US Bond Yields Rip

Bond yields surged after a strong ADP report which surprised to the upside, reporting a 298k gain in private payrolls in February. On cue, the USD jumped across the board. Oil prices, on the other hand, slid on gushing US crude oil inventories, which printed another record today, representing an upsurge of 8.2 million barrels over last week’s print.

Overnight, the US dollar hesitated on the initial move made on US Treasuries earlier in the week, and with a stellar ADP pointing the way to a strong NFP on Friday, US dollar bulls went on the offensive as surging US Bond Yields put the USD back in vogue.

Australian Dollar

The AUD got smacked with the ugly stick in the lead up to the ADP report, due to weaker than expected Chinese trade data and it’s damaging effects on the global growth story line and commodity prices.

The 3 C’s (commodity prices, carry trade and China) have turned to negative, and as such, the near-term outlook for the Aussie dollar is pivoting south. I expect the markets to re-engage short AUDUSD positions after the break of the .7550 level and I also expect any near-term rallies to be faded.

Storm clouds are building on the AUD horizon, and according to my weather map, a perfect storm is developing, more so with US yields looking poised to make higher highs.

Commodities

In the broader equity markets, lower commodity prices weighed on the shares of energy and mining companies, offsetting any gains for the financial services sector, as bond yields climbed.

The commodity bloc currencies have not received a boost from oil prices, which tumbled on the latest inventories reports. WTI toppled sharply from 53 to just above the critical 50.00 per barrels. Moreover, while the stronger US dollar has not helped, the ferocity of the move suggests that speculative longs were trimming, which could accelerate on a break of the psychological $50.0 level.

Japanese Yen

Dollar bulls who were lacking conviction early this week are in catch up mode ahead of the NFP, which is being viewed as the precursor to a Fed rate hike next week. The surge in US fixed income markets, with US 10 year yields moving in on the 2.60% level, this has sent the market scurrying for top side dollar exposure. While the stop side technical structures (114.75-115) have remained intact, US bond yields are set to rip even higher, so it is only a matter of course before we test the 115 level.

I suspect only a lower than expected NFP will topple the dollar apple cart, but this is highly improbable, as significant topside ADP surprises usually signal the NFP beating consensus.  Longer term players, however, will probably be tempered by the US hawkish stance on trade policy. Still, there are many moving parts in these equations.

Euro

It is interesting that German ten-year yields rose ahead of tonight’s ECB meeting. Perhaps it is a sign that investors are getting fidgety about a possible change in ECB policy rhetoric. While it is not impossible that the ECB would follow the new Fed hawkish playbook, I suspect the ECB will call the play which errs on the side of caution and keeps policy accommodative in the face of rising political uncertainty. But for the EUR short players, it all boils down to whether or not the market buys into the Draghi’s expected dovish lean in the face of improving macro and inflation outlooks in Europe

EM Asia

China is seen as one the primary drivers for ASEAN EM risk sentiment, and with the economy looking stable, and with PMI indexes all pointing up, ASEAN currencies are insulated from much of the Fed headline risk. With recent China trade data coming in below expectations, coupled with surging US bond yields, expect ASEAN local units to trade with heavy bias over the near term.

The Malaysian Ringgit should get hit from both sides as oil prices plummet and surging US yields weigh on the unit near term.