Morning Commentary: Uneven Impact: The Non-taper Tantrum

A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.

Uneven Impact: The Non-taper Tantrum Share this story: Andrew Kositkun Senior FX Advisor

U.S. yields have been on an upward trajectory since September 2020, but unlike prior months, the majority of the increase in yields since February has been driven by a rise in real yields. This is a phenomenon that is reminiscent of the 2013 taper tantrum.  However, while the current broader U.S. dollar rally is consistent with what we saw in 2013, sectoral performance is markedly different. Back in 2013, euro and yen weakness was relatively contained, with commodity currencies weakening more substantially. In the current environment, it is the euro and yen that have underperformed, while commodity currencies have shown relative resilience. This divergence in performance is explained by many factors, with the most notable one being the global growth backdrop. Here’s a look at the other difference between 2013 and 2021:  Real yields have increased by a smaller magnitude this year than in 2013. In 2013, nearly the entire increase in nominal yields was driven by real yields. By contrast, only a fraction of the nominal move in yields is explained by real yields in 2021.  U.S. yield spreads relative to the rest of the developed markets are widening at a much quicker pace in 2021 than in 2013. This reflects a more activist Fed compared to other central banks.  The global growth picture is more constructive in 2021. While the U.S. is expected to lead the way, the growth outlooks in developed and emerging markets have been upgraded year to date. Conversely in 2013, European and U.S. growth outlooks were relatively stable, but emerging market growth was being downgraded.  The combination of wider yield spreads in favor of the dollar and a better global outlook not only helps to explain why risk assets such as commodities and equities have held up relatively well despite the move higher in yields but also informs foreign exchange performance. The wider U.S. yield spreads should matter most for currencies such as the euro and yen that have central banks that are expected to be inactive for the foreseeable future. Meanwhile, an improving global outlook and the subsequent rise in commodity prices have been supportive of commodity currencies, leading to more resilient performance than seen in 2013.  With these dual and somewhat offsetting forces of higher U.S. yields but improving global growth expected to persist, continued dispersion in U.S. dollar performance is also expected. Namely, the dollar should do better against growth-vulnerable low-yielding currencies such as the euro, with commodity currencies (see petro currencies) and currencies with structural support (see the Chinese yuan) doing better.  Speaking of the Chinese yuan, U.S. and Chinese officials held their first face-to-face meeting since President Joe Biden took office. According to media reports, talks were contentious, but this was expected. Fundamentally, the meeting was as much about politics as it was about business, so posturing at the introductory session open to the media is not surprising. Notably, private talks were reported to be substantive and ran over time.

If we can help you with any Foreign Exchange needs, please email foreignexchange@cnb.com or call (800) 447‑4133. Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!

Follow City National Bank on social media:

Non-deposit investment products: • Are not FDIC insured, • Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and • Are subject to investment risks, including possible loss of the principal invested. This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.

Unsubscribe from this list  |  Update email preferences This message has been sent to bank@banking.offers.report. Please do not reply to this email. To ensure the delivery of future emails, please add foreignexchange@emails.cnb.com to your email address book or safe sender list. Copyright ©2021 City National Bank – All Rights Reserved. 350 South Grand Avenue, 12th Floor, Los Angeles, CA 90071 City National Bank is a subsidiary of Royal Bank of Canada. TERMS & CONDITIONS  |  PRIVACY STATEMENT NMLSR ID# 536994 | City National Bank Member FDIC