US yields rise, will dollar follow?

The US dollar gets a bond boost

The US dollar found support overnight, after trading lower early in yesterday’s session, as long-dated US bond yields resumed their upward climb, notably in the 30-year tenor. The dollar index tumbled to test support at 93.50 overnight, but the rise in US yields reversed the sell-off, leaving the index 0.17% lower at 93.78, before moving slightly lower to 93.72 in Asia.

EUR/USD continued to trade sideways just below 1.1650 overnight but it was the reflation trade favourites that outperformed. GBP/USD rose 0.50% to 1.3800 and remains on track to retest 1.3900 this week. AUD/USD has risen 1.0% in the last 24 hours to 0.7485 and continues to target further gains to 0.7600. NZD/USD has been the star of the show, kiwi gaining 1.20% in the last 24 hours to 0.7170 this morning. With the frenzy around a potential 0.50% RBNZ rate hike rising to deafening levels, kiwi should continue to outperform if global risk sentiment remains firm. NZD/USD could test 0.7300 in the next few days in that scenario.

In Asia, the South Korean won rallied 0.85% overnight for much the same reasons, USD/KRW falling to 1174.50 this morning. The Singapore dollar also gained 0.30% while the Indonesian rupiah consolidated this week’s 1.30% gain after the Bank of Indonesia left policy rates unchanged yesterday. USD/MYR could test support at 4.1500 today after being on holiday yesterday as oil and commodity prices remain in space. The entire Asia FX space continues to receive support from the Chinese yuan, with USD/CNY falling to multi-month lows near 6.3800 earlier and hitting multi-year highs on a TWI basis.

The Japanese yen is seeing haven buying today after falling earlier, USD/JPY sliding back to 114.50 in Asian trading. The yen has surged after Mt Aso erupted in Japan. The gains are modest though, and USD/JPY rose as high as 114.70 intra-day reflecting the strong rise in long-dated US yields overnight. That highlights once again the US/Japan rate differential is the key driver of USD/JPY direction, with occasional bouts of haven buying bringing some two-way price action. USD/JPY is approaching a series of highs on each side of 115.00 which date back to 2017. It will likely encounter more offers into this area from options and exporters but remains a steadfast buy on dips.

Except for the reflation GBP, AUD and NZD darlings, another moves higher in US yields as we saw overnight, is unlikely to be ignored this time around. With speculative long US dollar positioning now reduced, and with US yields on the move higher once again in the long-dated tenors, the greenback could be approaching its nadir for now. It will take a combination of strong US earnings and a material retreat by US yields to cause a downside breakout through 93.50 in the dollar index now.

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