Currency Point: Hatching hawks

The FOMC was central stage last week and that will definitely filter into this week as more and more board members line up with their 2 cents.

We do need to highlight a few comments from last week that are catching a lot of attention, most notably Lael Brainard.

Governor Brainard has now completely hatched out to be a strong hawk and her comments last Wednesday carried serious weight into the FX and interest rate markets. The comments that mattered were around the Fed’s balance sheet and rate trajectory. She stated that the Fed plans shrink the balance sheet rapidly, indicating this will begin as soon as May. She was also strong on the view that rate rise would be consistent with the target set out at the last meeting.

There is a suggestion that the balance sheet could be unwound at US$95 billion a month as it looks to reduce its swollen balance sheet that stand at over US$7 trillion. That rate would be almost double what it was doing when it begun to unwind its GFC operations in late 2017.

Never one to miss out on hawkish talk is St Louis Fed president Jamie Bullard and last week was no different warning that the Fed is well behind the curve and needs to raise the Fed rate by more than 300 basis points by December in order to curb inflation. That would see US mortgage rates well into the 6 handle and even as high as mid-7 per cent if this was to come about.

Interestingly he did put in a caveat stating he is monitoring the curve inversion but that it need not mean a recession is coming. We shall see.

This all lead to USD strength again –
EUR/USD was back below $1.10 ranging between $1.0865 and $1.0938 at the end of last week.

GBP/USD was holding at $1.3075 but is down under the $1.31 it started the week at.

USD/JPY continues to follow real yields which meant the pair rose further to ¥124.00.

AUD/USD started the week with a bang on the back of the RBA’s signal that rate rises are coming, the pair hit $0.765 but finished the week at $0.7480, with a low of $0.7467 showing just how strong the USD is.