Fundamental FX Factors To Watch Focus:
- A parallel move in the US yield curve may be upon us as inflation fears are heating up
- WTI Crude oil has recently broken toward $70/bbl and its taking inflation breakevens along for the ride
- Haven currencies are on the defensive as the carry trade gets revived
- The Fed and yield curve disagree, but who will win?
Focusing on the Federal Reserve as the key determinant of where markets were heading was so two years ago. Now it seems that forces beyond their control (gasp at the thought) are dictating the market’s focus. The force is in a word, inflation.
The IEA Chief Economist, Fatih Birol said it best earlier this week on a Bloomberg Interview when he said that those who wanted inflation and higher prices should be careful what they wish for because they just might get it. It is referring to inflation as Birol was referring to the sharp drop in Venezuelan output, which has turned the economically strained company to a net-importer as a key concern for the market that could in turn only add to the supply shocks that are driving up crude oil prices.
As a key proponent of intermarket analysis, I often preach that no market can be seen as an island. What shocks happen in one market will often have spill-over effects and crude oil’s spillover effect to fixed income, a key proxy for inflation expectations is