Dollar Direction To Be Dictated By Yellen Today

Friday May 27: Five things the markets are talking about

Directionless range bound trading continues to dominate proceedings ahead of the bank holiday long weekend in the U.S and the U.K. As has been the nature of trading in May, without fresh impetus, investors are wary about strapping on aggressive new positions.

Even with the uptick in ‘hawkish’ Fed rhetoric, the “big” dollar continues to find it difficult to step out of its recent range amongst the major pairs ahead of decisive events and data in the holiday shortened trading week in the U.S. next week.

Capital markets are awaiting the U.S. jobs data for May scheduled for June 3 and a speech from Federal Reserve chairwoman Janet Yellen scheduled for June 6. They are also watching Ms. Yellen speech later today when she speaks at Harvard University. Traders are increasingly anticipating ‘dovish’ overtones from the Fed chair to overshadow some rather hawkish remarks from her colleagues in recent days.

1. Day 2 G7 rhetoric

The market was always going to be apprehensive about what could be said, but they need not have been. Investors were served up more of the same “nudge, nudge, wink, wink” rhetoric, peppered with a few tidbits.

The usual communiqué noted the downside risks to global economy. Members collectively vowed to stand ready with a coordinated response to economic conditions, while acknowledging that policy would be custom made according to each nation’s conditions. Top of their agenda was Brexit threat to growth.

Not a surprise, G7 leaders spoke out against disorderly FX moves, called for refrain from competitive devaluation. In reality, there is not one country that will not manipulate rates if they feel it would be beneficial to their economy.

There was little mention of the US-Japan tensions that emerged at last week’s meetings where the two sides disagreed over what is a disorderly move in the currency market.

2. Japan remains in deflation despite negative rates

Negative interest rates have been supporting PM Abe’s Japanese economy thus far in 2016. The problem for his government is that Japan’s inflation readings continue to trend in the wrong direction.

Data overnight showed that April’s national core-CPI fell for a second consecutive decline (y/y -0.3% vs. -0.4%E), while the May Tokyo reading slipped further into the ‘red’ (-0.5% fourth straight decline, three-year low vs. -0.5%e).

With analysts expecting Japan’s economy to contract in Q2, there is further speculation that Abe’s government will have to postpone the second round of sales tax increase scheduled for April 2017. The ‘deflation’ signal reports suggest that the delay could be as long as two-years, and that a formal announcement could come within days.

3. Strong week for U.S debt sales

Yesterday’s U.S treasury debt sale completed the treble. Despite this week’s Fed ‘hawkish’ rhetoric this was an impressive week for U.S debt sales. There was strong demand right along the curve (2-, 5- and 7-year debt).

Yesterday’s +$28b auction of 7-year product attracted +17% direct bidding, the most in 10-months, while indirect bidding – a proxy of foreign demand -was an impressive +65%. With NIRP dominating global proceedings, foreigner continues to scour the world for a “positive” return. The strong demand even came as bond yields had fallen ahead of the sale. The run-up in short-term yields have made U.S product more appealing to foreign buyers.

Currently, U.S debt is holding its recent price gains – 2’s: -4bps at +0.88%, 10’s -5bps: +1.82%, 30’s: -4bps at +2.63%, 2/10 spread: +1bps at +0.96%.

4. Global bourses flatline ahead of Yellen

It’s not a surprise to see global equities little changed ahead of comments from the Fed’s Janet Yellen later this morning that could offer clues on the timing of the next U.S. interest rate rise.

Ahead of the open stateside, Euro indices are trading flat following a small positive, albeit light trading Asian session. The Fed’s Yellen’s is scheduled to deliver remarks lunchtime at Harvard University.

The market wants to see if she will “toe the party line” and repeat comments from some of her colleagues that U.S policy makers could soon raise interest rates.

The WSJ Dollar Index is up nearly +3% this month as investors have considered the prospect of a June or July rate increase.

Indices: Stoxx50 -0.2% at 3,055, FTSE flat at 6,426, DAX -0.2% at 10,251, CAC-40 -0.2% at 4,470, IBEX-35 -0.2% at 9,041, FTSE MIB -0.5% at 18,110, SMI +0.6% at 8,278, S&P 500 Futures flat.

5. Commodities

The big story this week on the commodity front was the fact that crude prices finally broke through the psychological $50 handle – a seven-month high.

Thus far, those gains have been short lived. Light crude (WTI) has slipped -0.8% to $49.09 a barrel, while Brent is off -1.27% to $48.96. Crude prices have advanced almost +3% this week, supported by a drop in U.S. oil inventories and output.

The markets focus will now shift back OPEC and its June 2 meeting. Members are unlikely to set a production target, but stick with the Saudi’s market strategy of “squeezing out rivals.”

Gold on the other hand is up +0.1% to $1,211.68, but still straddles its three-month low on the back of a ‘hawkish’ Fed.

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