For many, it is not clear why the dollar and short term US rates found a little stability yesterday. Perhaps it is the proximity to next week’s FOMC meeting and the unfashionable view that the Fed could use the meeting to signal a June rate hike – just as the October 28th meeting last year forewarned the Dec. hike. Anyhow needless to say that next Wednesday’s FOMC meeting will have a large bearing on whether the risk on/dollar off environment extends through the remainder of the quarter. Portfolio managers clearly have cash to put to work, but are not really prepared to take on the local currency risk. DXY has found support ahead of 94.00. Slight bias to 95.25.Very little is expected of the ECB today in terms of policy changes. Instead President Draghi is expected to deliver a robust defense of ECB independence following criticism from German Fin Min Schaeuble that ECB policy was causing ‘extraordinary problems’ for German banks and pensioners. The EUR impact should be neutral from all this, but there is a slight risk that Draghi will want to correct the notion that the ECB has no room to ease further – the suggestion of which sent EUR higher at the last meeting. Price action has bbeen generally risk supportive but as USD yields climbed, USD gained traction across the board. AUD and CAD remain in strong trends gaining value with commodities, Gold is sticking with the rest of the bunch but seems expensive given the move higher in interest rates. EMEA Emerging Markets perform relatively well, ECB expectations are not as high as before but still the pressure will be on for further steps. Asia EMFX has stabilizied with some USD strength returning but central bank easing fears also limit gains.
