The equity and credit markets rallied and the US yield curve bear steepened after the first executive orders and the salvo of announcements by President Trump on trade tariffs, tax cuts and the desire for lower oil prices and interest rates. The correlation of the dollar and the shape of the Treasury curve is going through a first and tentative regime change, although the proximity of the Fed and ECB meetings next week calls for caution in drawing premature conclusions, Societe Genrale’s FX experts note.
US Dollar falls out of favour.
“It is noteworthy that the CAD and MXN both strengthened yesterday and are on track for weekly gains with broader G10 and EM, despite the threat of 25% US tariffs on 1 February on imports from Canada and Mexico. Since the election last November, the steeper yield curve has featured as a catalyst for a stronger dollar. However, the relationship rolled over in the last 48 hours, a test for the heretofore successful strategy of buying dollar dips. Both the yuan and the euro also ignored the tariff threat from the US.”
“EUR/USD rose to a new high of 1.0457, narrowing the gap with 2y bond spreads. The Scandis outperformed this week in G10. Latam, driven by the BRL, and CEE led by the PLN, excelled in EM. Dispersion in bond land was evident in the outperformance of the UK and Australia relative to Europe, Canada and the US. Brent crude touched a low of $78/bbl after Trump vowed to bring down the price of oil as a mechanism to stop the war in Ukraine. Lower energy prices would also serve his purpose of lowering inflation.”
“The Fed meets next week and is overwhelmingly expected to keep interest rates on hold. Pricing for the March FOMC was static at around -7bp. The rise in US continuing claims to 1.899m, the highest since November 2021, stands out, but did not change perceptions about the resilience of the labour market. Demand for new IG and benchmark bonds was rock solid in the US and Europe. Strong bidding was evident for syndicated debt in France and the UK. Investors also flocked to Spanish and US debt. Japanese investors scooped up foreign bonds for a second successive week and raised allocation to non-Japanese stocks for a sixth successive week.”
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