USD: Dollar to remain weak as 10-year yield is still the key – MUFG

Analysts at MUFG Bank point out that the correlation between the US dollar and US bond yields has strengthened. They see a limited impetus for higher yields, so they consider the US Dollar is set to remain weak.

Key Quotes:

“The 10-year UST bond yield still matters. The FX/UST yield correlation has actually become more significant over the past month, which is somewhat surprising given the UST 10yr yield has traded in a narrow range. But our analysis across G10 FX with UST 10yr yields based on daily % changes over a 30-day window shows every FX pair is more strongly correlated than a month ago.”

“The most robust correlation remains USD/JPY while GBP and CAD show the weakest correlations. With UK-specific supportive factor compelling in our view, we expect that correlation to remain weak. If 10yr UST yields are set to move higher, the differing correlations if sustained point to downside potential in EUR/GBP. “Substantial further progress” needed for the FOMC to alter the pace of purchases has certainly been achieved following today’s jobs report pointing to 10-year yield downside risks that leaves the dollar vulnerable to the downside.”