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U.S. Yield Run-up And The Dollar: Here's What Happened

By Kathy LienForexJan 09, 2018 04:57PM ET
www.investing.com/analysis/behind-the-dollars-slow-response-to-yield-runup-200278949
U.S. Yield Run-up And The Dollar: Here's What Happened
By Kathy Lien   |  Jan 09, 2018 04:57PM ET
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By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

One of the biggest stories in the financial markets on Tuesday was the surge in Treasury yields. Ten-year rates broke above 2.5%, rising to the highest level in 9 months.
Normally, a move as significant as this one would coincide with a strong dollar rally but the fluctuations in the greenback were modest, with most of the gains incurred during early European hours. USD/JPY ticked slightly higher while EUR/USD ended the NY trading session pretty much where it started. Many forex traders are frustrated by the divergence between yields and currencies but this decoupling was a common occurrence last year. It’s a sign that investors have priced in Fed tightening and are selling bonds for stocks, which explains why bond prices fell while equities hit record highs.

It's also important to realize that Tuesday’s moves in currencies were driven in large part by the Bank of Japan’s policy actions.
The BoJ surprised the market Monday night by reducing its bond-buying program for the first time since 2016. Although the decrease was modest, it broadens the number of global policymakers stepping away from the markets. The Japanese yen soared against all of the major currencies on the back of the news and its decline pulled not only USD/JPY lower but also other major currencies such as EUR and GBP. With many bond experts calling this the beginning of a bear market, yields are poised to move higher and if they are right, at some point the dollar will catch up and rally more substantially. Until then, anyone looking to buy dollars should keep their eyes focused on overextended currencies that may be due for a correction – think EUR/USD, AUD/USD and NZD/USD. With no major U.S. economic reports on the calendar Wednesday, traders should take their cue from risk appetite and yields. USD/JPY still has significant support between 111.75 and 112 and we expect these levels to hold.

Meanwhile, investors continued to unwind their long euro positions despite better-than-expected German data.
Industrial production, the current account and trade balance rose more than expected but instead of rebounding, EUR/USD extended its losses for the third consecutive trading day. German industrial production rose 3.4% against a 1.8% forecast. The trade surplus increased to 23.7B from 18.9B and the current account surplus rose to 25.4B from 18.1B on the back of stronger exports and imports. While EUR/USD found support right above 1.19, we continue to look for a move below this level down toward the 1.1830 to 1.1850 region. It's also worth nothing that the Swiss franc was the day’s worst performer. Having consolidated below 98 cents since the beginning of the year, the swissie's slide drove USD/CHF sharply higher. This move was fueled in part by a larger-than-expected increase in unemployment and a continued decline in retail sales.

GBP/USD on the other hand remains confined within a 1.35 to 1.36 trading range.
Sterling traders shrugged off a better-than-expected BRC retail sales report but could finally react to Wednesday’s industrial production and trade balance numbers. GBP/USD is itching for a near-term correction and with the slide in the PMI manufacturing index pointing to a softer result, if these releases surprise to the downside, we could see a deeper correction toward 1.3450.

For once, we have consistency in the performance of the commodity currencies.
The Canadian, Australian and New Zealand dollars all traded lower on Tuesday. The rising dollar caused USD/CAD to rebound despite the nearly 2% rise in oil prices, increased Canadian yields and stronger-than-expected housing starts. The Australian dollar also shrugged off higher building approvals. Aside from being driven lower by the stronger U.S. dollar, the lack of gains in gold, iron ore and copper prices held AUD back. No economic reports released from New Zealand and nothing material is expected from the 3 commodity-producing countries on Wednesday, outside of the weekly oil inventory report.

U.S. Yield Run-up And The Dollar: Here's What Happened
 

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U.S. Yield Run-up And The Dollar: Here's What Happened

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Comments (6)
Quân Nguyễn
Quân Nguyễn Jan 10, 2018 1:07AM ET
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I would like to get your hands on the sale of the same year with anyone. Thank you gentlemen
mike khodabakhshi
mike khodabakhshi Jan 10, 2018 12:14AM ET
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I think cot is bullish on jpy. We will see
Patrick Allen
Patrick Allen Jan 09, 2018 8:05PM ET
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Spot on report, but when everyone piles into stocks, look for rally in bonds.  Crowded trade getting more crowded by the day.  Look back at 2000 and 2008 if you want to see euphoria turn to panic.
tony ooh
tony ooh Jan 09, 2018 8:05PM ET
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crowded trades? beam me up.
tony ooh
tony ooh Jan 09, 2018 5:58PM ET
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amusing. what happened/; way too much money chasing fewer goods. global data show awash in easy currency. and it will get worse. you gotta' wonder when bolivar framed notes are being sold on ebay as a curiosity now. rates need to go up. who knows where this ends up. no one at this point in time knows. grantham thinks he knows, but he just keeps plowing the same field. at least grantham puts his call in writing. you might take a look at putting a firm call in writing as the calendar day we sell our equities before crash; not correction.
yassine ballage
yassine ballage Jan 09, 2018 5:56PM ET
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Excellent summary Kathy, Brilliant
Cameron Osborne
Cameron Osborne Jan 09, 2018 5:47PM ET
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You got pretty much all the FX chatter today, good summary.
 
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