USD slides on bond plays and Fed talk

The US dollar suffered a huge selloff on the back of sharp-narrowing bond yields and dovish Fed comments.

Stacks of U.S. one-dollar bills are arranged for a photograph in New York, U.S
Source: Bloomberg

The dollar index plunged 1.6% yesterday, dropping to sub-96 levels, from above 97 as the gap between US 10-year treasuries and German 10-year bunds closes.

We have seen a massive 17 bps move in the German 10-year bunds, which represented a 32% surge from the previous session and outpaced the 8 bps jump in US 10-year.

The spike in Germany sovereign debt yields was mainly attributed to a strong improvement in Eurozone inflation readings, which rose more than expected to 0.3% year-on-year in May, from a flat growth in April.

Core CPI reading increased by 0.9% while the market was looking for 0.7%. Once again, markets perceived improving inflation as a sign that the region’s monetary stimulus scheme may be shelved earlier than expected. This is in spite of earlier statements by ECB chief that the central bank will maintain its QE programme until September 2016.

Another part may be explained by positive dialogues surrounding the Greek bailout talks. Seemingly constructive discussions may have led to some traders unwinding portfolio hedges placed in the event of a missed payment to IMF. The increase in yields naturally make the euro more attractive to hold and markets certainly think so by bidding EUR/USD well-past the 1.11 handle.

Meanwhile, Fed governor Lael Brainard, FOMC voter, was decidedly less optimistic about the US economic growth. She said that there may be reasons beyond just bad weather and port disruptions weighing on the recent weak readings. She added that a strong dollar would delay US rate normalisation, although she believed a 2015 rate hike is still possible. Brainard’s dovish comments are anaemic to the USD, and may have caused a few traders to unwind long USD positions.

STI in the red

The sharp fall in the Straits Times Index (STI) on Tuesday was a bit of a puzzle, although an impending change to the liquidity rule of the STI may have contributed some to the slide. The only explanation that explains the strong reversal is that longs are getting fatigued owing to the lack of liquidity in the local equity market.

It is debatable whether the liquidity rule change may help boost trading, especially when the fall in volume seems to be more systemic and has been brewing for some time (or years!). As I mentioned yesterday’s note, trading volume has been falling since 2009. After yesterday’s tumble, STI is now trading down 0.7% on the year.

From a technical perspective, the close below the 200-day moving average of 3360.76 brings the 16 January low of 3291.50 into focus, ahead of the 2015 low of 3267.89. Meanwhile, Noble Group decisively moved below key support at SGD 0.80 yesterday, falling 6.3% to close at a six-year low of SGD 0.745.

14-day RSI indicates that the counter is in oversold conditions, but the threat of the El Nino phenomenon as well as ongoing corporate governance issues may continue to weigh on the commodity firm.

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