The US dollar was the main mover in an otherwise quiet session on Monday, with American and British traders away on public holidays. There doesn't seem to be an end to the dollar's suffering. Inflation is heating up and yet the Fed remains committed to cheap money policies, keeping real Treasury yields suppressed near record lows and eating away at the dollar's rate advantage.
This paradigm could persist over the summer. The latest comments from Vice Chairman Clarida marked the first baby step towards discussing policy normalization, but it will probably take several more months of solid economic data before the Fed officially turns in that direction.
- Dollar drops in thin trading, turns gaze to ISM data and Fed speeches
- OPEC meeting unlikely to roil markets, but Iranian negotiations might
- Aussie unscathed by RBA, gold continues to rampage
Even when the tapering signal arrives around the early autumn, it might not spark massive market reactions if the Fed links any QE withdrawal with lifting the asset ban on Wells Fargo. That chess move would ensure that a massive player that's thirsty for long-duration assets steps into the bond market with force to fill the hole the Fed would leave behind, negating some of the upside pressure on yields.
It might therefore be a difficult summer for the dollar, especially against currencies whose central banks are already moving away from loose money policies, like sterling and the kiwi dollar. But there is light at the end of the tunnel. Ultimately, everything revolves around economic growth and America is in great shape in that respect, thanks to the overload of federal spending.
OPEC unlikely to disturb the waters, but mind Iran
It's a crucial day for the energy market, with the world's most powerful oil cartel and its allies deciding on their production levels. The producers agreed back in April to add around 2 million barrels a day by July, a commitment they are expected to stick to.
Oil prices are trading higher since that announcement, which will only make them more confident that the market can absorb some targeted production increases. The reaction today will depend mainly on what they signal about future supply increases, beyond what's already been agreed.
But the real story is Iran. If the negotiations with America about reviving the nuclear deal bear fruit, the sanctions that have crippled Tehran's oil industry could be relaxed and a flood of lost supply could come back online. Diplomats suggest significant progress has been made, although issues remain. While this might not trigger an outright trend reversal in oil prices, it would likely be enough for a deep correction.
Aussie undecided, gold shines, barrage of data eyed
The aussie is trading like a rollercoaster on Tuesday, spiking higher after Australia's current account surplus hit a record, then surrendering those gains after the RBA struck a cautious tone, only to rebound once again. Some headlines that China will ease some environmental restrictions in its biggest steel production hub helped too, painting a brighter picture for Australian iron ore exports.
Gold is reaping the rewards of the broader macro environment. With inflation rising and the Fed keeping its foot heavy on the monetary pedal, real Treasury yields are depressed near record lows and the dollar is getting smoked – both blessings for bullion. The party could continue until the Fed gets serious about scaling back its QE program.
Finally, the calendar is packed today. The ISM manufacturing PMI for May will top the US agenda, while the Eurozone and Canada will see the release of inflation and GDP data respectively. The Fed's Quarles (14:00 GMT) and Brainard (18:00 GMT) will deliver some remarks before the FOMC blackout period begins ahead of the June meeting.