- US yields still in the driver seat pushing USD higher
US Treasury yields remain the primary driver in FX, and yesterday’s fall back in yields saw a partial reversal of most of the moves witnessed in the prior three days, with the USD softening particularly vs. NZD (helped by very strong PMI) but also AUD. However, the bid under the USD and the pressure on US treasuries (esp. 10Y) is back in place in the European session, supporting our view that this will continue to remain the dominant theme in the next few weeks. This is discussed at greater length in the latest edition of our FX Weekly – Treasuries’ Pain Means USD Gain.
- Stronger US data required for sustaining upward USD momentum
While the higher US yields has been driven by a general portfolio shift away from US treasuries (reducing safe haven bid) as US equity markets charge to multi-year highs, this itself has been driven by an increasing optimism on the US economic outlook. Thus the current market configuration (higher USD, higher US yields and rallying equities) may require continued strength in US data to persist with such momentum. We have another full economic calendar Friday, featuring CPI, Industrial Production and the preliminary University of Michigan Consumer Sentiment Index. Michigan CSI, less driven by labour market conditions than the Conference board reading, should reveal how higher equities and higher gasoline prices are balancing out. We are a little below market forecasting 74.0 down from 75.3, vs. consensus of 76.0. Inflation readings will also be looked at, and a stronger core-CPI print (above 0.2%) could continue to support USD should it weigh on US Treasuries. A scheduled speech from Fed arch-dove Charles Evans in Frankfurt (19:00GMT) is only likely to have a impact in the unlikely event that he agrees with his arch-hawk colleague Lacker who said today that further stimulus is unnecessary
and that rates will have to rise next year.
- BoJ Minutes fail to signal radical shift
Minutes of the mid-February BoJ meeting (at which CB agreed to a further Y10tn of asset purchases) showed that one member was keen to shift to a longer-term 2% inflation target to avoid one-sided yen moves. But while this provided a small boost to USDJPY, there was little else to suggest that the BoJ has decided to radically shift its approach. If anything, what was more interesting was that some board members felt uncomfortable with asset purchases being viewed as financing the government deficit. This lowers the odds somewhat for the BoJ to come out with aggressive unsterilised QE – something that could promote “domestically driven” JPY weakness. But this is less relevant for now, with JPY being almost exclusively dictated by the surge in US yields.
- TICS show US been readily funding C/A deficit recently
Yesterday’s January US TICS data shows that US investors repatriated $6.3bn in January, much less than the outsized $38.5bn seen in December. The large ($101bn) net long-term capital inflows were dominated by foreign investors net buying of Treasuries ($93.9bn. of the total) which makes sense as foreigners were probably seeking sanctuary in Treasuries as fears of a Greek default intensified. That said, the US has been (for a change) readily funding its current account deficit in recent months. As can be seen from the chart, net long-term inflows have averaged $60bn per month (3mma basis) filling in a current account deficit “hole” of about $40bn a month. However, the TICS data in no way indicated that the inflows were being dominated by “risk-on” flows into US equities, thus offering no support to the hypothesis that the USD is trading in synch with broader risk appetite. However, we will probably have to wait until the February and March data for more evidence, which followed the release of the strong January and February payrolls reports which prompted the current USDequities positive correlation.
BNP Paribas