- Paradigm Lost? Treasury sell-off fails to support USD
Just when the FX market was settling into its new paradigm of bond-yield watching, the spectacle of US Treasury yields shooting higher in the NY afternoon while the dollar heads lower is cause for some fresh soul-searching. In the absence of a clear rationale, there was some attempt to pin USD weakness on the UPS acquisition of Holland’s TNT, though there was no obvious evidence of large-scale flow emanating from any one particular source to validate this. Breaches of technical levels and stop loss buying were also (predictably) cited; we could also point to a further EUR-positive compression in yields against Germany across the EMU spectrum on solid demand for yesterday’s 20-year EFSF issue and as the Greek CDS auction passed off peacefully. But whatever the root cause, the USD was generally softer, with only USDJPY managing to retain the recent link to US yields. Fed-speak was credited in some quarters with being responsible for the heavier bond market tone, though price falls in fact came some time after reported comments from NY Fed President Dudley and Dallas Fed President Fisher. Dudley acknowledged signs the economy is improving (though he also argued the US is not out of the woods and on QE3 said nothing had been decided) and that rates could change earlier or later than the current late-2014 low rates commitment. The much more hawkish Fisher said the language did change at the last FOMC and repeated his view that there is plenty of liquidity in the US financial system and no more is needed.
- More Fed-speak and US housing starts today’s main focus
Fed-speak is again high on the agenda for Tuesday, with Chairman Bernanke scheduled to speak at George Washington University, Minneapolis Fed President Kocherlakota speaking in St Louis, and confirmation hearings taking place for two new Fed governors, Stein and Powell. Regarded as ‘moderate hawk,’ Kocherlakota’s comments will be especially interesting (assuming we get no significant policy steer from Mr Bernanke) while comments from Stein or Powell could be market-moving if they offer up any opinion on their current proclivities with respect to Fed policy. The data highlight Tuesday will be US February housing starts where market consensus for a small rise contrasts with our economists’ forecast for a small fall. Despite Monday’s opposing movements in bond yields and the USD, we would still expect good economic news to be associated with a firmer dollar, for the time being at least. We should nevertheless remember that historically the lag between bond yield changes and currencies has been long and variable; it is also worth noting that real US yields have risen much less than nominals and in the case of the 2-year, most of the yield back-up has come via higher inflation expectations meaning declining real yields. This is hardly a currency positive, in fact it adds to incentives for US investors to look abroad in search of better returns (see chart).
- Minutes show a more relaxed RBA, but AUD weaker on miner China outlook
The Minutes from the RBA’s March meeting provided little for those looking for evidence of concern about the exchange rate; indeed there was little evidence of concern about anything. The risks from Europe were seen as having receded, the slowdown in China seen as a healthy ‘soft landing’ and while the domestic economy is facing is a difficult adjustment, and neither unemployment nor inflation appear likely to require RBA action. But while the AUD-supportive Minutes allowed the market to rebuild some longs, these were undermined by a BHP warning that Chinese iron ore demand growth is slowing; the mining giant was also reported to be reviewing expansion plans. But while the reaction may be understandable given the importance of the mining industry, it seems somewhat excessive: BHP still sees that demand growing by 50-60% and says that the current price is floored not significantly below current levels. Meanwhile Rio Tinto and Fortesque appear much more optimistic; and the RBA retains its longer-term bullish outlook; indeed, in terms of investment flows, the RBA places much more emphasis on the nascent expansion of the LNG industry.
BNP Paribas