| 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.
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