As mentioned in last week’s note central bank differentials will be vogue in the coming years. The Bank of Canada moving on its COVID-QE programs is just the beginning of what will drive FX positioning.
On this point, if you lay out central banks on a scale of dovish to hawkish all are still technically dovish clearly, but some are less dovish than others.
The BoC, the standout, has now tapered and is on a path to ‘neutral’. The Bank of England, and the Federal Reserve are believed to be the next in line with its suggestion the Federal Funds rate will move in 2023 according to its dot plots.
The RBA and the RBNZ are happily sitting on their hands. Although the RBNZ now has macroprudential rules to deal with making it tougher to hold a truly dovish line. While the RBA has low inflation but with higher growth an interesting spot to be and one that most now believe will trigger a third tranche of Aussie-styled QE.
However as with everything markets be it bonds, equities or FX your start point is always Stateside and thus last Thursday and Friday gave us insight into the moves of the USD going forward.
First here are the key points from the Fed’s policy statement and speech:
Second here are the take-outs from the first quarter GDP figures:
So, the Fed is more dovish than the BoC and probably the BoE but is sitting on strong growth.
Thus the reactions in FX are just as interesting as the USD is mixed.
EUR/USD has got to $1.2150 a new two-month high, this is a level that we see as the top of its Q2 trading band and also a point that will worry the ECB.
GBP/USD is stuck in the $1.395 range but is pushing higher more consistently than been sold off. Interesting inflection point for Cable.
USD/JPY rose 0.3% to 108.95, with a high of 109.22 as US Treasury yields bounced on the Q1 GDP report.
AUD/USD reversed CPI-disappointment to be chasing $0.78 as iron ore drives new record highs on an almost daily basis.
Source - database | Page ID - 21558