Friday night’s big risk-off move had the potential to morph into an outright bear-market move seeing a 10-20% decline in equity markets, following a period of complacency and generally improving risk appetite.
Call it a bond market tantrum, as markets realise that central bank action to prop up markets would have to end some day.
In the event it’s a case of “business as usual” and investors have opted to buy the dip, seeing the S&P500 recover by 1.5% and the USD lose some ground.
There was nothing of note on the economic calendar, but three more Fed speakers spoke, ahead of the beginning of the pre-FOMC meeting blackout period.
Conspiracy theories about the Brainard’s late-scheduled speech were running rampant on Friday, with worries that the known dove would turn hawk and, that was suggested to be partly behind Friday’s sell-off. However, Brainard stuck to her guns and argued that the case to tighten policy pre-emptively was less compelling.
Being a voter, her words carried more weight than the other two non-voting speakers overnight. But both Lockhart and Kashkari were hardly champing at the bit to raise rates. Lockhart repeated his call for a “serious debate” on raising rates but stopped short of recommending higher rates, while Kashkari saw no urgency to raise rates.
On the back of all this Fed-speak, the USD has been on the back foot since the US market open and sees the various gamut of USD indices down in the order of 0.2-0.3%.
JPY has been the best performing, showing steady strength since the open yesterday. USD/JPY is down about 0.8% to 101.80.
NZD is up to 0.7350, with a nice rally since dipping below the 0.73 mark last night, supported by improved risk appetite. Now that Friday’s move has proved to be a false scare, traders will be reluctant to sell the currency ahead of what is expected to be a bumper Q2 GDP release on Thursday.
NZD/AUD drifted to as high as 0.9738 yesterday afternoon, but has since softened a touch and then largely traded sideways in a narrow range, sitting at 0.9720 this morning.
China’s data dump this afternoon is the key economic event today, with recent improvement in PMIs suggesting that growth in retail sales and industrial production should look fine.
GBP is well bid, trading up 0.5% to 1.3330 while the EUR is flat at 1.1235.
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