Fed speakers not keen to pause on interest rate hikes

The dollar has been on the front foot for the day as Fed speakers are still talking about a big hiking cycle game. The market is fully pricing a 25bps hike at the May meeting and is only slightly pricing in more hikes after that. The 2Y treasury yields have rallied around 30bps in the last two days. The problem the Fed sits with is that the whole yield curve is almost now inverted, and given this shape, there is stubbornness in pricing a “Fed pivot.” Continuing to raise interest rates also increases the interest the Fed pays on reserve balances at the reserve repo auctions daily. This is helping larger banks like JP Morgan’s but is a problem for smaller banks that do not hold all these excess reserves. This also keeps pressure on the rising interest expense for the government. All in all, we expect that the May hike might be the last in the cycle.

Rand battles long other EM currencies

The rand was under pressure throughout the day as the dollar rallied. The rand in the short term feels stuck between R18.00 and R18.50 and would continue in this range until something meaningful happens in the market.