Greenback Consolidates While Yields Continue To March Higher

The US dollar is consolidating inside yesterday’s ranges against the euro and yen while extending its gains against sterling and the dollar-bloc currencies. The sell-off in the US debt market continues to drag global yields higher. The 10-year Treasury yield reached 2.01% on September 8 and now, nearly three weeks later, is near 2.35%. It had finished last week at 2.25%. With today’s three basis point increase, the 10-year yield is above the 200-day moving average.  

The 10-year German Bund yield moved above 50 bp today for the first time since early August. In early September, it reached a low near 29 bp. The US premium reached 1.88% today, the most since July. The two-year premium reached almost 2.2% earlier today, its largest since March.  

The US 10-year premium over Japan has risen sharply as well. It bottomed on September 7 just below 2.03%. It tested 2.30% today, moving above its 200-day moving average (~2.26%) for the first time since mid-July.  

There are only two major currencies that have appreciated against the dollar over past month, sterling and the Canadian dollar. The gains in both can also be traced to interest rate expectations. The market has moved to discount a strong chance of a BOE hike as early as the November 2 meeting(~75% chance). The two-year Gilt yield has risen nearly 30 bp over the past month, nearly twice the increase of the US two-year Treasury yield. The yield on the 10-year Gilt is up 35 bp, again nearly twice as much as the US increase.  

Canada is a similar story. Its 10-year yield is up 27 bp, and the two-year yield is up 31 bp. Over the past two weeks, first the deputies and yesterday the Governor seemed to signal to the market that it will not likely raise rates next month, as some had thought likely given the continued strength of Canadian real sector data.  

The immediate focus is on inflation reports. Spain and German states have reported a mixed bag ahead of tomorrow’s preliminary regional estimate. Spain’s harmonized measure rose 0.6% in September, which is a touch less than expected, and due to the base effect, the year-over-year pace ticked down to 1.9% from 2.0%. Five German states reported inflation figures today. The year-over-year rates increased in two states, fell in one state, and was unchanged in the remaining two. The composite will be reported shortly and is expected to tick up to 1.9% from 1.8%.