Warsh Swearing-In Spurs U.S. Dollar Rally, Markets Reprice

Kevin Warsh, confirmed by the Senate last Thursday, is scheduled to be sworn in as Federal Reserve chair on Friday. Markets moved before his first public remarks as investors priced expectations for tighter policy, a firmer balance-sheet stance and changes to Fed communication.

The U.S. dollar strengthened against major currencies and the dollar index rose from its early-May consolidation near the mid-90s. Traders reallocated capital away from risk assets: cryptocurrencies fell sharply, global equity indexes showed mixed results with North American benchmarks holding up better than some Asian markets, and government bonds sold off, pushing yields higher.

Precious metals lost ground as real yields increased. Oil has traded above $100 per barrel for the past two weeks amid persistent tensions in the Middle East and limited market expectation of a swift diplomatic settlement. A prediction market placed the probability of a peace deal by the end of June at about 35 percent.

In foreign exchange, the dollar gained against all major peers since the confirmation vote. The Canadian dollar narrowed earlier losses versus most currencies but remained weaker versus the U.S. dollar. USD/CAD has rebounded inside a longer-term range roughly between 1.3550 and 1.3950 and is approaching the midpoint, with resistance clustered near 1.38 to 1.3950 and support near 1.3550.

Market participants are watching Warsh's remarks at 10:00 on the day of his swearing-in for signals on the Fed's policy path and balance-sheet plans. Important economic releases this week include U.S. purchasing managers' indexes due tomorrow and U.S. consumer sentiment and Canadian retail sales later in the week.

Elior Manier, a market analyst, commented: ‘With so much uncertainty, the only clear expectation is a more hawkish and restrictive central bank.'