Mazen Issa, senior FX strategist at TD Securities, suggests that as the market awaits key Fed events in the minutes and the symposium this week, the broad USD is off to a firm start and it comes against a backdrop of suppressed Treasury (and global) bond yields.
“We think this firmness can continue, at the very least on a tactical basis as we think the Fed will not be able to bridge the gap between aggressive easing priced into the curve and the Fed's definition of a "mid-cycle adjustment". As such, we see a risk that US yields adjust temporarily and tactically higher in the short-term in the coming days (a dynamic which we think will be met with inevitable demand).”
“We do not expect the USD to be immune to this adjustment and perhaps more durably than the rates market. There are some signs that the recent bid in the USD may persist for a while longer. For one, even with the rally in US 10s in recent weeks, the USD still remains the only game in town as far as carry is concerned (in the G10).”
“Dethroning this status will be very difficult to do without a return to aggressive balance sheet expansion we think. Here, the ECB is just much further ahead in this process. Taken in conjunction with US data surprises moving in the USD's favor only serves to reinforce its its allure (although still healthily stable on a y/y trade-weighted basis).”
“Further to this, option markets are pricing in a modest premium in USD calls, and, after leading the move lower against the USD earlier this summer (but in line with the move in US10s), both the EUR and JPY have begun to diverge from the recent drop in 10yr yields. This suggests to us that the market requires a fresh catalyst to compel upside in these currencies vs. the USD, neither of which - with some caveats in the JPY - is compelling at the moment.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.