Funda-FX wrap: watching the bond run-off and implications for FOMC

From a fundamental perspective on Thursday, it felt like traders were gearing up for the G7 meeting and indeed the triple whammy of central banks next week, while, not least, the historic summit between Kim Jong-un & Donald Trump.

In respect to the G7, it could prove to be contentious considering the recent turn in rhetoric and tariff announcements from the Whitehouse towards not only China but its allies in Canada and the EU. 

""Fruitful": That’s President Trump’s prediction for his upcoming meeting with Kim Jong Un on June 12. However, Trump himself speculated the summit could last several days and that it would likely take more than one summit to reach agreement on North Korea’s nuclear program. Markets are watching these developments closely (alongside this week’s G7 meetings) for implications for the outlook for trade and geopolitics," 

analysts at ANZ explained. 

What is very key here is the bond run-off

There was a flight to the safe havens and a further whack to EM-FX. What is very key here is the bond run-off because that is creating an offshore USD liquidity squeeze in a market already highly short of the dollar in terms of debt funding capabilities and is something that the Fed will need to consider next week, leaning towards a potentially dovish hike.  It matters because the smooth running of the global financial ecosystem depends on the world’s banks having access to a liquidity pool of affordable US dollars to sustain their operations. With Fed hikes scheduled in, borrowing dollars is going to be less affordable than previously.

Key data events

Meanwhile, as far as data went, analysts at TD Securities offered the following wrap up:

"German factory orders fell -2.5% m/m in April, well below consensus expectations of 0.8%, and the volume of orders is now sitting at its lowest level since July 2017. The underlying shipments data was a bit better though with a 0.3% gain, pointing to a similar-sized increase in German IP tomorrow, but leaving us less firm on our initial upside forecast. So it looks like IP is starting out Q2 on decent footing, but the steep drop in orders does leave questions about how long that growth can continue."

"TRY CBRT surprised the market with a hawkish hike of 125bps. Lira rallied 2.2%. We expected tightening of 100bps. Now we enter a tactical USDTRY short."

"CAD The Bank of Canada's Financial System Review conveyed a largely neutral tone, noting modest improvements in household debt dynamics balanced by signs of speculation in the condo market and the uncertain impact of B-20 mortgage regulations. Risks to the financial sector were broadly unchanged from November though the risk emanating from EM stress was reclassified from an independent scenario to one that feeds into the risk of a recession or tighter financial conditions. The Bank also announced that the FSR will be published annually in June, rather than semi-annually, going forward."

"USD Initial jobless claims were 222k for the week of June 2nd, little changed from the prior report, while the 4-week moving average held near recent lows at 226k."

Key headlines/news

• Turkish Central Bank hikes one-week repo rate to 17.75% from 16.5%
• UK official: UK will leave customs union when it leaves EU
• Irish PM Varadkar: Backstop for Irish border 'is not something that can be time limited by a date
• US: Initial claims was 222,000, a decrease of 1,000 from the previous week
• EU's Barnier: Backstop must be workable to avoid hard border
• Canada's financial system remains resilient as vulnerabilities show further signs of easing
• BoE's Ramsden: Unusually subdued growth in wages appears to be coming to an end
• BoC's Poloz: Will incorporate tariff impact in July's monetary policy report
• US Pres Trump: No deal if North Korea doesn't give up nuclear program
• US Pres Trump: Will invite North Korea's Kim to US if summit goes well