USD Riding Higher Yields, Can Thank a BOJ & ECB

Talking Points

– Widening seductiveness rate differentials assisting a US Dollar extend a gains, like in EUR/USD due to German-US produce spreads.

– Concerns over Australia losing a AAA credit rating spiteful AUD/USD; concerns over UK PM May’s doing of Brexit spiteful GBP/USD.

– See a DailyFX Economic Calendar and see what live coverage for pivotal eventuality risk impacting FX markets is scheduled for subsequent week on a DailyFX Webinar Calendar.

Join me on Wednesday, Dec 21 during 06:00 EDT/11:00 GMT for a Weekly FX Trading QA in a DailyFX Live Trading Room.

The US Dollar is shutting behind in on a 2016 highs currently amid a continued arise in US Treasury yields. After final week’s FOMC assembly in that a trail to 3 rate hikes in 2017 was outlined, markets might be starting to feel that Fed officials might be a reason dovish themselves.

After all, usually “some” of a officials incorporated a approaching impact of a mercantile impulse strike from US President-elect Trump, definition that some policymakers might not have practiced their forecasts upwards enough. Furthermore, we didn’t hear from Fed Chair Janet Yellen that a trail of rate normalization would be “gradual”; during slightest she appears to be fresh for a probability of an economy heating adult faster than formerly anticipated.

For a US Dollar, a pivotal takeaway, as mentioned first, is a arise in US Treasury yields (more of a ‘Trump reflation trade’ as we’ve called it given right after a election) , quite in a universe where in some places disastrous rates insist or rates are ‘under control’ in some form. Mainly, this means a Euro and a Japanese Yen.

Chart 1: EUR/USD Daily Timeframe (October 2015 to Dec 2016)

USD Riding Higher Yields, Can Thank a BOJ amp; ECB

The ECB’s preference in early-December to change how a QE module is undertaken can erode a market’s enterprise to reason Euros over a medium-term. Previously, produce curves in Europe were flattening as investors front-ran ECB bond-buying: with a ECB observant it wouldn’t buy debt with yields to majority next a deposition threshold of -0.400%, there was a nonesuch outcome along a produce curve. This is no longer a box now that a ECB will buy holds during any YTM, that reduces a need to go serve down a curve. Concurrently, with a preference to buy 1-year debt, a ECB has signaled that it is fundamentally altering process to be means to keep a front-end of European produce curves pinned to a floor.

Between a ECB’s process change and a Fed’s signaling for a faster gait of rate hikes, a German-US 2-year produce widespread has widened out significantly in a past few weeks, proof to be a pushing force behind EUR/USD weakness. The same can be pronounced about what’s function with a Japanese Yen. In a rising produce sourroundings where a BOJ is pegging a JGB 10-year produce during or next 0%, a Japanese Yen stands out to be a loser. Interest rate differentials (US-Japanese 10-year produce spreads) have changed neatly opposite a Yen, and seem staid to do so for a foreseeable destiny (three- to six-months).

See a above video to see how these elemental developments interpret into actionable trade setups in EUR/USD and USD/JPY. Likewise, see a video for a demeanour during GBP/USD and a UK PM’s “Mayhem,” because a timing of concerns over Australia’s AAA credit rating are backing adult with a bearish outcome in AUD/USD, and technical considerations in Gold, Crude Oil, USD/CAD, CAD/JPY, EUR/JPY, and GBP/JPY.

Read more: FX Calendar Thins Out Before Christmas, though Several Key Data Remain

Join me on Wednesday, Dec 21 during 06:00 EDT/11:00 GMT for a Weekly FX Trading QA in a DailyFX Live Trading Room.

— Written by Christopher Vecchio, Senior Currency Strategist

To hit Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter during @CVecchioFX

To be combined to Christopher’s e-mail placement list, please fill out this form

About author