Forexlive Americas FX news wrap: Dollar and bonds go for a wild ride

  • June US ISM manufacturing index 53.0 vs 54.9 expected
  • US May construction spending -0.1% vs +0.4% expected
  • S&P Global final June US manufacturing index 52.7 vs 52.4 prelim
  • Atlanta Fed GDPNow Q2 tracker falls deeper into negative territory
  • Crypto lener Voyager suspends withdrawals
  • BlockFi sells itself to FTX in earnout-laden deal
  • OPEC badly missed production quotas in June
  • Honda reports a sharp drop in June US auto sales, blames supply issues
  • GM warns that supply chain issues affected Q2 but re-affirms 2022 guidance
  • Baker Hughes US oil rig count 595 vs 594 prior
  • Fed’s Daly: Want to get to around 3.1% Fed funds at year end

Markets:

  • Gold flat at $1806
  • US 10-year yields down 8.5 bps to 2.89%
  • WTI crude oil up $2.51 to $108.29
  • S&P 500 up 1.1%
  • JPY leads, AUD lags

This was a holiday-thinned trade with Canada out and many US traders heading out early for the long weekend but it was also the start of a new month of trade.

There were some massive moves in FX and bonds. The dollar and yen soared in Asia and Europe with the euro, pound and Australian dollar crumbling. The latter ran stops after busing the May low and fell to 0.6765, which is the lowest since June 2020.

In the bond market, 5-year yields were down 22 bps at the lows to 2.88%, a far cry from 3.62% on June 14. It’s a similar story across the curve as it bull flattens. The Fed funds market has taken down the terminal top to 3.34% in Feb and falling 50 bps over the remainder of the year from there.

The moves in the dollar and bonds both unwound to some extent. 5-year yields halved the decline while the dollar did the same.

EUR/USD fell as low as 1.0367 before bouncing to 1.0422. Cable was even more intense in a swan dive to 1.1971 before bouncing 130 pips (and still ending down 85 pips).

The commodity currencies turned around with the loonie finishing nearly flat with the help of oil and gas, far outperforming its commodity cousins. I’d caution on that trade as Canada was out.

The yen was the winner on the day as spread compression becomes the norm. The BOJ may have won the war if inflation starts coming down again and so do international bond yields. That will be an interesting one to watch in the days ahead.

This article was written by Adam Button at www.forexlive.com.

Crypto lener Voyager suspends withdrawals

The crypto lender was caught up in the 3AC collapse. 3AC had a loan of 15,250 BTC and $350 million USDC. Voyager says it’s ‘pursuing all available remedies for recovery’ but 3AC is in bankruptcy so that’s going to be a long wait.

“This was a tremendously difficult decision, but we believe it is the right one given current market conditions,” said Stephen Ehrlich, Chief Executive Officer of Voyager. “This decision gives us additional time to continue exploring strategic alternatives with various interested parties while preserving the value of the Voyager platform we have built together. We will provide additional information at the appropriate time.”

The company hired Moelis & Company and The Consello Group as financial advisors, and Kirkland & Ellis LLP as legal advisors. 

Moelis specializes in M&A and restructurings.

The market wasn’t expecting much from Voyager. The stock isn’t trading today because of a holiday in Canada but it’s been a precipitous fall since before the 3AC collapse.

The company entered into a definitive agreement with Alameda for a US$200 million cash and USDC revolver and a 15,000 BTC revolver on June 17.

On June 14, it said:

Voyager differentiates itself through a straightforward, low-risk
approach to lending and asset management by working with a select group
of reputable counterparties, which are all vetted through extensive due
diligence by its Risk Committee.

It’s tough for crypto to find any kind of a bottom until we get all the bad news. Stuff like this makes crypto investors want to pull their funds.

This article was written by Adam Button at www.forexlive.com.

The big US dollar moves have now mostly unwound

There was a fierce bid for US dollars to start the month but it’s now largely reversed.

I could tie together a narrative around rates, Fed hikes and whatnot but I’m going to shrug here and put this on flows around the turn of the calendar.

I don’t know if that was European money scrambling for dollars or something else. But it ended abruptly after the European close.

Directionally, some of it makes sense with the market significantly shifting the terminal top of Fed funds down to 3.33% from +4% a couple weeks ago.

This article was written by Adam Button at www.forexlive.com.

You have two options

The market is navigating different outcomes and in the simplest terms, here’s how it shapes up.

1) High inflation with ongoing growth and Fed hikes above 4%

This is the scenario the market grappled with for most of the year and the results speak for themselves. It was the worst H1 for the S&P 500 since 1970 and the worst for the Nasdaq ever.

2) A recession but inflation under control

The word ‘recession’ never sounds good to investors but I’d argue that done right, this is the better scenario. As the market has shifted its focus to recession, borrowing costs have come down and a terminal rate of 3.25-3.50% in Fed funds is priced in, coming down to 2.75% about 8 month later.

Unfortunately, markets have gotten drunk on cheap money for far too long and are hopelessly addicted now. Everything is leveraged. If rates top out and we can kick the can down the road on popping the bond bubble, then there’s scope for a ‘recession rally’ as bizarre as that sounds.

The third scenario

The nightmare scenario is stagflation, where we get a recession and inflation doesn’t fall. That might be possible if the world continues to be short of commodities, or loses faith in central banks. I think we priced in a chance of this in the past few weeks but given how quickly consumer sentiment and industrial orders are declining, along with commodities, this has grown more remote.

Overall though, I don’t see a ‘recession’ scenario as that bad, especially since I think the hit to the jobs market will be modest.

This article was written by Adam Button at www.forexlive.com.