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USDUS BondsResilience

Breakouts in US bond markets – a tailwind for the USD

Chris Weston
Head of Research
Jun 30, 2023
Arguably the big talking point has been the resilience of US economic data, with an empathetic reaction to the US weekly jobless claims. US data is now consistently beating the streets estimates, and we see that in the Citigroup economic surprise index, which has turned positive and headed higher.
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We see US bond yields rising across all parts of the curve, with UST 2’s moving to new cycle highs and looking to make a play at the March highs of 5.08%. Importantly, US 5yr real rates (US 5yr Treasuries adjusted for 5-year expected inflation) are eyeing a break of 2%, representing a rise in the true cost of capital and a tightening of financial conditions.

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The moves in the US bond market are a clear tailwind for the USD and, in times gone by, would be a major headwind for growth equity.

In rates, we now see 21bp of hikes priced for the 26 July FOMC meeting, and should the Fed hike in July, the door is open for another in November. 

Naturally, in this backdrop, we’ve seen the USD find buyers, although the US dollar index is up ‘just’ 0.4% - US yields are not only moving higher but have built a premium over German bunds and other G10 yields and often its that ‘spread’ which has such an influence on FX markets.

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Technically, the US dollar index looks quite constructive as it pushes towards 103.50, where the set-up on the daily is suggesting the skew in risk is to the upside. GBPUSD is testing trend support and may squeeze into 1.2545 horizontal support (and the 50-day MA), where the scalpers may look to work off the level.

USDJPY has seen no real reaction to today’s Tokyo CPI print, which underwhelmed at 3.8% vs 4% eyed – in essence, the Tokyo CPI print should see the pair moving towards 145, and the carry traders will be looking to test the BoJ here – above 145, and we may hear of the BoJ/MoF ‘checking rates’ with Japanese FX desks, which should curb the upside.

Clearly, the BoJ/MoF will want to limit the upside, as 150 wouldn’t sit well with them. Trading JPY intervention requires a constant vigil on the charts, and one needs to be in front of the screens – in October 2022, when the Japanese authorities bought back JPY6.3T (c. $42b) USDJPY fell 541 pips, but it did so over 1hr 30 mins – so if price cracks again as JPY buying is seen, there would be time to be involved.

Looking forward to the upcoming session, we see US core PCE and EU CPI are the highlights. US core PCE inflation (due 22:30 AEST) is expected to be unchanged at 4.7%, and given the upside momentum in US bond yields, if this surprises and increases to 4.8% or above, then that could cause some real gyrations in the USD and broad markets.

One to watch, but I’m surprised by the resilience in gold given the moves in the US bond market – still for now, I question if growth equity (such as the NAS100) continues to march higher if US bond yields are trending higher, and how this offers the USD tailwinds.

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