OCBC Bank

EUR-USD Heavy. Comments from Lagarde still leans dovish, especially when set against the Fed, citing that EZ and US are in “different situation” relating to inflation. She also mentioned space to cut interest rates if needed. Relative central bank dynamics should continue to set the EUR softer against the USD. Near-term, the bounce above 1.1900 eased downward pressure, but we expect the reprieve to be temporary. Multi-session targets at 1.1800 and and the April low of 1.1704

USD-JPY Laggard amid USD strength. The bounce higher in back-end UST yields saw the USD-JPY supported amid the USD retracement on Monday. Nevertheless, the 10y UST yield may need to consolidate between 1.50- 1.70% range for the pair to see more significant upside. Not the preferred expression for USD strength at this point.

AUD-USD Heavy. The bounce on Monday failed to retake the 200-day MA (0.7557), leaving the technical posture still negative for the pair. May need more help from improving risk sentiment in the near term, but we do not expect it to be forthcoming. Prefer to use bounce to enter shorts in this pair.

GBP-USD Heavy for now. The GBP-USD also failed to recover the 100-day MA (1.3943) in the bounce overnight. Focus will be on the BOE decision (Thu), especially to see if there will be any hawkish champions after Haldane leaves. This should keep the GBP perhaps more stable compared to the cyclicals into Thu.

USD-CAD Firmer. The USD-CAD retraced after a test of 1.2500 on Monday. 1.2400 will again need to be recovered – our bias is that it will be materialized.

Themes/Strategy

The UST curve bearish steepened overnight, undoing part of the excessive flattening move post FOMC. The 10Y yield rebound, after touching an intraday low of 1.35%, to close at 1.49% near day high level but still a tad below the 100DMA. Near-term driver is likely to shift back to supply, with the 2Y, 5Y, and 7Y coupon auctions lining up. The 2Y and 5Y have not been the pressure point, and we expect this situation to remain so.

NY Fed Williams said the economy is way off from substantial further progress, reiterating the usual rhetoric, while Bullard said it seems unlikely that the Fed will raise rates while it is tapering asset purchase. These comments might have helped stabilize front-end yields. The adjustment at Fed fund futures and Eurodollar futures appears done, before the Fed turns yet more hawkish. In this regard, Powell’s testimony and a slew of Fedspeak this week are closely watched.

USD liquidity has stayed flush. Usage at the Fed o/n reverse repo facility reached a fresh record high of USD765.1bn on Monday, while the bill auctions overnight drew strong demand; yields at the 3M and 6M bills were 2bp and 1.5bp higher than at previous auctions, at 0.045% and 0.055% respectively, tamer than the 5bp hike in the o/n RRP rate. USD liquidity may only start to normalize upon a resolution to the debt ceiling, and further when the Fed’s tapering kicks in.