Will a Less Dovish Fed Help the Dollar Rebound?
The bond market sent a clear message that they are in agreement with the Fed and that any inflation surges will likely be transitory. To the surprise of many traders, both nominal and real yields entered into freefall after headline consumer prices jumped 5% in May, the fastest pace since the summer of 2008. The other big takeaway from the past week was that the ECB was matching the Feds stubborn dovish stance. The ECB policy decision saw a commitment to keep pandemic purchase at higher levels, while noting it is premature and too early to discuss exiting PEPP. Currency market volatility is plummeting for the dollar index and that will likely remain the narrative unless the Fed shows more willingness to discuss a progress-dependent tapering strategy. The week ahead is filled with key rate decisions from the Fed, BOJ, Norway, and Turkey. The Fed is the main event as it could show policymakers becoming slightly less dovish given the modest progress in the labor market and hot inflation reports. If the Fed is optimistic and starts the taper discussion, that could be positive for the dollar. China will deliver a couple of key economic releases with updates on retail sales and industrial production, both which are expected to show some softness. Geopolitics will also dominate the headlines as Iran nuclear talks enter a pivotal stage, the G-7 Summit continues, and the EU-US hold a summit. Country  US  The main event of the week is the FOMC meeting, which should yield a slightly less dovish Fed. The labor market outlook has improved following the job creation acceleration in May and expected June bump, as half the states end federal unemployment benefits. The Fed is in a position where they can lay out a progress-dependent tapering strategy. The Fed will still require substantial further progress in both the US labor market and inflation. Wage gains have been impressive and that should support the expectation the job market will continue to improve over the next few months. Inflation is heating up and will remain elevated over the next few months, but it is still widely expected to be transitory. If the Fed still seems to be in a position to return to some normalization by the end of next year, the bottom could be in place for Treasury yields. The FX market is waiting for a clear signal from the Fed as the three-month volatility on the dollar has plunged to the lowest level in over a year. It is also a busy week of key economic indicators, with Tuesday showing a deceleration in retail sales and modest softness in the Empire Manufacturing Survey and May PPI readings. Wednesday delivers updates on housing activity, with Housing Starts expected to bounce back in May, while building permits decline. No economic releases on Wednesday as that day is all about the Fed. Thursday could show another improvement with jobless claims and a steady Philly Business Outlook. EU  On Saturday (June 12), Germanys Green Party holds a two-day digital convention to elect a new leader. The front-runner, Annalena Baerbock, is expected to win the nomination as the partys candidate for Chancellor. The EU holds a summit on Tuesday, with US President Joe Biden in attendance. The EU is hoping to repair relations with the US, which deteriorated during the Trump administration. On the economic front, the Eurozone releases Industrial Production for April on Monday. The consensus stands at 0.4% m/m and a whopping 37.4% y/y. On Thursday, the EU releases Final CPI y/y for May, with an estimate of 2.0%, unchanged from the preliminary reading. Norway  The Norges Bank, the countrys central bank, holds its policy meeting on Thursday. The bank is expected to maintain its key rate at 0% and signal that it plans to hike rates later this year. The big question is whether the bank will hike rates hike in September or December. If the central bank does raise rates this year, it would become the first major European central bank to raise rates since the start of the Covid pandemic. Switzerland  The Swiss National Bank (SNB) will announce its rate decision on Thursday. The bank is widely expected to keep its deposit rate at -0.75%, the lowest rate for any major central bank, and will publish its annual financial stability report. SNB Vice-President Fritz Zurbruegg said in an interview that the bank will continue its policy of negative rates and will intervene in the foreign exchange markets when necessary. UK  President Joe Biden is currently on a state visit to the UK. On Sunday, Biden and his wife will meet Queen Elizabeth II at Windsor Castle. On Monday, the UK government will announce if the government plans to end Englands lockdown on June 21. Cases of the Covid Delta variant have been on the rise. Last week, the number of daily confirmed cases was the highest since February. As a result, the June 21 target is increasingly in doubt. The Association of Corporate Treasurers conference takes place from Monday to Thursday. The keynote speaker will be BoE Governor Andrew Bailey. The UK will publish employment data on Tuesday. The unemployment rate for April is expected to remain unchanged at 4.8%. On Wednesday, CPI y/y is projected to accelerate to 1.8% in May, up from 1.5% beforehand. Emerging Markets  Iran  On Friday, Iran holds a national election to choose a successor to President Hassan Rouhani. Russia  On Wednesday, Russian President Vladimir Putin will meet with US President Joe Biden in Geneva, in what is expected to be a cordial but frosty meeting. Prior to the Geneva meeting, Biden will meet with European leaders at a NATO Summit in Brussels. Topics of discussion will include Russian aggression and cyber attacks. Turkey  Presidents Joe Biden and Recep Erdogan will meet on the sidelines of the NATO Summit on Monday. The meeting comes at a time when the Biden Administration has been sharply critical of Turkeys foreign policy and human rights record. The central bank (CBRT) is widely expected to keep rates at 19% at the policy meeting on Thursday. CPI, which has been running in double digits, ended a streak of seven consecutive increases in May. This could make it more difficult for the central bank governor to resist President Erdogans demand to lower rates. China  Local equities finished the week in the red as China passed a law penalising companies in China if they comply with sanctions from overseas governments. (read USA and Europe) That rock and a hard place law may weigh on sentiment next week. Additionally, there is some geopolitical risk attached to the weekend G-7 meeting in Britain. Notably President Biden is turning up the heat on China internationally, while his trade minions have constructive interactions with their Chinese counterparts. China releases Industrial Production and Retail Sales on Wednesday with the YoY numbers expected to slow in May. A big downside miss would be negative for equities. Meanwhile, the subtle messages about Yuan appreciation from the PBOC seem to have put a floor under USD/CNY. THe worlds most indebted property developer, Evergrande, is in trouble again. If the creditor bullet finally hits them this time, the shockwaves will be felt in China corporate debt markets and potentially equities. Watch also developments in Guangdong and the COVID-19 situation there. Like the rest of Asia, China has itchy trigger fingers on the spread of COVID-19. If the spread escalates and China ramps up lockdown inside and outside of the province, that will be felt in markets right across Asia. India  Indias COVID-19 cases have fallen to just 100,000 per day but appear to be on the right track. That has led to increased buying of oil by importers which has put a floor under USD/INR over the last week as parts of the country reopen. I expect this to continue over the coming week with USD/INR potentially rising to 73.50. The downward pressure on the INR may be amplified by the release of WPI food, fuel and inflation on Monday and the May Balance of Trade on Tuesday. Trade will have taken a serious pandemic hit and although distorted by 2020 base effects, YoY inflation could rise to near 15%. With the RBI subtly in QE-mode, the stagflation story may return weighing on local equities and the currency. Australia & New Zealand  Australia releases RBA Minutes which should be a non-event with markets focus on employment data due on Thursday. Always a volatile data set, it is usually good for some decent intra-day volatility. A negative print in the full time component would be a surprise and raise concerns that the recovery is slowing. THat would weigh on the currency and local equities, but probably only for a day or so as the RBA remains ultra-dovish with an employment/wage focus, as the minutes will reveal.  Otherwise the currency will remain a slave to movements in the US Dollar which looks likely to weaken this week. No significant data or event risk from New Zealand. Japan  Japan releases Industrial Production on Monday, Machinery Orders and Trade Balance on Wednesday, and a BoJ rate decision on Friday, conveniently, a day after the FOMC meeting announcement on Thursday Asian time. Both Industrial Production and the Trade Balance will feel the heat from rising commodity prices and COVID-19 restrictions, which keep getting extended and widened. But USD/JPY will remain tied to the movement in US/Japan rate differentials. THe BOJ will be heavy on lots of detail, but light on market moving announcements as per usual. Political risk is increasing in Japan. The noise about cancelling the Olympics is rising. A definite negative for local equities in the short-term if it happens. Secondly, PM Suga has been dragged into the Toshiba Board governance scandal with accusations of direct interference. This is an evolving situation which wont unseat him, but threatens to make the rumoured post-Olympics snap election a much more closely run affair. Markets  Oil  Energy markets will pay close attention to the resumption of Iran nuclear talks over the weekend. Optimism is high for the deal to get revived, especially after the US said it would remove some sanctions on people including a former Iran official. The crude demand recovery is looking very robust, but it will be hard for crude to continue to rally until energy markets know how much oil to expect from Iran. Pressure to revive the deal before the Iranian presidential election on June 18th no longer seems like a big motivating driver as an arch conservative is likely to win. Depending on how much Iranian crude returns and how quickly, Brent crude prices could rally to $80 or drop towards the $65 level. Even if oil prices correct, energy traders are still optimistic that prices will settle higher over a very robust demand recovery and expectations that the market will stay balanced. . Gold  With nominal and real yields in freefall, golds become an attractive investment again. After a sizzling CPI report was unable to change traders minds that inflation will likely be transitory, Wall Street seems content to be in wait-and-see mode over the short-term. While the argument for a weaker dollar seems easy, the ECB is in no rush to change from their ultra-loose policy and that might keep FX in a lull. With financial markets expecting low FX volatility, gold might see itself stuck in a broadening formation pattern. If the $1,900 level holds for gold, key resistance will come from the January high of $1,962.50. Bitcoin  The spotlight has tentatively shifted from regulatory and ESG concerns to El Salvadors decision to be the first country to formally make Bitcoin legal tender. The next question is whether the rest of Latin America and the Caribbean try to follow suit. The developing world has many countries that are cash economies and the case for making Bitcoin legal tender might not be so hard. The $30,000 to $40,000 trading range remains intact for Bitcoin and is welcomed news for longer-term bulls. An extended consolidation is healthier for Bitcoin right now as much of Wall Street remains on edge until clarity emerges over the US regulation and how quickly progress is being made over ESG concerns. Key Economic Events  Saturday, June 12  The G-7 summit resumes in Cornwall, southwest England, with guest countries India, Australia, South Africa and South Korea in attendance. Iran nuclear talks to restart in Vienna. If Iran pushes back on international inspections, talks could collapse. Germanys Greens have a two-day convention with Baerbock likely to be announced as the partys candidate for chancellor. Sunday, June 13  President Biden and the first lady meet Queen Elizabeth II at Windsor Castle. Monday, June 14  NATO Summit in Brussels will address concerns over Chinas rise, Russian aggression, and cyber attacks. President Erdogan meets President Biden. UK PM Johnson announces government decision over ending Englands lockdown on June 21 st . . ECB Executive Board member Schnabel gives opening remarks at the CEPR/EBRD/ECB Symposium  BOE Governor Bailey speaks at the Association of Corporate Treasurers conference. Riksbank Deputy Governor Floden takes part in a round-table discussion on the Financial Stability Report. Economic Data/Events:  Eurozone Industrial production  Japan Industrial production  India CPI, wholesale prices  Japan industrial production, capacity utilization  Turkey Current Account Balance  Poland Trade & Current Account Balance  Bank of France industrial sentiment  Switzerland producer and import prices  Tuesday, June 15  EU/U.S. summit is held in Brussels  BOE Governor Andrew Bailey speaks at TheCityUK annual conference  ECB Governing Council member Rehn presents the Finnish central banks economic forecasts  ECB Executive Board member Panetta speaks at a Bundesbank conference on the topic of Cash in times of turmoil.  ECB Governing Council member Holzmann and IMF Mission Chief Franks present the results of IMF Article IV consultations on the Austrian economy. UK PM Johnson holds a bilateral meeting with Australian PM Morrison. Economic Data/Events:  US industrial production, PPI, retail sales, Empire manufacturing, TIC flows  Canada housing starts, existing home sales  France CPI  Germany CPI  Poland CPI  India Trade Balance  Eurozone Trade Balance  New Zealand food prices  Australia RBA minutes, house price index  Japan tertiary industry index, trade balance  Russia GDP  UK jobless claims, unemployment rate  Sweden Unemployment Rate  Turkey budget balance  Switzerland economic forecasts  Wednesday, June 16  Federal Reserve officials will publish updated projections for interest rates, employment and inflation for the first time since March. Powell will face questions about when policy makers will begin tapering their bond-buying program. Presidents Biden and Putin meet in Geneva  VivaTech Paris virtual event. Apple CEO Cook and Facebook CEO Zuckerberg to speak  Economic Data/Events:  FOMC Policy Decision: To hold interest rates near zero update projections and officially begin thinking about tapering  S. housing starts, building permits  Canada CPI  UK CPI  China retail sales, industrial production, jobless  New Zealand BoP, current account to GDP ratio  Australia Westpac leading index  Japan trade, core machine orders, Bloomberg economic survey  Russia industrial production  Czech PPI  EIA Crude Oil Inventory Report  Thursday, June 17  ECB Governing Council member Visco and Executive Board member Elderson speak at the Institute of International Finance G-20 conference. ECB Chief Economist Lane takes part in the Barcelona GSE Summer Forum. RBA Governor Lowe addresses the Australian Farms Institute Partner Forum in Toowoomba, Queensland. The SEC may make a decision over Bitcoin ETFs  Economic Data/Events:  US initial jobless claims, leading index  Norway central bank (Norges) rate decision: To keep rate at 0% and signal a rate hike in September  Switzerland central bank (SNB) rate decision: To keep its deposit rate at -0.75% and release its annual financial stability report. Turkey central bank (CBRT) rate decision: Expected to keep One-week Repo Rate unchanged at 19.00%  Italy Trade  Switzerland Trade  Eurozone CPI  South Africa retail sales  New Zealand GDP  Singapore electronic exports  China new home prices, SWIFT global payments  Australia unemployment, RBA FX transactions  Japan Tokyo condominium sales  Spain labor costs  Russia gold and forex reserves  Friday, June 18  Iran presidential election  EU Economic and Financial Affairs Council meets in Luxembourg. To review VAT rates, the banking union, and markets in crypto-assets. Economic Data/Events:  Japan central bank (BOJ) rate decision: to keep policy settings unchanged  UK Retail sales, BOE/TNS next 12-month inflation  Thailand foreign reserves, forward contracts, car sales  Japan CPI  Austria CPI  Russia money supply  Germany PPI  Poland employment, wages  Sovereign Rating Updates: