The US Dollar was unable to hold onto gains on Monday, which may have had more to do with an unwind of USDBRL short positions than value buyers seeing the USD as oversold. Either way, the DXY is working on its lowest weekly close since October 31, and if you look at the bond market or listen to St. Louis Federal Reserve President James Bullard, who is a non-voter, you can see why. On Friday morning, Mr. Bullard said that “FOMC’s contemplated policy rate path is overly aggressive relative to actual incoming data on U.S. macroeconomic performance.” The bond market seems to agree as the spread of short-dated maturities that are sold compared to longer dated maturities that are bid are flattening. It’s also worth noting that fear is not compounding despite the pullback in US economic growth. When looking at the options market, 1-month 25 delta risk reversals showing traders are not paying a premium for protecting against the JPY appreciating that many would expect after Wednesday’s miniture sell-off. This tends to show that markets remain stable, which could help risk in the coming days.
What’s important to note is that the front end is being supported by the Federal Reserve, whom Bullard said could be hiking too aggressively relative to economic data, and the back end is said to be market driven. As of Friday, the 2/10 Year Treasury Yield Spread was at 0.94%. This is lower than the 20-day average of 1.02653%. This bear flattening of the 2/10 spread helps to show if the trend of lower/ flattening continues that future growth in the US is not being priced in by the bond market and that the Fed may, in fact, be setting up for unwarranted aggressive tightening. On the other side of the most popular FX pair, EUR/USD, the EUR has been shining and looks set to have the central bank headed by Mario Draghi confirming to markets that their form of tightening is working its way into the limelight. On Friday, EUR/USD traded above 1.12 for the first time since November 9 and is working on its highest weekly close since September.
