Oil gets back, US Dollar VS Yen and Euro

By
Andria Pichidi
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Treasury yields have dipped slightly alongside modest losses in US equity futures. US Equity futures are mildly weaker, with the USA30 off -0.4%, the USA500 down -0.4% and the USA100 easing -0.2% in market trading. The WSJ (paywall) reports that Credit Suisse and Nomura announced today that they could be hit with sizable losses from dealings with a US client. Nomura Holdings Inc was hit by warnings of a possible “significant” loss related to the unwinding of trades and Credit Suisse was also under pressure, after the bank warned of losses related to a US hedge fund defaulting on margin calls. The client remains unnamed, and the reason(s) why the hedge fund had to liquidate are unknown. However, the news weighed on shares of other global banks, adding to the unsettled tone in equities this morning. Also adding to the defensive tone were reports that Archegos Capital Management LLC (the family office of Bill Hwang) was the source of block trades selling Chinese tech giants and US media firms. Markets thus far point to little systemic risk, but investors are on alert for signs of contagion as a number of banks reportedly have exposure to Archegos.

As markets turned a little defensive, the US Dollar remained firm, matching the near 5-month high that was last seen at 92.92 by the measure of the USDIindex. The Yen traded moderately firmer, finding a safe haven draw amid a cautious sentiment in global markets. Base metal prices were mixed, while USOIL prices lifted by over 1%.
USOIL printed 1-week highs of $61.75 into the New York open, up from overnight lows of $59.42. The lows were seen after reports circulated that the container ship stick in the Suez Canal had been “partially” freed, though since rallied to highs, as it remains unclear when the ship will be able to clear the canal. More recently, headlines indicate marine traffic may begin again later today. Meanwhile, rising Covid cases in Europe and other parts of the globe should limit oil price gains going forward.
Nevertheless, the approach of month- and quarter-end, along with Japan’s financial year end, is the cause of portfolio rebalancing flows, which might be net positive for the Yen over the near term. The pronounced divergence between stock market gains and bond market losses over Q1 has resulted in an usually large need, by the standards of recent years, for major investment managers to rebalance their portfolios to maintain weightings in the different asset classes, which typically maintain a 60/40 ratio between stocks and bonds. Taking a step back, we could see more pronounced Yen weakness on the proviso that the global reflation trade continues, which we expect despite the disappointing vaccine rollout in the EU and rise in tensions between the West and China.
In conclusion, the passing of month- and quarter-end, and the end of the financial year in the case of Japan, should set the scene for a revival of the reflation trade, which could be bullish for the US Dollar and US dollar bloc and other cyclical currencies, and bearish for the Euro and Yen.

 

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Andria Pichidi

Market Analyst

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