USD sentiment hit a bearish extreme as investors disagreed with the Fed’s projected rate hike path, buthas started rebounding since last Friday. Yesterday’s sharp CAD appreciation on the back of BoC Deputy Governor Wilkins saying the central bank was looking at the possibility of raising interest rates as the economic recovery picks up indicated that there is a substantial risk of the USD rallying should the Fed underline its current rate projections. We call the DXY 2% higher from here in the next six weeks. Japan’s FinMin Aso suggesting that he can see the USD rallying on higher US interest rates is a view we subscribe to. Higher US rates will increase Japan-based fund managers’ USD hedging costs, which should push USDJPY higher as they reduce their hedge ratios. USDJPY closing at 110.40 or higher would signal that a corrective bottom has been traded.

Rates pessimists cite the recent decline of global surprise indices spreading from the US into other economies including EM. However, most of the recent data moderation has been spotted among soft indicators while most hard data have remained solid. Most labour markets continue to tighten at a rapid pace and it seems that it is now the shortage of skilled labour which is hampering hiring. In the US, the spread between job openings and the rise of employment has become wider, suggesting that a period of higher wage growth may be imminent. It has primarily been the recent moderate wage growth slowing in the US from 2.8%Y to 2.5%Y which has pushed 10-year inflation expectations (measured by breakevens) from 2.08% to 1.78% within the past six months.