USD growth weakens in global markets - Reasons

By  Trend

With the latest Federal Open Market Committee minutes release this week and even in the couple of sessions prior, the USD rally moves have eased notably and the status of the major breakout above the 2.95-3.05% zone for the US 10-year benchmark is an open question, Head of FX Strategy at Saxo Bank John Hardy told Trend on May 28.

Hardy believes that yet the US dollar rally has mostly only faltered against a suddenly surging Japanese yen.

"Sure, the yen is very sensitive to the direction of global yields, but the pickup in volatility is out of proportion with recent developments and suggests that there is a bit more afoot," he said.

"It is difficult to quantify the fallout for the JPY from the North Korean summit situation, as the recent cancellation coincided with the sudden spike in JPY volatility. Otherwise, perhaps some of the JPY strength may be on the recent wobbles in emerging markets (as the aggravation of the TRY meltdown likewise coincided with the spike in JPY), which are popular destinations for Japanese savers looking for enhanced yield," he added.

Certainly, in any case, according to Hardy, the risk appetite backdrop is far from calm and is throwing off conflicting signals.

"The normal global risk barometer, the S&P 500 index, has neither followed through higher nor sold off after breaking important Fibonacci and trend-line resistance, and US large caps may have taken on a kind of odd safe haven status. In any case, we suspect that the very quiet moves in that index are odd rather than reassuring and that the VIX trying to establish new lows below 13 since the early February volatility event is a red herring," he said.

Looking over at EM equities, in USD terms the MSCI Emerging Market index has slipped below its 200-day moving average and has closed near the lows of the year in recent session, Hardy added.

He further noted that elsewhere, the Germany-Italy 10-year yield spread is crossing above 200 basis points, a deterioration that threatens a weaker euro versus the most liquid safe haven currencies like USD and EUR, with CHF potential perhaps frustrated by the Swiss National Bank.

"Note a story discussing the potential for “pooled” sovereign bond backed securities circulating as a novel way to partially address the debt mutualisation issue in the EU. In EMs, we need to keep an eye on TRY after Erdogan and his AKP leadership shot itself in the foot, by announcing that “relief from high interest rates” are a priority for the party’s election platform," hardy concluded.