US yields dominate the FX outlook

John Hardy

Head of FX Strategy

US Treasury yields largely ignored the weak key US data late last week – the Thursday CPI miss and weak US Retail Sales Friday – and US yields ended the week on a high note, with the 10-year yield touching the pivotal 3.00% level for the first time since early August.

Friday’s close was the second-highest weekly closing level for the cycle since 2013. The persistent weakness in the US bond market put a quick end to the US dollar sell-off and kept the USD bears frustrated for now. 

Emerging markets are in the spotlight this week, both due to key event risks and the risk to the more vulnerable EMs from higher US rates. Last week saw Turkish and Russian rate hikes that provided at least temporary support for the lira and ruble and this week sees two central bank meetings for what are widely considered the “next weakest links” in the more liquid emerging market currencies, the South African rand (SARB to meet Thursday) and Brazilian real (Selic rate announcement on Wednesday). 

Neither central bank is expected to hike rates to shore up the currency, but might need to do so to avoid a deepening rout, if the backdrop sees a further rise in US yields and the dollar.

President Trump issued fresh tariff threats over the weekend on Chinese imports, keeping risk appetite on edge – the week ahead can only bring headlines on the trade wars front. This threat, together with the sentiment towards emerging markets and the direction of US yields look to be the chief driver this week.


The EURUSD turnaround late Friday emblematic of the situation for the USD at the moment, as the weak US data was unable to impress the US Treasury market, which closed the week on a very heavy note and kept bond yields up near pivotal levels to start this week. EURUSD’s inability to clear the local 1.1733 high and dove back lower – a tactically bearish development at minimum and this swings the focus back to the downside pivots just above 1.1500 level.
Source: Saxo Bank
G-10 rundown

USD – a USD comeback on higher US yields. It’s often an interesting “aha” moment when the implications of poor data are ignored, so the tactical risk shifts back to more USD strength until proven otherwise. US long yields are the key coincident indicator.

EUR – traders at a loss for what to do here as ECB outlook is fixed for the foreseeable future while EU rates are not participating in any semblance of a liftoff.

JPY – the yen on its back foot on the strong US yields – though the situation gets tricky for JPY traders if we see both higher yields and risk-aversion. Interesting as well that USDJPY never participated in the USD sell-off last week.

GBP – it is rather clear that the UK government and the EU can progress toward a deal, but can May survive a possible leadership challenge from within her party and would sufficient Labour votes approve a Chequers-like deal when parliament votes on an eventual deal?

CHF – Italy continues to generate headlines but the Italian-core spreads have tightened further. Nonetheless, EURCHF trades heavily – something is afoot. Perhaps the franc is seen as a safe haven preferable to Japan in the event of a deepening trade war if a Chinese devaluation takes down Asian currencies. Certainly, the new strong local highs last week in CHFJPY demand some explanation.

AUD – the backdrop is not supportive, as we look at weak commodity prices, the risks to Asia from trade wars, an unfolding credit crunch in Australia that will continue to impact the housing bubble, and near-record yield spreads versus the US.

CAD – USDCAD so far hasn’t been able to manage a break of the pivotal 1.3000 level and the US-Canada yield spreads have been stretching persistently in the wrong direction since mid-August. Key for CAD this week is the Friday Aug. CPI data after the “Trim” core measure matched a cycle high at 2.1% year-on-year in July and the headline level hit 3.0% y/y.

NZD – awaiting the NZ GDP data up on Thursday for next steps, as well as whether China continues to defend its currency floor versus the EUR and USD and the RMB index.

SEK – as anticipation has been recently building for Sweden’s Riksbank to move ahead of the ECB, the market has pushed back the expected date of the first rate hike to February after the CPI miss last week, even as the record shows that the country often sees a big dip in prices in either July or August. We’re still constructive on SEK versus the euro.

NOK – EURNOK looks heavy ahead of this Thurday’s Norges Bank meeting and the expected hike the bank will deliver. Key will be guidance and the direction of risk appetite and the oil price for whether EURNOK can push significantly below the 9.50 level. 

Upcoming Economic Calendar Highlights (all times GMT)

• 0900 – Eurozone Aug. Final CPI 
• 0900 – ECB’s Coeure to Speak 
• 1015 – ECB’s Praet to Speak 
• 1230 – US Sep. Empire Manufacturing 
• 0130 – Australia RBA Minutes 

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