Without Yield Support, The Dollar Wilts


Falling US yields weigh on the US dollar.  The 10-year Treasury yield is flirting with the 1.50% mark, and the greenback is trading heavily against all the major and most emerging market currencies (UDN).

European and the Asia Pacific benchmark yields are lower as well.  The JP Morgan Emerging Market Currency Index is edging higher for the fourth consecutive session.  The lower yields are not doing equities much good today.  Outside of China, the large equity markets in the region fell, and the MSCI Asia Pacific Index is posting back-to-back losses.  The three-day rally in Europe's Dow Jones Stoxx 600 is at risk as most sectors, but health care and real estate, are losing ground.  Financials are the largest drag.  US future indices are a little changed to slightly firmer.  Oil (OIL,BNO) and other industrial commodities are firmer, and the CRB Index closed yesterday at new six-year highs.  Gold is unable to benefit from the weaker dollar and lower interest rates.  The upside momentum that had carried it briefly above $1900 fizzled (GLD).  

Asia Pacific

China reported a smaller than expected rise in last month's consumer prices but a larger rise in producer prices.  Falling food prices helped temper the rise in consumer prices to 1.3% rather than 1.6% that the median in Bloomberg's survey projected.  The decline in pork prices helped keep food prices in check, while non-food prices rose by 0.9%.  Producer price inflation accelerated to 9.0% from 6.8%.  The median forecast was 8.5%.  Oil, metals, and chemicals were the drivers.  Beijing is trying to finesse lower producer prices by cracking down on unauthorized activity, but it does not appear sufficient.  Reports suggest it is considering some sort of cap on thermal coal prices before peak summer demand.  One proposal would cap the price to the miners, while another proposal was to limit the price at the port.  Still, the discussion shows that Chinese officials are still reluctant to allow supply/demand to adjust prices.  If thermal coal prices or other commodities are not allowed to move freely, is Beijing really prepared to allow the yuan to be convertible as some are suggesting could take place with the introduction of a digital yuan?  

The Reserve Bank of Australia did not adjust policy last week, but comments today suggest it may join the queue of central banks adjusting their stance as the inoculations are gradually allowing some return to normalcy.  Former RBA member Edwards said that the RBA would likely scale back its QE next month, which others, including ourselves, had suggested was possible.   The RBA's Assistant Governor Kent admitted he has been surprised by the strength of the rebound and is optimistic about growth fueling wage increases and inflation.  Currently, the RBA targets the April 2024 bond at 10 bp.  It is to decide next month whether to switch it to the November 2024 maturity.  Targeting the 3-year yield at the cash rate is a way to underscore the lack of intent to raise rates in the interim. 

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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