Commodity G10 rallied broadly on the back of surging oil price after the truly bullish EIA report, while the Canadian dollar is lagging behind its peer.
The spiking Covid cases and new lockdown in Toronto weigh on the currency and lower the probability of BOC taper announcement in their decision next week.
And while the Fed seems keen to avoid any taper talk, the European Central Bank (ECB) appears content to address it head-on. The ECB’s Banque de France Governor Francois Villeroy de Galhau was quoted as saying that the central bank could “possibly exit PEPP by March 2022.”
He stressed that policy could remain accommodative beyond this point through reinvestments under PEPP.
That sounds like a recipe for a market tantrum to me. Policymakers like the French governor will argue that even if the flow of purchases eases in Q3, the stock will still be high.
So, with the 10-year EUR vs the US spread narrowed, it’s providing a slight advantage to the EURO on the race to policy taper normalization.
With US yields remaining near the bottom of the perceived current ranges and oil rallying magnificently overnight night after a genuinely bullish EIA inventory report driving G-10 Commodity currencies higher, one could expect the ringgit to hitch a ride on this oil price momentum.
Gold caught in a narrow range
Gold has reverted closer to the $1730 pivot zone, a level where it’s been see-sawing now what seems forever. Gold is broadly staying within the current ranges, although the market has been trading firmer on balance.
The dollar’s pullback has likely been a key supportive factor along with a more balanced positioning. While stocks have been acting as competition for gold lately, equities at all-time highs are likely encouraging stronger hands back to the fray looking for policy diversification.
Biden’s economic team doesn’t want higher rates
There’s been a media report that President Biden’s economics team has double-checked the Fed’s inflation forecasts to ensure the stimulus plan doesn’t cause an inflation leap beyond what the Fed could control. It said they concluded that it wouldn’t and that the Fed’s numbers and analysis look right.
In other words, the Biden administration provided a formal pushback on the fears of people like Larry Summers. Still, the report said that Biden’s team remained wary and that the infrastructure package has been designed to slowly feed money into the economy to avoid an inflation surge.
Interesting in all this is the fear that they do generate inflation. The report said White House officials are running multiple intraday inflation checks.
NOTE – one interpretation of what’s happening could well be that cheap money is critical to the whole process.
It’s not that the White House doesn’t want inflation. Instead, it can’t afford to have the Fed raise interest rates because there’s inflation. The White House might not conflict with the Fed because it was under Trump, but the fear is still the same: for the plan to work, rates have to be left low.
Market analysis from Stephen Innes, Chief Global Market Strategist at Axi