There has been a pause for thought in the bearish dollar trend after an enigmatic spike in US Treasury yields yesterday sent dollar bears heading for shelter while leaving a sea of red in their wake across FX markets.
The higher US 10-year yield has triggered risk reduction on weaker short dollar positions. A surge in US bond yields has left more questions than answers.
The rationale for the spike in rates probably lies somewhere between 1) supply fears as both the ECB and the Federal Reserve are set to commence the weighty task of removing QE, and 2) speculation is seeping in that the FOMC could deliver an upbeat statement with a more hawkish assessment of inflation.
The higher US yields are providing the dollar with a modicum of support, but recently bond yields, 10-year rates, in particular, have offered little traction for the dollar. Rubber would eventually meet road with regard to supply concerns; this fact is as much a factor as are hawkish hopes from the Federal Reserve Board driving this technical momentum.
But US fixed income is the clear driver for now with 10-year yields pushing above 2.70. As the market looks for some consensus, the thematic shift is likely to be confirmed or refuted by the profusion of economic data due later this week.
But do not ignore the Treasury refunding announcement this week as which will be sizable. Ultimately, until the debt ceiling is resolved, little can be issued.
Expect FX traders' heads remain on swivels due to the sudden jump in US yields and the abundance of economic data left in the diary this week
The US Stock Markets
The US equity markets are broadly lower with Tech and Energy stocks accounting for much of the decline. And while the surge in US bond yields has factored, I suspect the busy week ahead on both corporate and economic news has investors reducing risk while banking some well-earned profits.
Oil Markets
Oil market bulls have been watching the USD with exasperation as the reasons to sell oil are outbalancing reasons to buy with the inescapable influence of the stronger dollar clearing the path lower.
But when combing bearish signals from the jump in US rig counts and Iran’s Oil Minister Bijan Zanganeh pushing back against higher prices, warning that it would lead to more shale production, the markets remain fragile to the downside.
However, with traders dialing in on Venezuela’s political turmoil, it should continue to offers support as the country remains the most significant risk in the oil markets global supply chain.
Gold Markets
Gold is under pressure due to the surge in global bond yields as central banks get set to reduce stimulus as economies improve. While QE reduction was always in the cards, the sudden global bond market repricing caught a consolidating gold market off guard, triggering waves of profit taking as higher interest rates make gold less attractive.
There was no surprise that this week’s expected rise in two-way US dollar risk was going to tame the gold bulls temporarily, but there was no accounting for this inexplicable push higher in global yields that touched multi-year highs. But one day is hardly a trend, and given that there’s little-to-no consensus agreement as to what’s actually behind the recent bond market fire sale, markets will probably sit tight awaiting the business end of the week which offers more considerable event risk, but will hopefully show us the way.
The primary focus will be on Dr. Yellen's opening remarks post FOMC and does she explicitly see inflation picking up or will it remain a transitory factor in Fed thinking.
G-10 FX
The US dollar continues to consolidate but perhaps with a lot stronger bias than had been expected due to the bond market fire sale.
The Australian Dollar
It’s impossible for the Aussie to escape the broader US dollar influence but the FX rate remains well above the psychological 80 level supporting positive sentiment. And with the RBA conspicuously refraining from any verbal currency pushback, it suggests we are ways away from that trigger point. On the back of the weaker NZD CPI print, local traders are by extension factoring in a tepid AUD CPI print tomorrow, suggesting we could see a significant repricing of risk if the CPI beats estimates. Tomorrow’s CPI will be pivotal for near-term sentiment, but the underpriced STIRT curve remains attractive as the February 5 RBA comes into focus.
The Japanese Yen
Bond yields helped underpin the USD ahead of a busy week on the US economic data front. But we remain stuck in the middle of new ranges in USDJPY awaiting the next catalyst. Indeed, the market is still hanging on the premise the BoJ policy does pivot, but with a hefty supply of economic data this week, traders are reducing short dollar risk looking re-engage above 109.50 with stops likely placed above 110.25 as that would be a more precise signal of a trend reversal.
Asia FX
Malaysian Ringgit
The markets opened relatively calm yesterday with the ringgit caught between portfolio inflows and the USD strength, but the market handling the later better than regional peers. However, yesterday’s spike in Global bond yield in Asia caught regional traders by surprise who had likely become too complacent regarding the USD sensitivity to rising yields. But in fact, its a faster rise in US yields than expected that poses the largest threat to regional currencies, so predictably the bullish bets on the MYR have backed off as profit-taking has moved to the fore.
The short dollar position squeeze occurred across all currencies, so it is not a ringgit specific move. But two-way dollar risk gave the extensive diary of US economic data. However, there remains much debate about what’s driving this global market sell-off, but we will get further clarity as we move through the FOMC and US economic data which will likely clear up some of the debate.