The US dollar is under some pressure, particularly against commodity currencies. That’s despite rising yields.
The market has shifted its focus to growth rather than rate differentials and the US looks good. Or at least it does unless the Fed decides to hike further and really put the economy in a bad place. We saw that earlier this week as the RBA tried for a dovish hike and the Aussie was beaten up on worries about a housing and growth crunch.
What’s increasingly relevant is the relationship between bonds and oil. Falling crude prices this week were a big reason that 10-year yields retested 4.50% and now with oil rebounding $1.80, yields are up 5 bps across the curve.
US 10 year yields monthly
BMO highlighted the tightening relationships today:
“Wednesday’s price action
was remarkable in another aspect – it revealed investor attention has once
again shifted to the energy sector and the inflationary implications from the
oil market. We’ll be the first to note that it’s a slippery slope to assume that
crude will dictate the direction of nominal yields; although it goes without
saying that the spillover potential has been relevant this week. As oil
stabilized overnight, the buying pressure further out the curve has subsided as
well. With the front-month WTI contract only slightly above the $75/bbl level,
we anticipate that any sharp moves in the commodities market will have
implications ahead of the weekend.”
In the bigger picture, this unusual tick-for-tick oil/bonds relationship is unusual but it reveals a market that sees a slippery slope around inflation and indicates that the Fed is walking a fine line.
At the same time, I’m loathe to extrapolate a few days of price action in a quiet week but it’s worth keeping an eye on, especially with the US dollar moving opposite to yields.