The market has not changed its mind. Following Brainard's comments on Monday the market downgraded the chances, which were already modest, of a Fed hike next week. The September Fed funds futures is unchanged on the day. The implied yield of 41 bp matches the 50-day moving average.
Maybe the suggestion that 25 bp hike in the target range somehow would make the Federal Reserve imprudent, incautious or impatient is a bit much. Without expectations changing, the US 2-year yield is near 80 bp. It is eight basis points above its 50-day moving average. The 10-year yield is poking through 1.70%, which is about 18 bp above the 50-day moving average.
It is premature to make a hard conclusion. However, investors should be open to the possibility the sell-off in asset prices in the US, and especially the backing up of US interest rates and the steepening of the yield curve may be a protest against such easy monetary policy in the US. That hypothesis seems to be a corollary to the idea that monetary policy in Japan and Europe is maxed out, if not in terms of the lowest rates can go into the phantom-zone below zero and the amount of assets that can be bought, then as a function of the political will of policymakers.
The sharp backing up in yields is not just a function of the US. European benchmark 10-year yields were mostly up 3-5 bp Tuesday and 20-25 bp over the past week. The German 10-year yield is at seven bp, the highest since Brexit; two months ago it was near minus 30 bp. The rising bond yields in Europe not only reduce the amount of negative-yielding securities but also increases the universe of assets the ECB can buy.
The 10-year JGB has trailed a bit. It too was near minus 30 bp in July, but has only managed to hover near zero. The 20-year JGB had almost no yield two months ago but is now close to 50 bp.
The US Dollar Index has been steadily moving higher. We continue to monitor an uptrend line drawn off the April, June and August lows, which caught the September low as well. It comes in near 95.55. So far, this week has been about consolidation. Tuesday's USD was trading within Monday's range, which itself was within last Friday's range. A move above 95.60 is needed to signal another run at 96.00-96.25.
There is shorter uptrend in the euro that connects the July, August and September lows. It was near $1.1170 Tuesday, which was the also the euro's second consecutive inside day; coiling, as it were like a spring. Just above 7%, one-month implied volatility is near the lowest level of the year.
Sterling had a rough day on Tuesday as the lack of additional uptick in consumer prices in the UK left the headline rate at its highest level in a couple of years, spurring the largest drop in sterling in five weeks. Sterling's drop has pushed it through a one-month up trendline (since August 15 low) that came in near $1.3210. A week ago, sterling was bid above $1.34 to approach the top of its trading range post-referendum. The subsequent price action reinforces the importance of the upper end of the range. Sterling drew bids last time (late August) near $1.3065.
The dollar is firm against the yen, despite the sell-off in stocks, which is often seen a yen-supportive. Perhaps the rise in US interest rates, which is understood as yen-negative, is a more important consideration at present. Also, the outcome of the BoJ meeting is more uncertain for investors than the FOMC meeting. Within a JPY101.20-JPY103.20 range, it is difficult (for us) to have a strong view of the near-term price action.
Rising yields, falling commodity prices and perhaps the risk-off mood are punishing the dollar-bloc currencies. We have been looking for a push toward CAD1.3200, which was nearing mid-day Tuesday. Immediately beyond, there is the high from July near CAD1.3250 and the 200-day moving average now around CAD1.3270.
Since September 6, the US dollar has risen against all the major currencies and the most against the Canadian and Australian dollars, which have lost 2.4% and 2.9% against the greenback respectively. The Aussie was trading near $0.7730 as recently as five days ago. On Tuesday it approached $0.7440. The fact that it is beyond the lower Bollinger® Band (~$0.7475) warns that shorts ought to be cautious. Also, the $0.7450 area met the 50% retracement objective of the rally since late-May. The 61.8% retracement is found just below $.7380 and other technical support near $0.7400.