The minutes of the Fed's last meeting published on Wednesday showed that the main topics continue to be high inflation and employment in the US. At the same time, the division of the Central Bank members in assessing primarily the prospects for inflation and financial stability signals a high probability of the first serious discussions of a real change in the monetary policy by the regulator.
At the moment, the market is experiencing a paradoxical situation. On the one hand, investors are afraid that the Fed will start discussing the topic of reducing the volume of government bonds redemption, which was already mentioned several times. On the other hand, the dynamics of Treasury yields completely deny this. In connection to this, the yield of the benchmark 10-year T-Note has fallen to 1.288% today after reaching a local high of 1.753% in April. This is completely discordant with the growing expectations in the markets.
It seems that investors in Treasuries either do not believe that the Fed will change its monetary rate from a super soft to a tougher one in the near future by reducing the volume of Treasury redemptions first (it can be recalled that assets worth $ 60 billion are being bought out at the moment) or they are considering securities the US Treasury as a safe haven in the face of political and economic turbulence in the world.
The behavior of the 2-year T-Note, which has traditionally been sensitive to growth prospects or declines in interest rates, also indicates this. It made a downward correction after reaching a local high of 0.2840% in June and is now at 0.2142%.
Against this background, American and European stock indices continue to rise, reasonably winning back the movement of Treasury yields.
As for the currency market, the US dollar shows a lack of coordinated action with the behavior of the US Treasuries and US stock indices. It continues to receive support against all major currencies except Japan. From our viewpoint, this indicates that currency traders continue to show confidence that the Fed will announce the beginning of a reduction in the volume of asset repurchases from the beginning of next year.
We also adhere to this version of events, as we have repeatedly indicated earlier. We still assume that the discussion on the change of the monetary rate will begin either at the regulator's September meeting or when the President of the Central Bank, J. Powell, announced this during his speech at the forum in Jackson Hole in August.
Forecast of the day:
The USD/JPY pair is declining amid divergent views among investors regarding the Fed's monetary policy. The pair fell below the level of 110.25 and we believe that it will further fall to 109.00.
The USD/CAD pair rose above the level of 1.2515 on the wave of the decline in oil prices and uncertainty about the prospects for the US Central Bank's monetary policy. We believe that if the price consolidates above this level, the pair will rise to 1.2645.
