The dollar index fell 0.9%, as Treasury yields rose more slowly than European yields, though faster than steady JGB yields, while waning Fed, ECB and BoE rate cut pricing tended to weigh on risk-acceptance before the mid-afternoon release of Fed minutes and AI-leader Nvidia’s report due after the close.
The minutes were mostly a rehash of the last meeting’s statement and subsequent Fed comments, not extending earlier Treasury yield driven dollar gains.
USD/JPY rose 0.13% as relatively static JGB yields left the yen vulnerable against higher yielding currencies.
Two-year Treasury, bund and Gilts yields rose 3.9bps, 7.8bps and 7.53bps, respectively, versus flat JGB yields.
Treasury yields were boosted by heavy IG issuance and a poor 20-year auction. But also after Richmond Fed president Thomas Barkin on Wednesday conceded that the above-forecast January inflation data made the Fed’s job harder, and governor Bowman said now was clearly not the time for lower rates.
Later, ECB’s Pierre Wunsch stuck to his line that with wage pressures high and labor markets tight, rate policy could have to stay tight for longer than expected.
Further steps by China to stabilize its stock and property markets stabilized USD/CNY and got the CSI300 back up to 2022’s initial panic lows with a 1.35% gain, likely helping euro zone stocks amid German recession and the government’s lowered 2024 GDP estimate to 0.2% from 1.3% previously.
Regardless, 2-year bund yields broke out above 50% of its Sep-Dec slide at 2.84% with an eye toward the 61.8% and 200-day MA at 2.96%. That as the first ECB rate cut is fully priced for June, with 99bps by year-end.
That compares to a first Fed cut almost fully priced for June and just 89bps by year-end. But it might take more hawkish, top-tier U.S. data, such as core PCE on Feb. 29 and the ISMs and jobs reports in March to better confirm Fed rate expectations and the dollar’s path.
EUR/USD’s recovery from February’s lows was helped by a 5bp tightening of 2-year bund-Treasury yield spreads, but gains have largely been capped by the falling 30-day MA, last at 1.0829.
USD/JPY’s rebound from tenkan support by Wednesday’s lows amid rising Treasury yields ran into the downtrend line from February’s highs at 150.42. The rise was also aided by Japan downgrading its 2024 economic outlook, maybe limiting BoJ policy normalization.
There’s also a case to be made that a repeat of MoF FX intervention to support the yen ahead of 2022/23’s 32-year peaks is much weaker than it was in 2022. But the drop in Treasury-JGB yields from this year and last year’s peaks on eventual further Fed-BoJ rates convergence may need more hawkish U.S. data to take on 2022/23’s 151.94/92 peaks.
Sterling fell 0.6%, capped this week by the 30-day MA, and not helped by rising Gilts-Treasury yields spreads, as BoE dove Swati Dhingra again noted the costs that delayed rate cuts carry. Not to mention less risk-on support for the risk-sensitive pound.
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