Inflation is the Key

The shortened Memorial day week is chalk full of critical data but  Tuesdays PCE and Friday’s Payrolls results will be crucial in shaping the markets near term structural view for the USD. Given the Fed’s concern about realised inflation, dealers will be directed to the Average Hourly Wages Friday as this week’s print can cause massive volatility in Financial Markets given the releases proximity to  the anticipated June US interest rate hike

Similarly, Wednesday’s  EU  inflation data will play a significant role in Euro fortunes.  Moreso given the market’s high expectations for a more hawkish change in the ECB’s forwarding guidance, While the markets have been watching ECB speeches more intently, ECB Draghi stuck to the script while addressing a committee of the European Parliament suggesting the ECB’s  extraordinary amount of monetary policy support is still required.

While most markets sleep walked through yesterday’s session the same can not be said for the CNH as volumes s were trading well above average.The fallout from last week’s stronger CNY fixing and the latest funding squeeze are taking their toll on newly minted dollar longs and dampening enthusiasm for CNH trade.  If this were the objective of the Pboc latest temper tantrum, after the Moody’s downgrade,  the job was well done, given the huge carry, investors would likely prefer short USDCNH exposure. If the non-existent funding conditions persist, with T/N trading at 175 at one stage, we may see the USDCNH eventually test the key psychological 6.80 level as this short term carry is too juicy to ignore.

Euro

In early Asia, the EURO  toppled from 1.1170 to 1.1130 after a  headline surfaced that Greece may opt out of next payment without debt deal ( BILD). With the war of words escalation between the ECB and Greece regarding the inclusion in ECB bond buying program, the uptick in Greece risk premium is weighing on Eurozone sentiment.

The Euro was trading a tad dark as Draghi’s latest comments suggest the EU still needs stimulus, sounding much less hawkish than the market lean. The headline saw fast short term money take advantage of  both market positioning and early morning liquidity to drive the Euro to lower with ease   Positioning is a bit stretched on the EUR and EUR crosses so there could be some additional follow through on the headlines

Australian Dollar

The Aussie is under the gun in early trade more so from a general view that downside risk to the commodity space abounds rather than any one particular headline. With this dispirited  near-term view  for iron ore prices and  the Feds all but certain to raise interest rates in June, the Aussie appears  poised for a significant move lower

Japanese Yen

USDJPY has extended its decline below 111 as EURJPY positioning unwinds on this morning Greece headline But overall risk, in general, is struggling this morning on Greece and the latest UK election poll.

The Pound

But risk, in general, is struggling on the latest UK election poll.The gap between Conservatives and Labour parties is narrowing in the most recent polls in UK elections. The Times cites a Survation poll as showing that Conservatives are at 43% versus 37% for Labour- a lead of 6 points down from 9 points a week earlier.