Morning Commentary: U.S. Bond Yields Soar – A Game Changer?

Foreign Exchange - Morning Commentary

U.S. Bond Yields Soar – A Game Changer?

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Alan Rose
Alan Rose
Foreign Exchange Head Trader
Yesterday, there was a trifecta of news from the U.S. that put a charge into U.S. interest rate yields propelling the U.S. dollar higher against almost all major and emerging market currencies. Yesterday’s strong U.S. ADP report, the Service ISM survey (strongest report since August 1997), and further upbeat comments from Fed Chairman Powell caused U.S. interest rates to surge with the U.S. 10-year yield up nearly 12 bps (3.18%) on the session to close at its highest levels since 2011.
The economic data, combined with today’s U.S. jobless claims, continues to show the U.S economy as red hot and has caused some economists to raise their forecasts for the U.S. jobs report tomorrow. The spike in U.S. yields yesterday and overnight has rippled through all other G7 countries and has caused their interest rates to ratchet higher…in fact, G7 interest rate gains have outpaced the gains in U.S. interest rates overnight causing the U.S. dollar to give back some of its gains.
U.S. equities have ignored the eight Fed rate increases beginning in late 2015 and have continued to move higher supported by improving growth and earnings. With interest rates continuing to surge, is there a point at which much higher U.S. interest rates represents two-way risk for both equities and the U.S. dollar? In the short term, probably not, as strong U.S. economic momentum continues unabated. But this development needs to be monitored closely should U.S. interest rates continue to surge and begin to bite into the economy, equities and ultimately, the U.S. dollar.
  • Australia posted better-than-expected trade data for August but the improvement was ignored by the market. The Aussie dollar (AUD) made new lows for the year and lows not seen since 2016 as the U.S. dollar remained better bid in Asia; the AUD has only recovered marginally as the U.S. dollar has given back some of its gains.
  • U.S. jobless claims came in below expectations at 207,000 which is the lowest level of claims since November 1969. This is just one more piece of data to confirm the strength of the U.S. job market and economy. U.S. interest rates are correcting lower after surging again overnight with the U.S. 10-year touching 3.23%.
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