USD: Base metal rally adds to the narrative of inflation

The rise in base metal prices, where the likes of copper, tin, nickel, lead and zinc are all rallying on the back of global recovery expectations and supply challenges, is one of the hot stories in financial markets right now. This comes at a time when investors think that the Fed just wants to let inflation run high and that in the current climate, bonds are definitely not an asset class to keep. The main question for financial markets is whether the sell-off of bonds will prove sufficiently orderly to allow the prosperity of reflationary asset classes, including equities. And, despite US Treasury returns rising 50bp, yes 50bp, in a little less than two months, global asset markets have probably done well this year. But looking at the sell-off overnight in Australian and New Zealand government bonds, 17bp and 13bp respectively, this bond sell-off borders on the chaotic and indicates some more defensive FX positioning in the event of the chaos spreading to US Treasury markets. This week's focus will be on the semi-annual testimony of Fed Chair Jay Powell to Congress and then on Friday's January PCE results. We expect Powell to handle the current market problems well, i.e. not lead to the sell-off of the bond, but let's see if a tough week will survive with US Treasuries. For DXY, unless it ripples through the bond market to cause a correction in frothy risk assets, the major commodity rally will typically be seen as a dollar negative. This week we predicted an 89.80-90.80 DXY range.
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