We think the FX markets will take their cue from the US yield curve, where Friday's bullish disinversion of the curve (as short-dated yields crumble) point to a more reflationary setting and a weaker dollar. Were US two year Treasury yields to drop below the 4.10/20% area this week.
Whether those US short-end yields drop more this week will be determined largely by Thursday's US December CPI release. James Knightley is on consensus expecting core inflation at 0.3% month-on-month and 5.7% year-on-year. Downside surprises here were a big catalyst in the dollar reversing lower last year and this data point will remain one of the biggest FX triggers of the month.
In all, we suspect investors will be looking to add to positions in EM FX and the commodity complex this week. The Chinese renminbi is enjoying strong gains and Asia's high beta Korean won is flying. It seems very hard to fight this trend - especially in the second week of the year when money is being put to work. - ING FX Strategy
Comments