Dollar rallies as US yields move higher
The day after the FOMC policy decision has bond traders in agreement that the front end of the curve will be anchored, and the long end is free to soar. The playbook on Wall Street over the next couple of months will be to ride the reopening of the economy and double down on the cyclical rotation trade. The US is still early in this economic expansion and with financial conditions still looking healthy, stocks should still rally in the short-term.
US stocks are pulling back some as markets reprice inflation risks, with the Nasdaq bearing the brunt of the losses. Volatility will remain high over the next few months, especially as technology stocks struggle with their extreme valuations.
The dollar is rallying as Treasury yields easily break past some key technical barriers. The 10-year Treasury yield touching 1.75% suggests that 2.00% might not take much longer to happen.
Brazil’s central bank went big with its interest rate hike, paving the way for the rest of the emerging markets. The Brazilian real surged following the 75-basis point increase to the Selic target rate. These rate hikes come at a terrible time as economic uncertainty will not go away for Brazil until the COVID spread comes under control. Brazil is shattering COVID records with over 90,000 new cases of COVID-19 in a single day.
The BCB is worried about inflation and more interest rates hikes should be expected, with another 75-basis point increase likely to happen at the May meeting.
The Turkish lira surged after the central bank raised interest rates more than expected, a move that will draw the attention of many currency traders. The interest rate differentials for Turkey are outstanding, the policy rate is now at 19% and since the lira has been battered since mid-February, long lira bets could grow.
The British pound softened after dovish hints from the BOE signaled that taper talks are nowhere near. The BOE noted that there is a material degree of spare capacity at present and that the outlook for the economy remains unusually uncertain. The BOE stance on tightening sounded similar to the Fed, both will require clear evidence of the recovery.
The BOE is waiting for the bond market selloff to intensify before they push back, just like the Fed. Increasing asset purchases are not quite yet on their radar, but that could change if bond yields continue to skyrocket.
Bitcoin is taking a backseat to a plethora of major moves across Wall Street. A consolidation phase recently has been very positive for bitcoin and that could be the case right now. Bitcoin fundamentals have been relatively upbeat, with the biggest concerns remaining regulatory fears. Bitcoin appears poised to consolidate just south of the USD60,000 level, but if the move in the long end of Treasury gets out of control that could trigger some selling pressure.
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