DXY TO RESUME UPTREND: Divergence with 10Y Yield
Bond yields are moving upwards - NOT because of rate hike or inflation expectations - but because of changes in term premia of longer dated bonds.
Investors are demanding a higher premium to hold longer dated Treasuries.
This naturally pushes bond yields up.
DXY is normally extremely correlated with Treasury yields.
Right now, DXY is trading at a discount compared to the 10Y yield.
This needs to be corrected - suggesting that DXY will resume its uptrend.
Furthermore, US Treasuries are now 'high yielding' bonds.
This should result in capital inflows to the US, away from low yielding currencies such as EUR and JPY.
Equity markets suggest that the current economic climate favours risk, i.e. a 'risk-on' environment.
This, historically, supports high yielding currencies, in particular USD versus EUR and JPY.
All things considered, there are many fundamental arguments supporting USD against most G10 currencies.
Investors are demanding a higher premium to hold longer dated Treasuries.
This naturally pushes bond yields up.
DXY is normally extremely correlated with Treasury yields.
Right now, DXY is trading at a discount compared to the 10Y yield.
This needs to be corrected - suggesting that DXY will resume its uptrend.
Furthermore, US Treasuries are now 'high yielding' bonds.
This should result in capital inflows to the US, away from low yielding currencies such as EUR and JPY.
Equity markets suggest that the current economic climate favours risk, i.e. a 'risk-on' environment.
This, historically, supports high yielding currencies, in particular USD versus EUR and JPY.
All things considered, there are many fundamental arguments supporting USD against most G10 currencies.
Trade active:
Nice bullish pressure in DXY today
Comment:
These are excellent levels to buy USD. Month end rebalancing flows today were understandably USD negative. H1 2017 should be overall USD positive given the fundamentals in play.