FX Daily: Maneuvering between US bond yields and equities

Tighter monetary bias in a slowing growth environment
Philip Wee24 Sep 2021
    Photo credit: Unsplash Photo

    DXY moved into a higher trading range of 93.0 to 93.5 from 92.3 to 92.9 over the past fortnight. Although US initial jobless claims increased a second week, the US 10-year treasury yield spiked above its 100-day moving average to 1.43% in the overnight session, up from 1.36% last Friday. At its FOMC meeting on 22 September, the Fed signalled that it could taper asset purchases from November to mid-2022 and hike rates in 4Q22. While Wall Street rebounded on Thursday, the three major stock indices – Dow, S&P 500 and Nasdaq Composite – could still post monthly declines this month. In this environment, JPY and to a lesser extent CHF will be vulnerable to rising US bond yields. Other major currencies such as GBP and AUD will be more sensitive to stock market fluctuations.


    The deadline to suspend the US federal debt ceiling is coming up on 30 September. The White House has advised federal agencies to prepare for a government shutdown in the new fiscal year that starts on 1 October. Republicans in the Senate are expected to block the stopgap spending bill passed earlier by House Democrats to keep the government open until 3 December. The extraordinary measures by the US Treasury Department in August will run out of funds in October. Theoretically, a US debt default is considered negative for the USD. On the other hand, a default could also be positive for the greenback first. The Treasury and Moody’s warned that a default could be dire for the US economy, and by extension the world economy. More so now that China is grappling with a potential fallout from Evergrande. 


    GBP bounced off 1.36 for the third time in three months. The rebounds in July and August were capped at 1.40 and 1.39 respectively and is likely to be lower again around 1.38 this time around. The market is pricing in a 15bps rate hike by the Bank of England in February 2022. At its monetary policy committee meeting on Thursday, the BOE expects inflation to temporarily exceed 4% in 4Q21 and hold through 2Q22. The committee voted 9-0 to keep the bank rate unchanged at 0.10% and 7-2 to keep the gilt purchase target unchanged at GBP875bn. The BOE is also worried about slower growth from the end of the pandemic jobs furlough scheme for 1.6 million people. GfK consumer confidence fell from -8 in August to -13 in September, its worst level since April. Retail sales contracted for four straight months to August.


    Philip Wee

    Senior FX Strategist - G3 & Asia

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