It’s been all about the bond market this week with the massive bid in fixed income seeing US 10-year Treasury yields plunge from 1.44% at their highs on Tuesday to 1.25% on the lows yesterday. There has been some noise about risk aversion in global stocks, but that doesn’t really apply to the US where the S&P500 closed down less than 1% from its record high. European bourses have opened up in the green this morning while US stock futures are rising as markets roll into the summer.

Bond yields have now started to stabilise with activity and pro-cyclical currencies endeavouring to establish a foothold after their recent pummelling. AUD, CAD and NZD have all been under severe pressure as the reflation trade takes a knock, with the oil market swings certainly not helping matters either.

Contributing to the antipodean’s weakness has been a general worsening in China sentiment. After the disappointing July PMIs, there are reports that the PBoC is considering an interest rate cut which all seems to play into the rerating narrative of the global economic recovery faltering.

Dollar stable amid tumult, ECB review

DXY has lost some momentum due to low yielding currencies having a larger weight in the index. But the dollar has remained broadly supported which is to be expected in this unstable risk environment.

The ECB published the conclusions of its 18-month strategic review with the main takeaway being the higher inflation goal and willingness to tolerate a limited overshoot of the symmetric 2% target. However, the bank does not have the power to raise inflation to target on its own so warnings of an overshoot and forceful action may ring hollow. The timing of the release may also help ECB policymakers avert tapering discussions over the summer with the review helping the doves on the governing council.

EUR/USD found a bid mainly on the back of the market stress and has climbed above 1.18. But bearish momentum is still strong and points to a test of the late March low at 1.1704, with near-term support at this week’s trough at 1.1781.

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