USD: Another possible higher leg, as bonds, can remain fragile
At the moment, the sell-off in US Treasuries is the key driver of FX, with the dollar eventually seeking help, and not only relative to the normal JPY victim, as commodity currencies are actually hit the hardest. Although reflationary bets are doubling down on the bond market, other assets do not display signs of upbeat risk sentiment. The danger is that the rate of increase in US yields has accumulated in order to begin to be self-defeating and to trigger risk assets to be corrected. In FX, the ideal recipe for a stronger US dollar is indeed the combination of higher US yields and choppy equity results. The announcement of US retail sales for January and the FOMC minutes are the main risk events. As retail sales may be on the strong side and also in the run-up to the FOMC minutes, where investors are likely to factor in some initial debate between members about the timing of unwinding monetary stimulus, the bond market will remain fragile. Therefore, the bar for a hawkish surprise is set very high, and the release of the minutes can alleviate the selling pressure on US Treasuries, likely beginning to re-establish an atmosphere where rising equities are not interfered with by a more regulated increase in yields. The dollar should continue to find some help across the board until then.
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