Anchored short-term yields to contain USD upside – MUFG

The ultra-dovish communications from the Fed have fallen on deaf ears somewhat although economists at MUFG Bank would point to the short end of the US yield curve to argue some success and also to argue that while there is still scope for further USD gains over the short-term, the upside from here is beginning to diminish.

See: The US dollar has room to soar 20% – Nordea

Key quotes

“The FOMC and Chair Powell could not have provided much more of a dovish communication to the markets but the response is as we had suspected – price action indicating a high degree of scepticism.”

“We believe the financial market implications from the FOMC meeting will be a further steepening of the US yield curve. The Fed communications make it clear that the Fed is serious on altering its ‘reaction function’ that will continue to support inflation expectations. A major difference with the 2013 ‘Taper Tantrum’ we believe will be the much stronger anchoring of short-term yields.”

“Our conviction on the USD is relatively low and relative FX trades may provide greater opportunity over the coming months with Fed policy proving successful in anchoring short-term yields, curtailing the extent of USD strength while the macro backdrop remains USD supportive.”