With volatility and inflation still keenly in mind for traders, the FOMC meeting minutes will be in focus, we consider the outlook for forex, equity markets and commodities this week.
US dollar weakness is once more a key driver across global asset classes. Forex majors, commodities and equities are all relatively benefitting on the back of this. However the one oddity is that this dollar weakness is coming at a time when US Treasury yields are rising. All things remaining equal, rising US yields should be supportive for the US dollar (in the search for yield). However, if Treasury yields are rising due to rising inflation expectations then the dollar will come under pressure. The US 10 year Breakevens rate (the difference between the 10 year yield and the real yield of inflation-linked Tips) has been pushing higher in recent months, now around 2.3% which is way above the Fed’s 2% mandate. Longer dated yields are rising but not for growth factors (which would be dollar supportive. This is why there has been such a move into the Japanese yen which has inflation still terrible low at +0.1% (US core CPI recently at +1.8%). Eurozone inflation is also stubbornly low around 1.0% helping to drive relative euro outperformance. The US also runs a twin deficit of around 6% of GDP, whilst the trade deficit is worsening and following US tax reform, expectations that the fiscal deficit will also balloon. Both the Eurozone and Japan runs surpluses and this is helping to drive outperformance of the euro and yen. The dollar weakness is providing support for gold and also the oil price is also beginning to bottom. Rising inflation is a negative for currencies.
At Hantec Markets Ltd we provide an execution only service. Any opinions expressed by analyst Richard Perry should not be construed as investment advice or an investment recommendation. This report does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Forex and CFDs are leveraged products which can result in losses greater than your initial deposit. Therefore you should only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions.