Place Your Bets on a Rate Hike and the UK Referendum

The US dollar is broadly mixed.  The main narrative of increased prospects for a Fed hike in June or July has been pushed off center stage as the market reacts to local developments as investors await from US economic data.  Ostensibly, the data will determine whether the Fed raises rates in June or July.

On the other hand, despite the Fed's data dependency, we argue that the determining factor is the Fed's risk assessment.  In particular, we accept at face value the official recognition of the risks posed by the UK referendum.

Is it the Data, or the Response?

The US dollar bottomed against nearly all the major currencies on May 3.  The hawkish April FOMC minutes that began swaying opinion about the prospects for a summer rate hike were not published until two weeks later, and the confirmation by NY Fed President Dudley was not until May 19.

Technical Indicators Signal Dollar Strength

The US dollar was mostly firmer over the past week.  There were two exceptions among the major currencies:  Sterling and the Canadian dollar.

Many linked sterling's outperformance (+0.8%) to a growing sense that the UK will vote to remain in the EU, despite angst reflected in the elevated cost of insurance (one-month options).  The Canadian dollar (+0.7%) was helped by oil's flirtation with $50 a barrel and a central bank that was perhaps less dovish than some expected. 

Can More Than Energy Bind Tokyo and Moscow?

On 16 May 2016, Russia’s Deputy Prime Minister and Presidential Envoy to the Far Eastern district, Yury Trutnev, met with officials from Japanese and Russian energy and metallurgical companies. The meeting followed a summit between Japanese Prime Minister Shinzo Abe and Russian President Vladimir Putin to discuss enhancing bilateral ties.

G7 Over, Yellen on Deck

The US dollar is winding down the week on a firm note, but still in a consolidative mode.  The euro, yen, and Australian dollar are well within yesterday's ranges while sterling and the Canadian dollar pushing through yesterday's lows.

Asian shares were mostly higher, though Chinese markets closed with slight losses.  The MSCI Asia-Pacific Index rose (~0.7%) for a third session and secured a 2% gain for the week.  European bourses are seeing some profit taking ahead of the weekend, which trims their weekly gain.

G7 Initiatives likely can't Overcome Desynchronized Business Cycles

The G7 heads of state summit has begun.  The host, Japan's Prime Minister Abe began with doom and gloom.  Accounts suggest he warned of the risk of a crisis on the scale of Lehman if appropriate policies are not taken.  It is not clear to whom Abe was addressing.  It may not have been the other heads of state. It may have been a domestic audience Abe had in mind.

Is 'Hegemonic Stability' in Asia Obama's Responsibility?

At the end of this month, President Obama will become the first sitting US president to visit Hiroshima. The momentous visit is planned around Obama’s trip to nearby Ise-Shima for the G7 Summit. In light of the United States’ consistent pressure on Tokyo and Seoul to bury their own historical debate over the so-called ‘comfort women’, as well as Obama’s initiative to abolish the use of nuclear weapons, this visit is long overdue.

Oil Price Recovery and Brexit Insurance

The US dollar is trading with a softer bias today after the momentum stalled yesterday.  The pullback is shallow but could be extended a bit more in the North American session.  The US reports weekly jobless claims, durable goods orders and pending home sales.