Fed Hike Ideas Give The Beleaguered Greenback Support

Overview: A poor seven-year note auction and ideas that the first Fed hike can come as early as the end of next year spurred a steep sell-off in bonds and equities. Technical factors like the triggering of stops losses, large selling in the futures market, which some also link to hedging of mortgage exposure (convexity hedging), also play a role. The abrupt shift in view helped gave the greenback support. Its recovery was especially pronounced against the high-flying dollar-bloc currencies and sterling. Even though US yields pulled back, the carnage spilled over into Asia Pacific trading, where most large markets were off 2%-4%. At the same time, some of the smaller bourses, such as Singapore, Malaysia, and Indonesia, held up considerably better. Europe's Dow Jones Stoxx 600 is off around 0.65% in late morning turnover, and it is set to snap a three-week advance. US shares have stabilized at lower levels. The US 10-year yield, which hit 1.60% yesterday, is at 1.48%, and European benchmark yields are mostly 1-2 bp lower, though 10-year Gilt yields at 0.81% at new higher for the week. Follow-through dollar buying is evident today against most of the majors, and the Antipodeans, Scandis, and sterling are off 0.3%-0.5%, while the Swiss franc and yen are little changed. Emerging market currencies are mostly lower. This week's loss in the JP Morgan Emerging Currency Index (2%) would the largest in more than four months. Gold fell to almost $1755, its lowest level since last July, and is around $1760 near midday in Europe. It is off about 1.4% this week. April WTI has consolidating below yesterday's $63.80 high. It is in roughly a 50-cent range on either side of $63.00.It settled last week near $59.25, making it about a 6.25% advance this week.  

Asia Pacific

Japan reported better than expected January industrial production and retail sales figures. Industrial output rose 4.2% in the month. Bloomberg's survey median was for a 3.8% gain. It appears exports may be playing a decisive role as domestic demand seems soft. It was the first gain in three months. Retail sales fell by 0.5%, less than half the decline expected. Tokyo's February CPI ticked up, but both the headline and core rates stand at -0.3%. Separately, Japanese yields jumped, with the five-year yield rising to its highest level in 3 1/2 years (minus 2 bp) before slipping back to minus 6 bp. Japan's 10-year yield reached 18 bp, its highest since 2016 and just shy of the 20 bp cap under the yield curve control program. It slipped back to 16 bp at the close. There is some speculation that the BOJ could widen the target band for the 10-year yield at next month's meeting.  

The Reserve Banks of Australia and New Zealand are being challenged as well. The RBA bought government bonds in an unscheduled operation, and still, the 3-year yield still finished the week above the 10 bp target. The RBNZ Governor Orr said that including house prices into the central bank's remit, which he had opposed, will not impact monetary policy. He reiterated that the central bank will provide a stimulus for a long-time. On the week, Australia's 10-year yield surged 30 bp to 1.9%, while New Zealand's 10-year yield rose 28 bp and is also near 1.90%. The two-year yields tell a different story. Australia's two-year yield slipped 1.5 bp this week to 0.10%, while the New Zealand two-year yield rose 10 bp to 0.35%.  

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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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