USD firm; Support for steepening USD curve view

The USD stays firm amid European risks and trade tensions. Stick to USD curve steepening view.
Philip Wee, Eugene Leow09 Oct 2019
    Photo credit: AFP Photo

    FX: European risks and trade tensions

    The US dollar held firm after the Fed announced its intention to expand its balance sheet overnight. Meanwhile, European currencies are weighed down by German recession fears and Brexit related uncertainties.

    Emerging Asian currencies have started to depreciate again on fading optimism for a tariff truce from a China-US trade deal this week. Beijing has criticized US’s decisions to impose visa restrictions on Chinese officials accused of human rights in Uighur as well as adding 28 Chinese companies to its blacklist or “entity list”. US President Donald Trump warned that if the talks on October 10-11 failed again, US tariffs on USD250bn of Chinese goods will increase as scheduled on October 15 to 30% from 25%.

    Rates: Sticking by the USD curve steepening call

    It would not take much to drive 10Y US yields to revisit the recent low of 1.44%. Optimism of a China-US trade deal had initially driven 10Y yields towards 1.60%. However, this quickly faded when the US blacklisted several Chinese firms and put travel bans on selected Chinese officials (on purported human rights violations). With this overhang, market participants are awaiting potential retaliation from China, souring the prospects of a trade truce.

    We maintain that US Treasuries are expensive at current levels. The binary outcomes for the two events (Brexit and trade talks) suggest that the market will be risk averse. Notably, the VIX is above 20 while the implied volatility on USD rates has also spiked. Depending on how these two events play out in the coming few weeks, USD interest rates could be significantly higher or lower than where we are currently. Against this backdrop,USD rates positioning should be neutral with a slight preference for curve steepening.

    Philip Wee

    FX Strategist - G3 & Asia

    Eugene Leow

    Rates Strategist - G3 & Asia

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