FICC

The 1990s mid-cycle slowdown is an appropriate analogue to current market conditions. A lower dollar was the key ingredient the easing in monetary conditions that resolved this episode. This suggests that today, as the sole economic lever left, the greenback has further downside. Go short USD/SEK. Go long a basket of NOK, CAD, AUD and NZD against the USD.

China's 4.7 trillion RMB (~ $720 billion) fiscal stimulus program will be more bullish for base metals, particularly copper, than we initially surmised.

Special Report

In this Special Report, we revisit our list of signpost economic indicators introduced two years ago to identify if the U.S. and Euro Area were falling into a "Secular Stagnation".

Assuming last month's weak employment report is not the start of a trend, the market is still discounting too low a probability that the Fed will lift rates this year. This means the Treasury curve should bear-flatten in the coming months, providing an opportunity to move to above-benchmark duration.

DXY can test 98 by July, creating a shorting opportunity: it will be hard for the Fed to increase rates more than once without causing an accident. If, it can, it is because global growth is stronger, hampering the USD's prospects. There's some rays of sunshine in Japan and we are closing our long AUD/NZD trade. A few words on the yuan.

While the Fed's recent forward guidance leading markets to increase the odds of a policy-rate hike earlier than previously expected will restrain the recovery in crude oil prices, fundamentals will dominate price formation now that markets have rebalanced.

A Fed rate hike in June, July or September is likely to send our 12-month fed funds discounter toward 70bps by the date of the next hike. This re-rating of rate expectations will cause significant flattening at the long-end of the curve. Investors should enter a 5/30 flattener to profit.

There is a risk that global bond yields move higher in the near term, although we prefer to position for that move via cross-market spread, yield curve and inflation trades.

Special Report

Long-term fundamentals are often poor predictors of the outlook for currencies over the subsequent 12 months. For shorter time horizons, investors should focus on the medium- and short-term currency determinates introduced in this Special Report.

The BoC will continue to watch from the sidelines. Our short-term model shows that the Canadian dollar is modestly cheap after having reached technically overbought levels earlier this month.