USD: Rally seen as a temporary FX market correction rather than the start of a sustained rebound – MUFG

The sharp move higher in US yields has finally started to spill over more into the FX market were a correction is now underway, point out analysts at MUFG Bank. The see that recent outperformance of high beta commodity currencies and the GBP is now reversing, creating a more supportive backdrop for the USD in the near-term.

Key Quotes:

“The main focus in financial markets over the past week has been the ongoing move higher in global yields. Those developments intensified yesterday as the 10-year US Treasury yield spiked higher by 23 basis points from the open to an intra-day high of 1.61% which fully reversed all of the move lower from February and March of last year when the negative COVID shock first hit financial markets. While US yields have been trending higher since October, the pace of the adjustment has accelerated over the past week and month.”

“The faster pace of adjustment has started to prove more disruptive for risk assets in the near-term. US tech stocks have been amongst the hardest hit so far with the Nasdaq composite index down by around -7.5% from the recent peak. It has also triggered a correction in the FX market in recent days which until then had remained relatively resilient to rising yields.”

“Further position liquidation in the FX market would provide more support for the USD in the near-term, although we see it as more of a temporary FX market correction rather than the start of a sustained USD rebound on the back of higher US yields.”