[Market Review].
U.S. bond yields and the U.S. index both retreated. Following the previous day’s decline, the 10-year U.S. bond yield continued to fall back above 1.6%, while the U.S. Dollar Index fell below the 93 handle.
During the first quarter of the year, U.S. bond yields and the dollar index performed strongly as investors bet that the U.S. economy would rebound from the epidemic faster than other countries on the back of massive stimulus measures and positive vaccination progress.
However, by early April, U.S. bond yields and the U.S. dollar index became weaker. Hedge funds trimmed their long dollar positions even as the U.S. nonfarm payrolls and PMI data performed favorably, which may indicate that the market has digested most of the optimistic outlook.
Not long ago, Biden proposed a $2.25 trillion infrastructure bill, but Republicans were expected to oppose it. However, recently, non-partisan members of the Senate ruled in favor of the Democrats using the reconciliation process to pass additional legislation, meaning that they will be able to use the budget reconciliation process three times during the year, one more than previously. This may be able for the Democrats to pass the infrastructure bill without Republican support.
Gold climbed above $1745 at one point. U.S. bond yields and the dollar weakened, supporting gold. Gold prices climbed from near $1,730 to $1,745.36 an ounce at one point, setting a new high since March 25.
Silver broke above the $25 mark. Silver also followed gold’s rally, rising nearly 1 percent during the day to touch a high of $25.27 an ounce.
The euro continued to climb. While the dollar weakened, the euro continued to advance. The euro rose more than 60 points against the dollar during the day. The euro has weakened in recent months. Societe Generale pointed out that high U.S. bond yields, rising U.S. economic growth expectations, as well as the sluggish European economy, are the three main factors weighing on the euro.
The British pound retracted previous gains. And the euro continued to move higher, the pound retreated the previous day’s gains, and has now returned to 1.3840 near.
U.S. oil surged higher and retreated. Finally, a look at the oil market. U.S. oil surged higher and retreated during the day. Brighter economic growth prospects and expectations that summer travel will increase eased concerns that the epidemic was weighing on crude oil demand, supporting oil prices. However, falling stock markets and a much higher than market expectations increase in API refined oil inventories weighed on oil prices.
[Risk Warning].
U.S. bonds: Inflationary pressures fear not to pick up U.S. bond yields are expected to stabilize
Japan’s Sumitomo Mitsui Banking Corporation said that the current cost-push pressure from rising commodity prices has exacerbated inflation concerns, but this is largely influenced by the epidemic. As economic activity recovers from the epidemic, supply constraints will ease.
More importantly, the pace of recovery in service sector employment remains very slow, making uncontrollable inflation unlikely in the coming years.
As a result, inflationary pressures are not sufficient to support market expectations for a Fed rate hike. This will lead to a stabilization in U.S. Treasury yields, with the U.S. 10-year Treasury yield likely to peak in April for the next few months.
Australian dollar: U.S. indices will gain support Australian and U.S. fears are blocked at 0.77
Westpac prefers to buy AUDUSD on the low side rather than sell on the high side.
The bank noted that global trade has picked up and commodity prices are mostly higher than at the beginning of the year, favoring the Australian dollar. Nevertheless, the U.S. is clearly outperforming the eurozone in terms of epidemic control and vaccine rollout, which should temporarily support the U.S. dollar index and indirectly limit the upside of the AUDUSD.
Australia is likely to enter a period of data weakness after the expiration of the “jobs preservation” program. Technically, the AUDUSD is expected to continue to gain support at 0.7550, but may be blocked at 0.77, and a return to resistance at 0.8 may need to wait until the third quarter.
Canadian dollar: a combination of positive factors U.S. and Canadian expected to fall to 1.20
According to National Bank of Canada Wealth Management, Canada’s surpassed GDP growth, high commodity prices, and a hot housing market supported by record employment in high-income sectors have set the stage for the Bank of Canada to begin further tapering of quantitative easing as early as this month.
Although the market may have already digested the impact of this tapering of the bond purchase program, the formal implementation of the program may cause some volatility, and the strong upward momentum of the Canadian dollar is expected to gradually diminish, with the USD/CAD falling towards 1.20 in the second half of this year.
[Key Forecast
TBD Lagarde may emphasize maintaining the easing policy
First, let’s focus on the speech to be delivered by ECB President Lagarde. At the end of last month she said that the economic situation is facing uncertainty and the balance of short-term risks is tilted to the downside; the outlook for inflation is weak and policy easing is important.
According to current data, the emergency debt purchase program is “adequate”. The emergency debt purchase program will be adjusted as needed, depending on financial conditions. Adequate notice will be given before withdrawing the stimulus program.
It is clear that although the economy is at risk, it is not as serious as it was at the beginning of the epidemic. Based on this, we believe that Lagarde may emphasize that there is uncertainty in the economic outlook, that easing will be maintained and that the current bond purchase program is sufficient.
As economic conditions improve, the ECB will evaluate the bond purchase program and look for the possibility of an exit, although it is unlikely that such a signal will be released in the short term.
22:30 EIA crude oil inventories may decline
Next, take a look at EIA crude oil inventories, which were down 876,000 barrels in last week’s release. Some analysts commented that refineries finally got over the cold weather in the US in February. Refinery utilization rates recorded a fourth consecutive week of increases and rose to 83.9%, the highest level since the U.S. embargo began last March.
This morning, API crude oil inventories have been released and decreased by 2.168 million barrels. The financial blog Zero Hedge commented that the drop in API crude stocks exceeded market expectations, in addition to an unexpectedly large drop in gasoline stocks, but a surprisingly large increase in refined oil stocks.
Based on past experience, API inventory data and EIA inventory data have a relatively strong positive correlation, so EIA crude oil inventories may also decrease.
The current market expects that the EIA crude oil inventories may decrease by 1.325 million barrels for the week of April 2. If the released data exceeds expectations, oil prices may dip in the short term; if the inventory data is less than expected, oil prices are expected to strengthen.
Thursday 02:00 The Fed is not expected to worry about stronger inflation
Tomorrow morning, the Federal Reserve will release the minutes of its monetary policy meeting. Fed Chairman Jerome Powell said after the March meeting that the Fed believes inflationary pressures are temporary, but the market remains concerned that this could become a bigger problem. Goldman Sachs also believes that the probability of U.S. inflation “out of control” is small, with only a 31% chance of CPI exceeding 3% over the next five years. Investors will be watching closely for any new comments on inflation.
Also, keep an eye on the minutes for clues that hint at the conditions for a cut. Powell said last month that the Fed will reduce bond purchases as the economy makes substantial progress toward recovery and goals. Analysts expect the Fed to develop a clearer framework for the reduction around the middle of the year, but will not really begin to reduce the code until 2022.
The Fed’s latest “Summary of Projections” anticipates a rate hike in 2022, and market participants will be looking for new clues about the timing of the tightening. If the Fed does release hopes of an early rate hike, it is expected to lift the dollar index higher.
On balance, the Fed may reiterate that stronger inflation is only temporary, suggesting that the Fed will reduce bond purchases as the economy recovers and the job market makes substantial progress. Investors need to pay close attention to the Fed’s expressions for inflation and bond purchases. If the Fed releases optimistic signals, the dollar index may strengthen.
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