USD Strength Not Backed By US Government Yields

Quick Take

The US Dollar has been catapulted to new highs for the month, even if the reinvigorated rally is far from enjoying a positive backdrop if we look at US government yields. The micro and macro flows through US fixed income portray a much uglier picture not backing the USD strength story.

It is clear that the market has temporarily decoupled from treating the US Dollar (DXY) as a by-product of a country’s attractiveness, or lack thereof, towards its deteriorating sovereign bond yields. As I mentioned in twitter today:

If you pay attention to the latest movements in G6 FX bond yields, you will notice that there is just simply no better place to hide fundamentally speaking, which may help to understand why the latest dynamics in currency flows keep supporting the US Dollar even as US yields drop and equities hold steady.

Narrative In Financial Markets

  • The deteriorating Australian economic data left the RBA Governor boxed in with no choice but to cave in, following in lockstep the moves by other Central Banks (Fed, ECB) by acknowledging that the next rate decision is ‘evenly balanced’, which in layman’s terms means that the RBA is increasingly shifting its focus towards a potential rate cut. The Aussie was absolutely smoked on the rather ‘off-the-cuff’ comments as the 2x ATR decline suggests.
  • The Kiwi was trounced on a double-whammy, including the piggy-backing effect against the Australian Dollar, alongside a poor employment report, where a substantial miss on the jobless rate, lower participation, and the headline employment change weighted on the Kiwi. On the bright side for the Kiwi, even if not reflected in the price action, was the latest GDT dairy auction, which produced a winning bid of +6.7% which may result in Fonterra lifting its estimated payout for the current season and a marginal positive for the NZD.
  • US trade balance came not as bad as expected at first sight (-$49.3b vs -54b expected), but once you scope out the details, the drop in exports/imports is worrisome, as is the severe downtrend in the data series, especially if one excludes petroleum.
  • The UK is stuck in a convoluted political mess with no easy way out for PM May, with the chances of either a new election or her resignation a distinct possibility. Donald Tusk, the President of the European Council, had some harsh wording to share, noting “I’ve been wondering what that special place in hell looks like for those who promoted Brexit without even a sketch of a plan how to carry it out safely”. It doesn’t sound like the most constructive tone and certainly portrays how EU politicians are willing to give 0 concessions.
  • Talking about vibes and tones, for those betting about an eventual US-China trade deal before March 1st deadline time, one that goes far beyond buying soybeans, be reminded that as Daniel Rose, Rhodium Group Partner and former senior advisor for international economic policy with the National Economic Council and the National Security Council, said to CNBC that “a real deal on U.S.-China trade will require “grueling changes” on China’s part, and there’s not much evidence that China’s leaders are willing to take that on.” That’s the cruel reality right now
  • Do you need further evidence on the dire economic situation in Germany? Wednesday’s Dec factory orders at -1.6% vs +0.3% exp or the Jan construction PMI at 50.7 vs 53.3 further strengthen the notion that the engine of growth in Europe is facing some tough headwinds.

Potential Drivers Ahead — Economic Calendar

The EU Economic Forecasts report, even if it just serves as further anecdotal evidence, it should highlight the headwinds faced by the EU. Note, these are forecasts for EU member-states for the next 2 years and will provide further light on the negative trends in several EU member states.

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The Daily Edge is authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth ...

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