fx

US Data, OPEC cut, future US issuance and yields driving USD higher

US data beating expectations, OPEC agreeing its first production cut since 2008 and the incoming US Treasury Secretary suggesting to lengthen the bond maturity spectrum have pushed USD higher, with JPY once again falling most among its G10 peers. Global inflation expectations have moved higher, which is USDJPY-positive, but real rates and the US term premium have moved up too. A potential extension of maturity of US government issuance (say via 50 or 100y bonds) pushes the yield curve into even steeper territory, the opposite effect QE had, which had a yield curve-flattening impact. However, recent moves in the US bond market produced higher US real yields too, which suggests two things: USD strength vs.high yield currencies and caution on stock market valuations.

On the first point that higher US real rates should broaden the USD rally well into the high yield currency spectrum, we focus on countries with high foreign funding needs. The USD rally late last year into January was supported by higher real US yields. Within the G10, AUD looks vulnerable from its foreign liability position. The slowing housing market as we mentioned yesterday and today’s data showing apartment prices in Melbourne falling (-3.2%M) at the fastest pace in two years have the potential to release deflationary pressures which are not priced into the AUD rates curve. Second, higher real rates do not bode well for stock market valuation. High put option premiums for bonds and the VIX index having bounced off the lows may suggest taking caution with risk. USDJPY may still move higher, but may no longer be the pacemaker for the USD advance. AUD may be in line for getting it,and should risk correct lower due to higher real yields then KRW should fall too. AUD may be particularly vulnerable too as iron ore prices have started to fall again after Chinese commodity exchanges increased margin limits and reduced the daily trading limits to curb speculation, despite the rise of China’s Manufacturing PMI.

 On the first point that higher US real rates should broaden the USD rally well into the high yield currency spectrum, we focus on countries with high foreign funding needs. The USD rally late last year into January was supported by higher real US yields. Within the G10, AUD looks vulnerable from its foreign liability position. The slowing housing market as we mentioned yesterday and today’s data showing apartment prices in Melbourne falling (-3.2%M) at the fastest pace in two years have the potential to release deflationary pressures which are not priced into the AUD rates curve. Second, higher real rates do not bode well for stock market valuation. High put option premiums for bonds and the VIX index aving bounced off the lows may suggest taking caution with risk. USDJPY may still move higher, but may no longer be the pacemaker for the USD advance. AUD may be in line for getting hit, and should risk correct lower due to higher real yields then KRW should fall too. AUD may be particularly vulnerable too as iron ore prices have started to fall again after Chinese commodity exchanges increased margin limits and reduced the daily trading limits to curb speculation, despite the rise of China’s Manufacturing PMI.

emfx