FX Daily Update: Treasury Slide Sparks Market Nervousness
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FX Daily: Treasury slide keeps markets nervous
This week's highlights include the Fed's Jackson Hole symposium, the 15th BRICS summit and flash PMIs for August. The steady slide in US Treasuries presents a headwind for risk assets and should keep the dollar in demand.\
USD: Treasury slide supports the dollar
It has been a quiet start to the week for FX markets. Chinese authorities have delivered another rate cut – but this time the one-year loan prime rate has been lowered 10bp to 3.45%, while the 5-year loan prime rate has been unexpectedly left unchanged. The latter rate is seen as more important to Chinese mortgage markets and raises questions about how China plans to stimulate demand in that sector. The rate cut did not see large moves in the renminbi, and the ongoing low USD/CNY fixings suggest Chinese authorities are trying to draw some kind of line in the sand near 7.35. Unlike the Japanese, who are very transparent with their FX intervention activities, it is hard to discern whether Chinese authorities are intervening to sell dollars near current levels. However, with China employing monetary stimulus, expect the renminbi to stay soft and remain a popular funding currency.
The dollar looks set to hold onto its gains this week. In focus will be Friday's speech from Fed Chair Jay Powell at the Jackson Hole symposium. This comes at a time when US 10-year yields are closing in on 4.30%, and our rates strategy team favours 4.50%. Intriguingly, the team notes that the US 10-year yield correlates most with the pricing of the policy rate four or five years forward. In other words, the Treasury sell-off is less about the terminal rate for this tightening cycle and more about where the Fed Funds rate settles under more normal conditions. Chair Powell could shed some light on this on Friday. The bottom line, however, is that it looks too early for the Fed to sound the all-clear on inflation and the dollar probably holds its gains.
DXY is holding gains above the 100-day moving average at 103.20 and can probably edge up to 104.00 this week.
Additionally this week, look out for headlines from the BRICS summit (taking place August 22-24) in South Africa. The topic of BRICS expansion tops the agenda and inevitably will raise questions over the threat of de-dollarisation. Any evidence of that is very scant so far, as we note in our full report here.
