Vol Picks Up Heading Into Summer

Yields collapsing

The real action is taking place in the bond market where recent moves have been pretty extraordinary even by the standards of the recent past. The benchmark US 10-year treasury note yielded 1.25% on Thursday morning, plunging 20 basis points in three days. This “flattening” of the yield curve, where short term rates fall faster than interest rates further out, has dominated bond markets since the US payrolls numbers last Friday. 

The reflation tale has lost momentum in double-quick time with position adjustments being pared back at the worst of times – that is, when macro expectations are being reined in and when market liquidity is drying up ahead of the summer.  Essentially, we are seeing a recalibration of inflation expectations in the wake of the supposed Fed’s hawkish pivot at its June meeting. 

Risky currencies hammered

With concerns over the major increase in infection cases in the Delta variant, this general environment is helping safe haven JPY and CHF while the mighty dollar is taking a breather, having recently made fresh three-month highs.  The yen is on track to post one of its biggest daily increases this year as investors dump risky positions in currency markets. 

The rollback in the reflation trade is bad news for commodity-dollar currencies with AUD hitting levels last seen in early December. The Australian dollar is widely viewed as a proxy for risk appetite and has also not been helped by RBA Governor Lowe reiterating that inflation may only rise when the unemployment rate falls further and holds in the low 4% area, an outcome not expected until 2024. Of course, this comes after the bank took its first step towards QE tapering by announcing a smaller, third round of bond buying. 

OPEC+ disarray

Added to this summer cocktail for commodity currencies is an oil market which has dropped over 7% in the last few days, since the OPEC+ meeting failed to agree on production output levels for the next few months. With the rapid rising virus count in numerous countries around the world, an extended period without a deal could spur an increased amount of noncompliance. The early summer months are certainly alive with action in both financial markets and in several sporting arenas.

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Lukman Otunuga

Lukman Otunuga is a research analyst at FXTM. A keen follower of macroeconomic events, with a strong professional and academic background in finance, Lukman is well versed in the various factors affecting the currency and commodity markets. Lukman provides in-depth analysis on the global currency and commodity markets and is often quoted by leading international media outlets such as: MarketWatch, CNBC, NASDAQ, Reuters, AFP, The Guardian and Yahoo. Prior to joining FXTM, Lukman spent two years as a research analyst with international currency broker FXCM, where he focused on a technical and fundamental analysis of the global currency, commodity, and stock markets. Lukman was also responsible for leading educational seminars for international and local high net worth individuals, and has published a series of educational articles on forex trading with City A.M. Lukman holds a BSc (hons) degree in Economics from the University of Essex, UK and an MSc in Finance from London School of Business and Finance, where he studied corporate finance, mergers & acquisitions and the role of international financial institutions