The USD continues to rally across the board as US yields continued to be the primary driver as they threatened to break out above the fundamental 3.125 level. However, the ease of the 50+pb steeping that got packed into the 2-year vs 10-year treasury curve is creating the unwelcoming tremors across global markets. The speed of the move is what’s catching investors by surprise, and if 3.25 US 10-year yield is indeed the last line of defense, crossing that Rubicon will trigger a tsunami of dollar buying.
With 24 hours left in the trading week, it’s all about closing levels particularly on EUR/USD, USD/JPY and of course 10-year yields. The Friday finish line will be a very key indicator of overall market sentiment which should confirm the USD is firmly in the driver’s seat.
While US data didn’t necessarily move the dial, it didn’t thwart demand either with the Philly Fed soared to 34.4 in May vs 21.0 forecasts and 23.2 prior.
JPY: Not too unexpected, traders are expressing their USD stronger bias through the USD/JPY as the widening 10-year differential is too attractive to ignore.
EUR: A very quiet overnight session after the Wednesday tumult.
MYR: The surging USD and higher US yields continue to weigh on MYR sentiment. Higher oil prices continue to make the MYR less vulnerable to external shocks, but it is hard to argue the current direction with US yields moving higher. But the political risk premium is currently offsetting the benefits from oil as uncertainty continues to build over the debt agency reaction to the council removing the budget-balancing GST.
Oil Markets
The dual supply shortcomings from Iran and Venezuela continue to provide substantial support. However topside buyer remorse set in after Saudi Arabia commented that there are ample oil supplies and of course after such a busy week a bit of expected trader fatigue set in which has likely contributed to the wave of profit-taking as oil prices veer off recent highs. As for next week, unless there is an unexpected meltdown, bullish sentiment should remain intact, and you know what they say; “when in Rome.”
Gold Markets
Gold remains under pressure from the US dollar and utterly vulnerable to higher US bond yields which are showing signs of a significant topside breakout after the 10-year Treasury note yield hit 3.1 % overnight. The inflationary overtones from oil prices coupled with a strong US retail sales print have increased Fed rate hike expectations. As the trickle-down effects from US fiscal stimulus continue to show in the data, bond yields will move higher, but ultimately the positive data prints will leave a larger than life footprint on Fed members' interest rate views and challenge the current dot plot scenario.