Gearing up for higher US rates

October 6, 2016

The move higher on the US 2Y bond yield has had a notable effect on currencies over the past week, with the yield pushing at levels last seen 4 months ago. This reflects the increased expectation that the Fed will move on rates at the December meeting and has seen the dollar gain against most major and also emerging currencies, the Mexican peso the only one managing to outperform the greenback this week. Of course, this feels like a re-run of 2015, when the Fed passed on the September meeting, only to raise rates in December. Back then, the 2Y moved above the 1.00% level, which is another 15bp from current levels, so if seen, further support to the dollar is ahead into year end, the presidential election allowing.

The other potential road-block is the US employment report tomorrow, but with the November meeting not seen as an ‘active’ meeting, the potential for volatility in reduced a little vs. a normal Friday. For today, sterling remains in focus as the weaker tone has held from earlier in the week, with cable remaining near the lows for the year and EURGBP also having reached new highs yesterday. The shift in yield differentials has also continued to undermine the yen, USDJPY having moved higher for the past seven session, edging towards the 104.00 level.

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