US real yields have relentlessly marched higher since May. Some may be surprised by the recent ack of broad dollar strength, but one needs to recall that low real yields since late 2008 were manifesting themselves most in a weak dollar against commodity/$-bloc currencies (notably AUD and NZD) and emerging currencies. Therefore, a change in the real yield trend should most directly translate to dollar strength against those currencies, and indeed that has been the case (see first chart). With the dollar having already started to trend higher against the majors in late 2011 (grey line), the recent EM and $-bloc sell-off should be seen in the context of a broadening in of the multi-year trend turn higher in the US dollar. Given the pace of the sell-off, there will likely be a pause or partial reversal, but the message from higher real yields is that EM will suffer more than the US.
Read the full report: FX Daily
Deutsche Bank