FX Daily: DXY underpinned by wider bond differentials

DXY and US bond yields at two-month highs
Group Research, Philip Wee23 May 2023
    Photo credit: Unsplash Photo

    Markets need more clarity on two significant issues in the US. 

    First, investors are hesitant to move forward without a resolution on the US debt ceiling crisis before 1 June, the “hard deadline” by US Treasury Secretary Janet Yellen. However, the market speculated that the real X-date could be later, between 1 June and the tax receipts on 15 June. For now, US stock markets are not showing any signs of panic. Although the Dow fell 0.4% to 33287, it has been wedged mostly between its 20- and 50-day moving averages this month. S&P 500 is near the year’s high despite slipping below 4200 to 4193. Nasdaq Composite rose 0.5% and closed at a new year’s high of 12721. Regional bank worries subsided; the SPDR S&P Regional Bank ETF rose by 3.2% to 40.46, its highest level since 1 May. Apart from the brief spike in early May, the VIX volatility index held the year’s lows in a 16-18 range this month. 

    Second, the Fed keeps markets guessing about its next move at the FOMC meeting on 13-14 June. Minneapolis Fed president Neel Kashkari thinks it will be a close call on whether the Fed hikes again or pause. St Louis Fed President James Bullard sees the need for two more hikes this year to cool inflation. All Fed officials agreed it was premature to signal the end of the hiking cycle because inflation was still above its 2% target amidst a tight labour market. Hence, markets cannot rule out the dot plot pencilling a higher Fed Funds Rate target this year.

    Not surprisingly, DXY and US bond yields have responded by rising to two-month highs in May. Despite expectations for hikes in the EU and UK next month, EU and UK 2Y bond yields rose from this month’s low by 33 bps and 38 bps to 2.81% and 4.05%, respectively. The UST 2Y yield outpaced them with a 52 bps rise to a higher yield of 4.31%. As of 22 May, EUR/USD and GBP/USD depreciated by 1.9% and 1% this month. That said, EUR and GBP need to break below support levels at 1.08 and 1.24 to extend their downside. Tomorrow, GBP could lead the way if UK’s CPI inflation drops sharply to 8.2% YoY (consensus) in April after holding above 10% for seven months. 

    Quote of the day
    “I’m thinking two more moves this year – exactly where those would be this year I don’t know – but I’ve often advocated sooner rather than later.”
        St Louis Fed President James Bullard, 22 May 2023

    23 May in history
    The Good Friday Agreement was accepted in a referendum in Northern Ireland in 1998.


    Philip Wee

    Senior FX Strategist - G3 & Asia

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