US yields could hover near current support zones

Markets

Stock markets on Friday finished in green with nice gains especially in Europe (+0.8%), still enjoying the extremely low volatility environment. The VIX index finished the week with a new post-pandemic low. US Michigan consumer confidence in June was good (rose from 82.9 to 86.4 on improved expectations), helping to shape the benign stock environment. US Treasuries’ underperformance sent yields almost 3 bps higher in the belly of the curve. Real yields were the driver. Part of the move was definitely a technical counter move on the outsized yield drop on Thursday’s 5% CPI reading though. The 10y yield found support near the 23.6% retracement of the March 2020-2021 rise at 1.43%. Doing so, it also kept the lower bound of the downward trading channel intact. German yields for their part closed 1.8 (10y) to 2.6 bps (30y) lower with the 10y gapping and finishing below -0.25% support. Peripheral spreads tightened up to 5 bps in Greece. The US dollar was very well bid, a striking observance given low volatility and a not-so-bad risk climate. It followed an already resilient greenback on Thursday even as real yields then dropped 10 bps. EUR/USD tanked from 1.217 to just north of 1.21. DXY closed the session at the strongest level in a month at 90.55. Gains in USD/JPY were limited; the pair rose from 109.33 to 109.66. EUR/GBP followed the footsteps of EUR/GBP to end the week sub 0.86 even as UK industrial production figures disappointed a bit. Cable is rangebound just south of 1.42.

Asian dealings occur quietly. News is limited to a round-up of the G7 leaders meeting, which had no meaningful direct market impact. Moreover, Chinese, Hong Kong and Australian markets are closed today. Others print modest gains. Core bonds trade flat, as does the dollar and most other major currencies. EUR/USD is struggling to keep 1.21

We’ll be blunt: today’s going to be dull. There is no economic data scheduled for release and we’re two days away from a pivotal Fed policy meeting. It is likely that a majority of the governors will have brought forward their first expected rate hike in 2023. But more importantly, the June meeting could mean the start of the taper debate. Though only a first step in what is going to be a months-long discussion, it is important information to markets. That’s especially the case when markets are positioned for an ever accommodative Fed. Prove of this was Thursday’s reaction to the CPI outcome. Thus we expect no strong directional moves in the run-up to Wednesday’s Fed gathering. US yields could hover near current support zones. The picture for German yields deteriorated after Friday’s price action. First support lies at -0.30% (38.2% retracement of the Nov 2020-May 2021 rise). EUR/USD got caught in a downward trend channel. Support at 1.21 should at least hold going into the Fed meeting but we admit things look shaky. That’s also the case for EUR/GBP, which is nearing crucial technical support in the high 0.85 area.

News headlines

 In a statement concluding its 2021 Article IV consultation, the IMF said it expects the Turkish economy to expand about 5.75% this year. However it is seen to return to a lower trend next year. The Fund also called for steps to address low reserves and high inflation. "With high external financing needs, sizeable domestic foreign exchange deposits, and low reserve buffers, the economy remains vulnerable to shocks and to changes in sentiment at home and abroad", the Fund said. The Fund also emphasized the importance of strengthening central bank independence, rebuilding high-quality reserves, further simplifying the operational framework, and improving policy communication. This weekend, President Erdogan announced that the Central Bank of Turkey agreed to increase an existing currency swap line with the people’s Bank of China to $ 6 bln from $ 2.4 bln.

UK PM Boris Johnson is said to be preparing a delay in its plan to lift pandemic restrictions to cope the surge of the delta variant. The government planned to end social distancing rules on June 21. However, the Prime Minister this evening is expected to announce a delay of as long as four weeks for the easing of most rules.

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