Traders turn to the dollar as yields blowout finally takes a toll on markets
I'm not entirely convinced that piling into the dollar is the right play here but evidently, it seems like the blowout in bonds (yields surging higher) is seeing a rush to cash. Margin calls being hit? We're also starting to see equities get struck down as well with S&P 500 futures now lower by 0.6% on the day.
The gilts market made headlines earlier when 30-year yields, currently at 5.69%, ran up to its highest since 1998. The move higher has been coming all through August and it's also the same case for the likes of Europe, Japan, and the US. However, today looks to be the straw that breaks the camel's back as we see broader market implications hit.
In response, the FX market is seeing strong bids into the dollar pile in. EUR/USD is down 0.6% to 1.1640 and USD/JPY is up 1% on the day to 148.60 currently.
USD/JPY hourly chart
What looked like a potentially quiet session in Europe has turned out anything but that at the moment.
GBP/USD is also now down 1% to 1.3405 and even USD/CHF is more bid, up 0.3% on the day to 0.8030 currently. In turn, risk currencies are also lower with AUD/USD down 0.7% to 0.6505 on the day.
As much as we are seeing spillovers to broader markets, it's best to keep a level head on the situation at hand. A call for correction in equities is definitely something to be wary about especially if long-end yields continue to blow up in the week(s) ahead.
As for currencies, I'm still holding reservations about the dollar in general in all of this. The US yield curve continues to steepen and if that's a sign of a policy mistake by the Fed, it's not exactly one that will be all too supportive for the dollar amid ongoing political pressures and a confidence/credibility hit.
And despite the initial setback to gold we're seeing at the moment, the precious metal stands to reason to shine in this sort of environment. So, do keep an eye out for dip buyers in trying to seize the opportunity here once the dust settles. This article was written by Justin Low at investinglive.com.