Sitting on range-trade fence: complacent comfort
The past week has seen a short-lived flurry of market price action, with daily volatility in the US Dollar and equities edging higher on 30th April and again on 4th May. However, volatility overall has remained subdued, particularly in the benchmark US 10-year Treasury yield.
Moreover, the Dollar NEER and US 10-year yields – increasingly a bellwether for financial markets – remain firmly within their multi-week ranges while the S&P 500 yesterday closed in the middle of a narrow 3-week range of just 1.8%.
US markets are seemingly sitting on the fence at this juncture, unwilling to take material directional positions given the uncertain outlook for US and global inflation and central banks’ reaction functions.
However, the gradual 6bp fall in the US benchmark 10-year Treasury yield between 29th April and 5th May to about 1.58% and the flattening of the 2s5s and 2s10s yield curves alongside a 0.4% gain in the Dollar NEER is noteworthy.
Our take is that markets may have become marginally less worried that the Fed will have no choice but to tighten monetary policy sooner than it has indicated despite expectations that year-on-year US CPI-inflation will rise further in coming months.
Moreover, the inverse relationship between the “safe-haven” Dollar and riskier assets has remained strong. US macro data released in the past week have been strong enough to put a floor under the S&P 500 but not strong enough to push it to new highs.
Finally we think that markets, in particular real-money funds, have once again been paying greater attention to valuations, including the relative cheapness of the Dollar.
Notably most of the other major NEERs have also traded in narrow ranges since early March and few have moved much in the past month. Central banks, particularly in Asia, have been willing and able to keep their currencies on a short leash in order to maintain export competitiveness and minimise inflationary or deflationary pressures.
Within Asia, the Taiwan Dollar is looking expensive relative to the Korean Won, in our view.
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Olivier is an economist and rates & FX strategist with over 22 years experience in financial markets. He is Director and Founder of 4X Global Research, an independent, London-based consultancy which provides institutional and corporate clients with substantive research, high-quality analysis and insight on emerging and G20 economies and financial markets.