The broad dollar following yields higher – Nomura

G10/Global US yields have moved higher with the 10y now breaking the 3.1% level. 

Key Quotes:

“The broad dollar has followed yields higher, while US equities have traded sideways. Meanwhile, Brent crude has broken $80 p/barrel. AUD and CAD have traded strongly, and we have seen a bounce in GBP following declines post-BoE last week.

We have maintained a bearish dollar bias since January last year, but we have been caught out by the recent dollar bounce. We believe there are four reasons for this: 

1) missing the reduction in trade war concerns; 

2) not acting on implicit euro bearishness; 

3) not focusing enough on rising US inflation and 

4) getting the risk-off trade wrong – JPY did not outperform even in a jittery risk environment. Adding this all up, our conviction to be short USD/JPY at current levels is high thanks to trade war risks not being priced, recent US inflation disappointment, the yen performing as well as the dollar during the EM sell-off and the proximity of an actual Fed hike (which caps Fed hike expectations). The picture for the euro seems less clear; we have a bias for strength as excessive bullishness has been unwound, but we need confirmation that inflation (and growth) has troughed.”


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