Dollar’s Fading Link With Treasuries Aids Commodity Currencies

Updated on
  • Selloff in treasuries not resulting in broad dollar strength
  • Charts show commodity currencies may outperform the dollar

Bond Market Signals No 4% Growth in U.S.: Abramowicz

It may be time to fade the trade du jour that was so popular in the run-up to, and after, Donald Trump’s election as U.S. president.

The positive correlation between the dollar and Treasury yields, which touched 93 percent on Nov. 1, the highest in three years, has now declined to less than 54 percent. That in turn has helped spur gains in high-yielding, commodity currencies like the Australian and New Zealand dollars, the two best-performing major currencies so far this year, which continue to benefit from rising yields. 

  • While 10-year yields have climbed six basis points to 2.512 percent this year, the Bloomberg Dollar Index has weakened almost 2 percent.
  • Any yen gains against the dollar could also be capped due to interest rate differentials given the Bank of Japan’s commitment to keep 10-year bond yields anchored near zero.
  • The positive risk backdrop is reviving traditional cross-asset correlations, with the Dow Jones Industrial Average reaching 20,000, the VIX index closing at the lowest in three years and copper-to-gold ratio -- the traditional risk barometer -- flirting near a multi-year high.
  • As the global Trump trade unwinds, the yen could strengthen against the dollar in the weeks to come, but may weaken against the Aussie, kiwi, the rand and the Norwegian krone.
  • Charts suggest AUD/JPY may eclipse the mid-December high at 87.54 to reach a new multi-month high; such a move would expose the 200-week moving average at 89.89
  • NZD/JPY may approach its mid-December high at 83.74, which would cast attention on the 84.61 Fibonacci hurdle.
  • USD/ZAR faces downside momentum, with 12.2367 coming into focus

    • NOTE: Sejul Gokal is a technical strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

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