DXY depreciated 1.1% to 102, its weakest level since 25 April. Dow, S&P 500 and Nasdaq Composite rallied 2%, 1.9% and 1.6% respectively. The increases in the US Treasury yields were modest relative to those in the stock market. The 2Y bond yield increased 4 bps to 2.62% while 10Y firmed 7 bps to 2.85%. US President Joe Biden is considering removing some of the Trump-era tariffs on Chinese imports to fight US inflation. CNY recovered most in Asia by 0.7% to 6.65 per USD. The improvement in risk appetite and a stronger CNY boosted commodity currencies. NZD appreciated 1.2% ahead of the 50 bps hike to 2% expected at tomorrow’s Reserve Bank of New Zealand meeting. AUD appreciated 1% while CAD gained 0.6%. Reserve Bank of Australia Assistant Governor Christopher Kent estimated the neutral rate as 2-3%, a reminder that the 25 bps hike to 0.35% earlier this month was only the start of a normalization cycle in Australia.
Atlanta Fed President Raphael suggested the Fed could pause in September after delivering two 50 bps hikes in June and July to the floor of the 2-3% neutral zone. Speaking today, Fed Chair Jerome Powell will probably maintain the resolve to keep hiking until inflation comes down. Hence, investors hope this Friday’s PCE inflation will slow to 0.2% MoM (consensus) in April from 0.9% MoM in March. More importantly, they will not want the core PCE deflator (expected to be unchanged at 0.3% MoM) to repeat the surprise monthly jump in core CPI inflation.
EUR appreciated most by 1.2% to 1.0691. European Central Bank President Christine Lagarde affirmed the growing chorus within the ECB to end negative interest rates in 3Q22. The ECB will increase the deposit facility rate from -0.50% via 25 bps hikes at the 21 July and 8 September meetings. Bundesbank President Joachim Nagel declared the end of wage moderation in Germany and expected higher wage deals in the second half of the year. German Finance Minister Christian Lindner said the EU’s top priority must be to fight inflation. Although the EU plans to suspend budget rules to 2023 on the war in Ukraine, Germany does not intend to increase fiscal spending and urged member countries to be fiscally responsible. Having rebounded from its 1.0350 low on 13 May, EUR is approaching resistance at 1.0770 or its 50-day moving average.
CHF appreciated 0.9% to 0.9658 per USD, its strongest level since 26 April. Swiss National Bank governing board member Andrea Maechler will support rate hikes if inflation stays outside the official 0-2% target range. Over the past three months to April, Switzerland’s CPI inflation has risen above 2% YoY to 2.5% but core inflation was unchanged at 1.5%. Favouring CHF strength, especially against the EUR, to help fight inflation, the SNB is closely monitoring the ECB’s push to end negative rates. The SNB policy rate is -0.75%. Having fallen from its 1.0065 peak on 16 May, the next support for USD/CHF is probably between 0.9560 and 0.96.
Quote of the day
“The secret of politics? Make a good treaty with Russia.”
Otto von Bismarck
24 May in history
In 2022, Russia and the US signed the Strategic Offensive Reductions Treaty also known as the Moscow Treaty.
Topic
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