Dollar weakens on lower real yields, as equities and bonds pause

Dollar weakens on lower real yields, as equities and bonds pause

The dollar weakened overnight as traders focused on falling US real yields, resulting from an unexpected rise in US inflation. Better-than-expected Initial Jobless Claims released this morning fell to 963k, the first time below 1 million since before the pandemic. Markets had a muted reaction to the good news, and are focused on the stalemate in Congress over another coronavirus stimulus package.

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    August 13, 2020

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  • USD

    The dollar is lower, continuing the trend in place since March 20 when it spiked in a market panic into safe-havens. Yesterday’s pop in July’s CPI inflation to 1.0% YoY led traders to focus on real US yields: defined as nominal yields less the rate of inflation (US Treasury 2-year at 0.18% less 1.00% = -0.82%). Congress is in a stalemate on the stimulus package with little hope of an agreement in the near term, as the two sides are at least $1 trillion apart, with Nancy Pelosi and Secretary Steven Mnuchin engaged in verbal sparring.


    The UK pound rallied in-line with the euro. It’s trading near $1.31, up nearly 0.5% overnight. Buyers emerged following upbeat tweets by UK’s negotiator in the UK/EU talks, David Frost. There was no UK economic data released today.


    The euro is trading firmly over $1.18, up nearly 0.5% from yesterday’s close. The bearish dollar is the key factor in the euro’s strength, but it was helped by somewhat higher optimism with a UK/EU Brexit agreement following upbeat tweets by UK’s negotiator David Frost.


    The loonie gained versus the USD within the broad-based dollar sell-off. It strengthened for the fourth straight day, and has been the second best performing major currency this month (up 1.43%), after the Norwegian krone (up 2.36%). Oil prices are holding around $42.50 a barrel.


    As a region, Asian currencies underperformed overnight, despite Asian equities outperforming other regions and commodities prices being generally higher. Foreign Direct Investments into China for July rose 15.8% versus 7.1% in June.
    The USD/JPY currency pair rose for the fifth straight day. It nearly reached 107.00, well off its low of 104.19 on July 31.

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Scott Petruska, CFA
Scott Petruska, CFA

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