The beginnings of dollar softening in step with stalling Treasury yields has levered risk appetite higher as investors look toward the release of Federal Reserve minutes on Wednesday.
A pause by the dollar following its resolute fightback of recent weeks was evident, but anecdotally and visually—looking at 10-year Treasury yields’ trickle off 7-year highs—profit taking, and technical factors were reasonable explanations. It’s notable that recent sessions have seen the dollar against the yen rejected at January failure highs slightly above 111.39 yen per dollar and late January peaks, slightly lower on the 111 handle. USD/JPY was last supported by 110.81 from which it kicked up to 113.74 in December. If the floor breaks in the near term, it is likely to be associated with the return of yield concerns; or, if heavy-looking USD/JPY breaks lower, vice versa, as well as more hesitant risk appetite. Oil, as a component of inflation reckoning, will be a significant input should it remain near $80 a barrel. Brent crude oil maintained a bid off Monday’s $78.10 low, having last week set its latest four-year high at $80.50.
Italy examines Giuseppe Conte
Unwinding Italian government bond yields from 14-month highs looked to have more to do with the wider yield slack-off than improving local sentiment. The caretaker president’s unusual decision to delay an endorsement of 5-Star/Northern League’s PM choice signalled concern over the suitability of the academic, Giuseppe Conte, who has no experience as a politician. Sergio Mattarella said he would hold a fresh round of talks with heads of upper and lower houses of parliament on Tuesday. He has recently signalled that a rubber stamp for the coalition’s PM candidate was not a foregone conclusion. A rejection would be unprecedented in recent times, but having been mooted, the possibility can’t be dismissed. If offered a mandate, Conte faces a baptism of fire politically and with markets. As such, disorientation in Italy’s markets will not necessarily be resolved in the near term by Mattarella’s decision, either way.
Euro longs held hard
Still elevated Italy risks may mean a deeper flush of euro long positions that survived sharp selling from early -2018 peaks has merely been delayed. Exits from those positions have been far tardier than late-2017 buying, according to recent EBS FX data. The single currency got to within five pips of its 9th May low against the dollar on Tuesday. Slippage then recommenced. Buyers need the rate to race over that line and keep going to avoid a resumption of weakness that reached as low as $1.1717 on Monday.
Wednesday’s UK inflation data may be more influential for sterling than the Bank of England’s inflation report and an appearance of The Bank’s governor before the Treasury select committee. The pound posted most of its 80-odd pip rise against the dollar from early AM lows before Mark Carney spoke. He attempted to qualify commentary that followed this month’s policy decision. Qualification didn’t add any information about rate timing though, so cable had returned 50 pips of the earlier move at the time of writing.
A similar sense of damp squib is probable from Wednesday’s Federal Reserve minutes. The central bank’s Philadelphia president, Patrick Harker, on Monday echoed much of the content of the statement issued following the FOMC’s hold decision in April. He said he would back three further rate rises this year—one more than the Fed projects—if warranted by sustained inflation at current levels. But he also saw “no rapid acceleration” of inflation and would rather not “contract the economy” with rates above neutral.
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