Currency Point: We have lost control

On the eve of what is likely to be the biggest upward move in Federal Fund rate in nearly three decades we have to ask. Have central banks lost control of inflation? The market answer is yes. The next question from there is can central banks catch inflation and not cause a recession? The market’s answer is no.

Seeing the US bond market curve as ‘dead flat’ (at one point on Tuesday the 2yr, 10y, and 30yr yields were exactly the same) and US equity markets tanking into bear markets the price here suggests we are in for economic and corporate pain over the coming 12 months.

Here is former New York Fed president Bill Dudley on what he believes will happen at the June meeting, ”My sense is that the Fed has decided to do 75 basis points rather than 50
basis points because of the data we have gotten over the last week or so showing higher inflation and maybe some more disturbing news on inflation expectations.”

So, with forecast of a 75 basis point rate rise coming this week and a probable follow up rise in July. Will this be the shock and ore need to regain control? Time will tell – but in the
interim the loss of control will be dire for risk assets. This has seen the DXY at a 2-decade high and is showing no sign of slowing down. EUR, JPY are being used for carry trading at incredible levels and that too is showing no sign of slowing. Then there is risk currency AUD, NZD and the Scandinavian currencies are being let for dead will no sign of this abating either.

All eye on Constitutional Ave.