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USD: US yields continue to adjust higher - MUFG

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 30, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has remained relatively stable since the Fed announced it would begin raising interest rates at their policy meeting on the 16th December.

    Key Quotes

    “Financial market conditions more broadly have remained relatively stable as well highlighting that the Fed’s decision to raise interest rates was well telegraphed and has not resulted in any unanticipated shocks in the near-term. The short end of the US yield curve has been more responsive to the Fed’s decision to begin raising interest rates. The two year US Treasury yield has continued to adjust higher moving to peak yesterday of 1.10% from a close of 0.96% on the 15th December and an intra-day low of 0.54% recorded in early October.”

    “The US interest rate market is gradually shifting to pricing in more tightening in the coming years which we expect to continue. It is also prompting a further bear flattening of the US yield curve. The spread between the two and ten year US Treasury yields has narrowed and is moving closer to technical support at just below 1.20% which is where lows going back to 2008 are located. The ongoing adjustment higher for US yields should continue to provide support for a stronger US dollar in 2016. The US dollar has failed to track US yields higher during the holiday period creating the potential for some catch up strength early next year.”

    “The latest economic data from the US has been more disappointing over the last month or so. The US economy is currently estimated to have lost some growth momentum in Q4 potentially expanding by an annualized rate of around 1.6% after expanding by 2.0% in Q3. For the year as a whole it would result in the US economy expanding by around 2.4% for the second consecutive year. According to Bloomberg, the consensus view amongst economists’ is for more of the same in 2016 which the Fed expects to prove sufficient to continue removing excess capacity and help lift inflation back towards their goal.”

    “Over the last couple of years the US economy has got off to bad start in Q1 as bad weather has exaggerated economic weakness which was subsequently corrected in following quarters. A warmer winter boosted by the El Nino effect is likely to prove more supportive for economic growth in Q1 of next year. A stronger start to the year for economic growth may make the Fed more willing to continue raising rates again in March which could reinforce upward momentum for the US dollar.”
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