EM LATAM SOV: Markets Wrap

Fed Governor Cook appears to have moved in the same hawkish direction as the rest of the FOMC since her last substantive monetary policy comments almost two months ago, remarking in a speech Wednesday that she is "prepared to raise rates" if her baseline case that "disinflation should resume in upcoming months" "does not appear in a timely manner". Previously, in March, she'd merely noted that she sees the balance of risks as "largely net in balance" even if "the inflation risk is greater right now" due to the conflict in the Middle East.

• In the latest speech, she opens her remarks about the economy by saying that "Inflation is clearly moving in the wrong direction", fretting as have some of her colleagues that while tariff and energy-related inflation pressures could soon abate, "even temporary and short-lived shocks could influence inflation over the medium term." She also argues that "yet another shock to prices could be layered on from the heightened investment demand due to AI."
• On the other side of the dual mandate, "the labor market appears to be largely stable" though she acknowledges that "a softening in demand [as a result of uncertainty over the war] could lead to a softening in the labor market."
• With her speech largely devoted to the impact of AI, she says that "We could be approaching the most significant reorganization of work in generations. Even if, in the long run, new jobs are created, I am aware that the timing of costs and benefits of AI may differ. Specifically, AI-related job loss could precede job gains. Although we do not have conclusive evidence of this occurring yet, it may still be on the horizon, and increased churn in the labor market could be anticipated."
• And she is "optimistic" on economic growth, in part due to AI helping "further boost productivity growth".
• In sum: "What does this mean for monetary policy? I see elevated risks to both sides of our mandate, and from a risk-management perspective, I currently believe that the right course of action is to hold rates steady. However, I want to be clear about my risk assessment: The risks remain tilted toward higher inflation. In my baseline forecast, disinflation should resume in upcoming months without having to raise rates. Similarly, I expect the labor market will remain stable without having to lower rates.
• "After five years of above-target inflation, I am particularly attuned to the risk that elevated inflation will become embedded in price- and wage-setting behavior. As such, I am prepared to raise rates, if the expected disinflation does not appear in a timely manner. Likewise, I will continue to monitor labor-market developments, as well, and would be prepared to adjust my policy stance downward should the labor market deteriorate."

• RES 4: 1.3899 High Apr 8 
• RES 3: 1.3875 1.0% 10-dma envelope
• RES 2: 1.3869 76.4% retracement of the Mar 31  - May 1 bear leg
• RES 1: 1.3852 High May 22 & 27
• PRICE: 1.3828 @ 17:29 BST May 27
• SUP 1: 1.3729/3643 50-day EMA / Low May 8 
• SUP 2: 1.3550 Low May 1 
• SUP 3: 1.3526 Low Mar 9
• SUP 4: 1.3482 Low Jan 30 and key support

A bull cycle in USDCAD remains intact for now and the pair is trading at its recent highs. Short-term gains signal scope for an extension towards 1.3869 next, a Fibonacci retracement point. For bears, a reversal would mark the end of the latest bull cycle and pave the way for a move towards 1.3550, the Mar 9 low and a key support. First pivot support to watch is 1.3729, the 50-day EMA. 

Wednesday's US rates/bond options flow included:

• SFRM6 96.3125/96.25 put spread bought for 0.75 in 5k
• SFRN6 96.50/96.3125 put spread bought for 16.5 in 10k
• SFRU6 96.3125/96.375/96.4375/96.625c condor, bought for 1 in 4k total (ref 96.245)
• SFRZ6 95.75p, bought for 10.5 in 10k total (ref 96.16)
• SFRZ6 96.43/96.31ps, sold at 9 in 10k total
• 5IK6 106.75 puts saw paper pay 0-03 on ~6.7K. These expire on Friday

• VBYM261 110.25 calls paper paid 0-05 on 9K. These expire on Monday