Market Pulse

Research evidence excerpt

Market Pulse

The USD had enjoyed, also, in the anticipatory period between mid-2021 and early 2022, when the Fed abandoned ZIRP again,

after the pandemic crisis. If we are in an anticipatory period now, and the Fed eventually does hike, the historical record

suggests that the USD will stay strong during this period.

Figure 1 - US: Two-Year UST Yield, Fed Funds Rate Target, and the USD's DXY Index

Source: Bloomberg LP

Of course, that's not proof; what other central banks are doing alongside the Fed is likely to matter too, as will the price of

crude oil, since it can set the pattern for relatively stronger or weaker growth in the US vs. the rest of the world, and help

determine whether the Fed eventually does hike. But at least so long as crude oil prices stay high, we can arguably remain in

the "anticipatory period", and that suggests a strong/robust USD. Conversely, a normalization of crude oil prices would likely

hurt the USD, by taking away the US's terms-of-trade advantage, and by diminishing the prospect for a Fed rate hike. If crude

oil prices were to drop should peace break out, the two-year yield would probably drop sharply too.

What else are we watching today? Well, peace is certainly on the market's mind. It certainly has helped that the re-escalation

between Israel and Iran and between the US and Iran had dissipated and subsided by yesterday afternoon. That's probably why

crude oil prices are lower, why stocks have rallied, and why the USD is a bit weaker. That's consistent with our story.

The rest of the week may not be so kind to stocks and FX, however. Tomorrow’s CPI and Thursday’s PPI inflation report, could

take short-term yields higher again, if the inflation prints are high. The narrative may shift back toward what the Fed will do on