k vs 559 K previous to move the Fed needle; still, I would suspect traders will err on the side of caution and pare back rate-sensitive risk if not move into summer holiday mode.
Traders will have to navigate several data points ahead of this coming Friday's NFP report that could shade consensus expectations on the margin. First, you should pay close attention to the jobs plentiful / jobs hard-to-get series within Monday, June’s consumer confidence (119.0 vs. 117.2) release. This data series is historically highly correlated with the unemployment rate.
In Asia FX, since the Fed let the cat out of the bag with its hawkish pivot balance of risks for a growing number of central banks in EM is now on whether they can afford to fall behind the curve as the policy gap to the Fed no longer a currency tailwind, making the RMB longs less attractive than before. Moreover, given the RMB tends to be the anchor for Asia EM FX, it could also make ASEAN currencies less appealing.
Against this backdrop, Indonesia is looking to stem IDR depreciation. The Indonesian government has rolled out new initiatives for taming IDR depreciation, according to Bloomberg. For example, the DNDF will be extended to longer tenors of up to one year and will implement local currency settlement in other currencies.
Whereas on the opposite side of the policy spectrum, the Bank of Thailand chief said access to credit for businesses is a more pressing issue for the economy than interest-rate levels and that they will stay focused on domestic concerns amid possible normalization by other central banks, i.e., no rate hikes anytime soon. The central bank of Wednesday trimmed its 2021 GDP growth forecast to 1.8% from 3% previously. Tourism worries continue as Thailand's most prominent market, China, plans to maintain Covid-19 border restrictions for another year.
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