Deutsche Bank says on the ructions in the US financial system since Friday:
- We believe these will have long-lasting negative implications for the USD and our bearish conviction has been strengthened.
In (very) brief):
- the Fed's new Bank Term Funding Program can be interpreted as re-establishing a temporary QE program by offering to absorb UST and MBS from banks at above-market prices
- This is in effect a self-regulating break to QT whereby if funding pressure becomes too acute as bond prices sell-off, liquidity gets reinjected into the system offsetting the reserve drain from QT.
- this tightening cycle will now be amplified due to stress in the US banking system.
- The immediate conclusion is that the bar for the Fed to reaccelerate tightening is significantly higher and the likely end-point of that tightening lower. We have been writing in recent weeks that "fear of 6%" is the single-biggest obstacle to our dollar bearish view and with this receding it is an important dollar negative catalyst.
- US wages continue to decelerate and as the defining arbiter of labour market tightness continue to signal improvement.
- wages are coming down despite strong employment growth because the supply side is finally responding.
- We stuck with our dollar bearish view last week but wrote that this week's US CPI report could have a critical bearing for our near-term views. Enough has happened since then that we no longer think CPI is as an important event from either a Fed pricing perspective or a broad read-across to inflation.
- as things stand our preferred dollar shorts remain the EUR and JPY, with the recent addition of the CHF.
Earlier:
