Daily Brief – Value shift

Value shift

A broad-based dollar advance has left key Dollar-crosses testing the extremities of recent ranges. The source of that Dollar rally can be attributed to a combination of many factors. Arguably the most important amongst those has been strong US economic data. The start of this week saw a relatively light data schedule allowing yesterday’s consensus-busting PMI data to steal the show. Hitting a five-year high of 58.4, despite a global bond sell-off and uncertainty in key commodity prices, provided the Dollar a tailwind.

The apparent comfort of US purchasing managers with higher yields validated a surge lower once again in US Treasuries. A few weeks ago, we noted that every financial news outlet on the planet was brandishing the same headline: the US 10-year treasury yield had exceeded 5%. Yesterday was the turn of the 5-year yield to hit the same level as that bond sell-off deepened further. Whilst political risk premia build within the Eurozone, the Dollar rallied on the back of a combined exceptional yield and economic resilience story.

Speculation of a US diesel-export ban is also seen as Dollar positive. Despite at economic face-value constraining the export capacity of the United States, the proposed ban can reinforce the Dollar’s safe-haven appeal. Energy importers including the Eurozone and the UK will pay the corresponding price for such protectionism. The Pound is taking this trading theme harder than the Euro likely because threats of higher fuel import prices and interest rates will meaningfully impact the Autumn budget due at the end of next month. Yields at this level are destroying any fiscal headroom the Chancellor had and this uncertainty has fed into Sterling.

Discussion and Analysis by Charles Porter

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