Following a week of consolidation between 99 and 99.5, the USD Index (DXY) will likely break lower in the final week of May. The US Treasury 10Y yield eased to 4.56% last Friday after hitting a 2.5-year high of 4.69% on May 19. The Sri Lankan Rupee surged 4.6% last Friday and recovered more than 60% of its May sell-off. USD bulls have retreated amid hopes of a US-Iran agreement to end the conflict and reopen the Strait of Hormuz, which in turn will relegate inflation to the transitory camp.
On Saturday, President Donald Trump announced that a peace agreement had been "largely negotiated" following intensive, Pakistan-led mediation and high-level calls with Middle Eastern allies and Israel. However, in a follow-up statement on Sunday, Trump instructed his negotiators not to rush the deal, saying, "Time is on our side." He emphasized that the US naval blockade on Iranian ports will remain in full force until a final text is signed and certified. US officials are hinting that a formal announcement could come very shortly if Washington and Tehran resolve their differences on the final details of the agreement. Both WTI and Brent crude prices are below USD100 per barrel this morning.
Meanwhile, Kevin Warsh was sworn in as the 17th Fed Chair at the White House on May 22. While stating that Warsh would “do his own thing” in upholding the Fed’s independence and interest rates, President Trump did not hide his desire for Warsh to start lowering interest rates. Warsh’s acceptance speech focused on leading a “reformed-oriented” Fed by moving away from backward-looking and economic dogmas, pursuing a dual mandate that can simultaneously achieve lower inflation with stronger growth, reducing the Fed’s balance sheet, and pivoting away from forward guidance dot plots and heavily parsed press conferences.
Instead, Warsh may abstain from providing his interest rate forecasts in the June Summary of Economic Projections, aligning with his disdain for forward guidance that locks the FOMC into pre-emptive policy paths. Doing so will allow Warsh to either prevent a rift with Trump over a hawkish projection or avoid losing credibility with the market through a dovish forecast. Instead, Warsh’s debut FOMC meeting on June 17 could be the start of a phase to downplay the dot plot’s significance as a policy roadmap. However, if this Thursday’s PCE inflation data comes in hot. Warsh’s strategy may create friction with the market and his Fed colleagues.
Meanwhile, more European Central Bank governing council members are leaning towards a 25-bps hike in the deposit facility rate to 2.25% at the June 11 meeting. ECB President Christine Lagarde is particularly attentive to the second-round effects of energy-driven price pressures. Lagarde warned that inflation projections will likely be revised in June despite the Eurozone’s long-term inflation expectations staying “broadly well anchored” to the 2% target. Hence, EUR/USD will likely set its sights higher again after failing to break decisively below 1.16 last week.
In Asia, markets are also wary about record-low currencies pulling back, like the LKR. Apart from FX interventions, oil-dependent countries such as India, Indonesia, and the Philippines have stepped up measures to stabilize their currencies. Following last month’s 25-bps hike in the Philippines and last week’s surprisingly large 50-bps hike in Indonesia, markets have fully priced in a hike in India on June 5. Over the past two months, markets also increased the odds from 20% to 80% for the Bank of Japan to lift rates to 1% at its June 16 meeting. Hence, the risk-reward has skewed from the USD posting new highs towards correcting lower against the JPY, INR, IDR, and the PHP, alongside its Asian peers.
Quote of the Day
“When everything seems to be going against you, remember that the airplane takes off against the wind, not with it.”
Henry Ford
May 25 in history
In 1927, Henry Ford announces the end of production for the iconic Model T due to declining sales, increased competition, and outdated technology.
Topic
GENERAL DISCLOSURE/ DISCLAIMER (For Macroeconomics, Currencies, Interest Rates, Digital Assets or Commodities)[1]
The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
[#for Distribution in Singapore] This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.
DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 11th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
[1] This disclaimer may not apply if the applicable assets fall within the definition of 'financial instruments' that are set out in Article 2(1) EU MAR (e.g. financial instruments that are traded on a regulated market, MTF or OTF, etc.). Section C of Annex I of MiFID2 specifies these 'financial instruments'.