US dollar falls back as Treasury yields edge down

The US dollar seems set to end the week lower against most currencies, as “risky” assets have rallied and US Treasury yields have edged down a bit. This fall back in the dollar and US yields is somewhat surprising in light of the stronger-than-expected inflation data released Wednesday. But we think those data add to evidence that inflationary pressures in the US remain strong, and will gradually push Treasury yields, and the dollar, higher. And while this week’s rebound in risky assets suggests that concerns about the global economic recovery are fading, the latest activity data from China and the US (due on Monday) are likely to set the tone for FX markets next week.

15 October 2021

We doubt China’s slowdown will stop Treasury yields from rising

We doubt that worries about a sharp slowdown in China’s economy will prevent US Treasury yields from rising further, in contrast to what took place in mid-to-late 2015.

15 October 2021

Monetary policy divergences

The Norges Bank’s tightening cycle began at the end of last month and we suspect that investors are underestimating the pace of rate hikes to come. By contrast, the Riskbank looks set to leave interest rates unchanged for some time, instead adjusting its monetary stance by shrinking its balance sheet. And interest rates at the SNB remain closely tied to those at the ECB, which means they are going nowhere fast.

15 October 2021
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We think the sell-off in DM bonds will resume

While the yields of long-dated government bonds in the euro-zone, UK and US have dropped back a bit in recent days, we think they will rise between now and the end of 2023. We expect increases in yields to be particularly large in the US given our view that high inflation there will prove persistent.

Another look at US inflation compensation

Although investors took today’s US CPI release in their stride, we still think there is scope for longer-dated Treasury yields to rise further over time.

13 October 2021

Emerging Markets Capital Flows Monitor

Net capital inflows into EMs appear to have dropped over the past few weeks as investors have turned more risk averse. Looking ahead, a further rise in US Treasury yields could lead to larger outflows from EMs over the coming months. The good news is that vulnerabilities to outflows in most major EMs look limited, but Turkey is a key exception.

“High-beta” G10 currencies unlikely to benefit from rising yields

We expect the US dollar to continue to grind higher against most other G10 currencies, and doubt that “high-beta” ones will fare much better than “low-growth” ones, such as the euro.

11 October 2021

Correlation between US equities & Treasuries not set in stone

While many observers seem to have been surprised by last month’s joint sell-off in US equities and Treasuries, there is no reason in principle why the two assets should be negatively correlated. It all depends on the economic and policy backdrop. Our view is that future returns from both will disappoint.

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