FX Update: US treasuries not leading the new charge higher in yields.

FX Trading focus: Yield rises elsewhere outpace US yield  

While US treasury yields are an important coincident indicator for US dollar direction, the impact of a rise in yields like the one we saw yesterday may continue to prove rather modest as long as financial conditions aren’t likewise tightening. And over the last couple of weeks, financial stress measures have generally eased, whether its market volatility itself or in an important indicator like credit spreads. So the ability of the US dollar to post a turn back to the strong side is an open question through the key data for the remainder of this week: the May NFP change and earnings data and May ISM Services data points tomorrow.

Further holding the USD in check is a string of more hawkish developments from other central banks, for example from the Bank of Canada yesterday (more below). These have yields at the short end and even at the long end of the yield curve for many currencies outpacing the rise in US yields. German Bund yields are posting a new high for the cycle today, while the US 10-year benchmark is still a full 30+ basis points below its cycle high. The same for the UK 10-year Gilt yield, which hit a new cycle high above 208 bps already yesterday and is following through higher today. In other words, when the impulse for new cycle highs in yields is driven by the Fed and market conditions tighten notably, the USD leads, when conditions are maintaining an even keel and other CB’s are leading the charge, the USD performance is likely to prove more mixed or even weak.

The JPY, naturally, is suffering strong fresh downside pressure on the general rise in yields, with USDJPY touching above 130.00 this morning. But given the new highs in Bund yields, for example, could be interesting to watch whether some of the other JPY crosses like EURJPY will outperform and reach new cycle highs first – watching 140.00+ in EURJPY.

Chart: USDCAD after Bank of Canada
USDCAD broke down further in the wake of the Bank of Canada meeting, which delivered the expected 50 basis point hike to take the policy rate to 1.50%, but offered up quite hawkish guidance in the final sentence of its policy statement yesterday, that the bank is “prepared to act more forcefully if needed to meet its commitment to achieve the 2% inflation target.” Between the lines, this means the willingness to hike by greater than 50 basis points. In response, Canadian short yields surged further and USDCAD punched down to new local lows well below the 200-day moving average before the modest USD comeback post-ISM Manufacturing release kept the action choppy. This 1.2600-60 looks the last gasp area for the pair to find any support – otherwise a capitulation toward the range lows to 1.2400 looks may lie ahead. Impressive that CAD has brushed off the oil market correction this week.