Citi

Asia has seen markets tentatively rebound once again following a choppy Tuesday session, where comments from Treasury Secretary Yellen saw heightened volatility materialise as she touched on interest rate hikes and inflation. A degree of walk-back following initial comments appears to be behind the rebound in Asia hours since, where AUD, NZD and GBP have outperformed counterparts. Bigger picture, CitiFX Strategy continues to look through noise expecting further upside for risk assets and USD weakness along with this as per the latest Monday Macro FiX.

Data wise today, USD ISM services is the main print of the day, while various pieces of Fedspeak are likely to see extra scrutiny following Yellen’s comments yesterday. Elsewhere we see central bank speak in EUR and CAD too. Over in EM, rate decisions in THB & PLN (hold), and BRL (75bp hike likely) are the focal points, with BRL IP and a COP quarterly inflation report also due.

While the USD notched bids against all of its G10 counterparts on Tuesday, tentative weakness has once again ensued in Asia hours, with AUD, NZD and GBP seen as the G10 outperformers. The most notable overnight developments came in the form of comments by Treasury Secretary Janet Yellen which contributed to the initial bid as highlighted in today’s Asia Open:

– Yellen stated when discussing fiscal efforts that “it could cause some very modest increases in interest rates to get that reallocation. But these investments are what our economy needs to be competitive and be productive. I think that our economy will grow faster because of them...It may be that interest rates will have to rise a little bit to make sure our economy doesn’t overheat.”

– We note that Yellen’s remarks were more aimed at highlighting optionality rather than advocating for a hawkish shift in policy guidance. The comments are not necessarily at odds with recent points made by Fed officials. Powell has on multiple occasions acknowledged that the Fed would have the means of countering any unwanted inflation that “materially moves above 2% and persists above that range.”

Yellen affirmed our above take after the NY close, and clarified via a Wall Street Journal event that she is neither “predicting nor recommending higher interest rates.” This appears to have calmed the market explaining the aforementioned rebound in risky FX. We also noted declines in equities too, with the S&P falling -0.7% to 4164.00, with losses spearheaded by losses in growth names. Nasdaq in comparison closed -1.85% to 13,544.00. Futures indicate a 0.2%-0.3% rebound though in Asia.

Natixis

FX: the US dollar rebounded against all G10 currencies on Tuesday after risk aversion took hold in reaction to the equity selloff. Traditional safe haven currencies, namely the Japanese yen and Swiss franc, were the ones that put up the stiffest resistance in the face of a resurgent dollar. The EUR/USD corrected back towards 1.2020. Commodity currencies were down sharply, in particular the Australian dollar, New Zealand dollar and Norwegian krone. Turning to emerging currencies, note the underperformance of the Turkish lira (USD/TRY at 8.32) ahead of today’s monetary policy meeting.

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