USD: Bond market sell-off continues to drive FX market performance - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the US dollar rally has continued to strengthen in the Asian trading supported by higher US yields.

Key Quotes

“The yen which is the most sensitive G10 currency to US yields has been the worst performing G10 currency following the election of US President Trump lifting USD/JPY sharply by over ten big figures. USD/JPY has now retraced more than half of its decline since late last year. Yet it is still lagging the reversal which has taken place in other major US dollar crosses having started the year close to 120.00-level . There is little evidence yet the abrupt sell off in global bond markets is exhausted with momentum still favouring a stronger US dollar in the near-term although recent sharp gains are starting to look more stretched. Any pullback for the US dollar will be viewed as buying opportunity in the current market environment.”

“The release yesterday of the latest US capital goods, initial claims and University of Michigan consumer confidence reports provided further evidence that the US economy has returned to a more solid expansion in the second half of this year. Core durable goods orders are gradually rebounding providing a positive signal for a turnaround in capital investment which has contracted for the last four consecutive quarters. The initial claims report signalled that the labour market remains healthy supporting the outlook for consumer spending. The University of Michigan’s measure of consumer expectations remains consistent with solid personal consumption growth of around 3% signalling that more modest growth of closer to 2% recorded in Q3 is likely to prove temporary.”

“The release of the latest FOMC minutes provided little fresh insight into the outlook for Fed policy. They revealed that “almost all” members believed the risks to the economy are now “roughly balanced” and that inflation is likely to return to their target even with “gradual” tightening. Members “generally agreed” that the case for resuming rate hikes has strengthened supporting the market’s view that a December hike is as good as done deal without a negative shock. The FOMC is more divided over how much slack remains in the economy. A significant fiscal stimulus under President Trump will provide a greater test in the coming years of how much slack remains. The recent sharp sell-off in the US interest market and rise in inflation expectations highlights that the market believes there is little spare capacity left.”