FX & Rates: Greater Fools Vs The Wisdom Of Crowds
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The market has reached remarkable consensus on three themes:
1) the ineffectiveness of negative rates; 2) the insatiable demand for higher yielding USTs from Japan and Europe; 3) the inevitability of the bull flattening trend in Bunds and JGBs. While we have been early on these, we now find ourselves uncomfortably mainstream.
But becoming contrarian is difficult: 1) the bull flattening is driven by central banks whose purchases are being pushed out the curve; 2) positioning continues to play catch up to these view; 3) shorting duration ahead of the UK’s EU referendum, with equity markets at their highs and on-going question marks about the solidity of the global recovery seems unappealing.
We therefore continue to favour flatteners and await impetus for the next USD move.
DXY had its worst NFP performance since '01, showing stretched Fed positioning. USD underperformance typically continues, falling an additional 3% 90days after the print. NFP leaves us cautious USD but data could prove May an outlier and Fed on course.
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