The European Central Bank’s Isabel Schnabel started it. In February she flashed a chart showing how much the euro had weakened against the US dollar. Two months later, the Bank of Canada’s Tiff Macklem bemoaned the decline of the Canadian dollar. Swiss National Bank President Thomas Jordan suggested he’d like to see a stronger franc. The US dollar had been soaring—now up 7% for the year—as the Federal Reserve prepared to aggressively combat inflation.

And so one by one, central bankers elsewhere, just as desperate to tame the relentless march of inflation in their own backyards, began sending not-so-subtle signals that they would for once welcome a stronger currency—which helps reduce the cost of imports by boosting buying power abroad. It’s a form of intervention so rare that their jawboning alone moved markets.

On June 16, two of them upped the ante: Switzerland surprised traders with the first rate increase since 2007, sending the franc soaring to its highest level in seven years. Hours later, the Bank of England announced its own rate increase and signaled bigger hikes to come

Eoin Treacy's view

Competitive currency appreciation a viable defense against inflation. A stronger currency makes imports less expensive but also depresses the competitiveness of domestic export-oriented businesses. In the last week Norway raised by 0.5%, the Czech Republic by 1.25%, UK by 0.25%, Switzerland by 0.5%, USA by 0.75% and Brazil by 0.5%. The ECB appears likely to raised by 0.25% in July. Here is a link to global-rates.com which carries a useful monitor for short-term rate movements. 

The Federal Reserve is still raising rates faster than other central banks but the rate of relative change is set to moderate. As commodity prices correct and recession risks are priced in, demand for traditional safe havens is improving but the Dollar is losing momentum.  

10-year Treasury yields failed to sustain the move to new recovery highs and are contracting rather quickly. The bond market is therefore betting that the risk of long-term inflation is declining sharply. Demand for long-dated debt is removing pressure to be in near-cash short duration bonds so their yields are not rising. The net result is the 10-year – 3-month spread is contracting quickly.

The Yen is very oversold against this background. It has been falling because of fears Japan was ignoring inflation. Perhaps they were right to hold tough.

Gold remains static above $1800. These periods of inert trading don’t last indefinitely and generally result in outsized breakouts.

Meanwhile Wall Street is barely steady in the region of the 1000-day MA. I remain short the Nasdaq.

At his testimony today, Jay Powell stated in his response to Congressman Barr’s question that the Fed is looking at contracting the balance sheet by between $2 and $3 trillion. He then corrected himself and stated they look at the size of the balance sheet relative to GDP.

That ratio currently stands at 3.66. To get it down to between 2 and 3 would be either a massive tightening or a serious GDP contraction.