Global Themes

As we hit the weekend, the bond markets have returned to some semblance of calm. German ten year Bunds had one of their narrowest trading ranges for the week today. With the difference in German & US Treasuries remaining steady, we saw the spillover effect into the FX markets with the Euro falling off from its four month highs traded earlier in the week. The Euro is up just under 9 percent from the low of 1.0456 traded two months back on March 16. US Dollar Treasuries yields have surged higher over the last few months, with the 5yr & the 10yr yield moving higher by 17 & 20 bps respectively. The FOMC members in various speeches have reiterated their view that they expect the US Fed Funds rate to move higher somewhere between June to Sept & the recent weakness in US economic data is being viewed as a soft patch. If the market actually priced in this expectation we should have seen a much stronger US Dollar but have actually seen the contrary. The level at which the Fed Funds Futures trade hold the answer to this. Fed Futures are pricing in a 19% probability of a rate hike in September this year & for Jan 27 meeting next year it is pricing a 64.4% probability. This means that the market is not really pricing a Fed rate hike this year & if incoming data over the next few weeks is stronger than expected we could see the US Dollar rally sharply, if the market reassess this possibility. US Economic Data has been on the weaker side largely, barring payroll data and we have some more key releases today.

CAD

The Canadian Dollar weakened slightly as Crude Oil Prices retreated and the US Dollar weakness eased. Canada’s red hot real-estate sector softened a bit as the New House Price eased to flat growth in March below market expectations of 0.1 percent growth earlier in the week. Today manufacturing sales were sharply higher than expected up 2.9 percent, after two months of contraction. The boost to manufacturing sales was provided by the aerospace and auto sectors.

JPY

Japan’s consumer confidence in April dipped lower to 41.5 for its first negative reading since December last year. Japans inflation at the wholesale level dipped lower to minus 2.1 percent(Y-on-Y) for the first negative reading since March 2013. This was in line with market expectations and was a result of the “base effect” of the April 2014 sales tax increase. Bank of Japan Governor Kuroda in a speech earlier today mentioned that he did not see an immediate need for further monetary easing as broad trend of inflation is improving steadily. He acknowledged that the timing for achieving the target of 2 percent for inflation has been delayed due to the effect of fall in oil prices. The USD/JPY has been steady and had not participated in the recent US Dollar weakness. This currency pair has traded a rather narrow range over the last few weeks as the rally at the long end of the US Treasury curve has offset the weakness in equities.

MXN

The Mexican Central Bank Minutes of the meeting held on April 30 that we released yesterday showed that members were against a rate hike at this point of time and that the costs of hiking rates would be higher than the benefits of such a move, especially before the US hikes rates. The central bankers preferred to use intervention as a tool to manage the exchange rate as too much weakness could impact inflation in the economy. Mexico’s economy is heavily dependent on crude oil and the fall in crude oil prices has sent shock waves through the economy where one third of the Federal Budget is funded by oil revenues. Inflation is currently around the 3 percent that the Central Bank targets.

GBP

The Sterling Pound is headed for its best week against the US Dollar in 6 years after its post-election rally. Opinion polls were all predicting a splintered house with a patched up & difficult coalition to assume power, but with the clear mandate obtained by the conservative party the political risk evaporated sending the Sterling Pound surging higher.

EUR

The Euro gave up some of its gains from earlier in the week as German Bund yields traded in a steady range with a slightly downward bias. European Central Bank (ECB) President Draghi did his bit for the weak tone in the Euro overnight as he stated that the ECB will implement in full its bond-buying program and it will stay in place as long as needed. This also sent European stocks higher which had been beaten down due to the turbulence in the bond markets. The never ending Greek-EU talks on reforms continued to be in focus and the Syriza government seemed to conceded to the demand of the “Troika” as it tried to move ahead with the privatization of its largest port, Piraeus. As soon as it had assumed power in January, the Greek government had tried to move back on this privatization which was agreed as part of the bailout funding deal. This has already ruffled feathers in Greece as the Syriza party is seen as rolling back its pre-election promises and we could witness political chaos in Greece in the coming months.