The latest BoJ and ECB meetings have confirmed that they have, at least for now, hit a limit for their easing policies. After the rather mixed message from the April FOMC meeting, it also seems as though the ‘Yellen put’ is the one safety net that investors can fall back on if global shocks were to derail the nascent economic recovery. On the face of it, none of this should matter so long as the latest risk rally is based on improving global economic fundamentals, growing company earnings and recovering commodity prices.
That said, a look at the G10 economic surprise indicators would suggest that with some notable exceptions the data releases, especially in the major economies, are still coming in below market expectations. At the same time, the recent US stock market rally has pushed valuation metrics to multi-year highs, suggesting that the Fed dovishness rather than earnings were the driver. The commodity price rally is supported by the approaching US driving season, indications of solid demand from EM and abating oversupply concerns on the back of the drop in US oil production. That said, there is no denying that weak USD on the back of a dovish Fed is also a factor behind the rally.
The question about the importance of the ‘Yellen put’ as a driver of the risk rally will become more relevant next week when US data could highlight the temporary nature of the latest economic slowdown and the continuing tightening of US labour market conditions. Given how entrenched the latest USD-bearishness has become, however, we think that it would take positive data surprises to bring the latest USD-bashing to an end.
Elsewhere, AUD could continue to struggle ahead of the RBA although we would prefer to express any bearish views against other commodity currencies like NZD or CAD. The latter could remain resilient if the upcoming labour data adds to the stream of positive surprises from NZ and Canada. We maintain a constructive view on SEK but recognise that investors could turn more cautious after the latest disappointing data. JPY could remain resilient given that the BoJ’s inaction fuelled concerns about its officials’ ability to boost growth and inflation.
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