WATCH THE BUCK - So my suspicions were confirmed Monday with stocks breaking the sequence of back and forth trade and rallying to fresh record highs. Currencies were mostly quiet, but the US Dollar has held up rather well in the face of the equity outperformance. So far geopolitical risk expressed by the Fed and ECB in recent days has failed to temper investor sentiment, and even today's weaker than expected China data has done nothing (to this point) to weigh on the market.
But I think the most interesting development at the moment has been this divergence between equity performance and US Dollar appetite. It is not uncommon to see the US Dollar under pressure when equity markets rally, and the fact that we haven't exactly been seeing it play out this way, is well worth the attention.
Perhaps the currency markets are a little more cautious at the moment, and I would think that if this is the case, there is certainly good reason ahead of Thursday's all important inflation data.
A BIG PIECE OF DATA - This week's CPI print has taken on added significance of late, with the US unemployment rate dipping back below 6.5%, giving the Fed less of an excuse to leave policy as is. Admittedly, despite the pullback in unemployment, there is still distress in the labour market. But even still, with the unemployment rate back below 6.5%, the Fed is closer than it wants to be to needing to consider more aggressive policy reversal. And so, in an effort to downplay these imminent reversal prospects, the Fed has reminded us that with inflation still "well anchored" below 2%, monetary policy is justified exactly where it is. But what happens if we see a jump in inflation that takes us close to or even above 2%? This could really shake things up and would most likely narrow yield differentials back in favour of the US Dollar, with the Fed being forced to accelerate its reversal timeline. So make no mistake, if there is one piece of economic data this week that could spark volatility in global markets, it will be Thursday's CPI print. If you are looking at currency markets and trying to gauge risk sentiment, pay attention to USD/JPY 102.00 and EUR/CHF 1.2200. Above these respective levels suggests the markets are inclined to take on more risk, while below opens the door for a liquidation in risk. Let's see how it plays out.