USD In Demand On Jump In 10-Year T-Bill

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

The biggest story in the financial markets Thursday was the sharp rise in Treasury yields. hit fresh 9-year highs as the rose above 2.9% on the back of a stronger and relatively low . Normally, these 2 reports do not have a significant impact on the markets and we are skeptical of their influence Thursday. Instead, we believe it’s the talk of ongoing denuclearization in North Korea and diversification from as a transactional or investment instrument that are driving bond prices lower and yields higher. This would also explain why the rise in yields did not have significant impact on , which barely budged as 10-year rates broke through 2.9%. With that in mind, the increase in yields supported the dollar’s gains against other currencies. While Iran may be the only country to officially switch to from dollars for its foreign financial reporting, we are certain that other countries are unofficially reducing their exposure to U.S. dollars. No U.S. economic reports are scheduled for release on Friday so the dollar should take its cue from equities and treasuries.

Meanwhile, continued to defy fundamentals. In March, fell -1.2%, which was twice the amount economists anticipated.
Although did not deviate as much from their estimates, dropping -0.5% vs. -0.4% forecast, all 3 pieces of key U.K. data this week missed expectations. In fact, nearly every data point released this month deteriorated from the prior period – this includes , the PMI composite index, , , and . But after an initial sell-off, GBP/USD recovered all of its intraday losses to end the NY session only slightly lower. Part of this resilience can be attributed to the belief that the Bank of England will raise next month as rate-hike expectations have only fallen slightly to 85% from 87.5% on Friday. Investors are also relieved that the U.K. government’s push to leave the customs union failed in the House of Lords. Contrary to Prime Minister May’s desires, an amendment was made to the Withdrawal Bill this week that requires the U.K. to remain in the customs union and seek Parliament’s approval for changing any regulation relating to employment and consumers. The House of Commons will probably reject these changes, but for the time being, it’s a win for soft Brexit supporters. We continue to stress that even though the next BoE meeting is 3 weeks away even if they choose to raise rates, in light of recent data disappointments, there should be profit taking ahead of the monetary policy announcement.

For the fourth day in a row, ’s attempt to break above 1.24 ended in failure. There are clearly a lot of option barriers and stops being aggressively defended at that level.
Although German bund yields also rose sharply Thursday, more so than Treasury yields of the same tenor, the currency struggled to rally. The Eurozone reported a slightly weaker and while Friday’s report is expected to show higher price pressures, the risk is to the downside given slightly weaker growth in March.

Softer data also drove the and dollars lower against the greenback. While the improved, Australia reported significantly weaker in March.
Only 4.9K jobs were created, all of which were part time as more than 19K full-time jobs were lost. The also eased slightly, reinforcing our view that Australian dollar is vulnerable to a deeper correction toward .7720. Although in New Zealand rose more than expected on a quarterly basis in the first 3 months of the year, on an , CPI growth slowed to 1.1% from 1.6%. Not only is this the weakest pace of growth in 18 months, but it is also near the bottom of the RBNZ’s 1-3% inflation range. Therefore it should be no surprise that NZD/USD extended its slide for the third day in a row. , on the other hand, shrugged off higher and Canadian bond yields to end the day above 1.26. The loonie will be in focus Friday with and scheduled for release. Both reports area expected to be softer, which if true would reinforce the Bank of Canada’s caution and renew the rise in USD/CAD.

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