Equities continued to roar higher last week, but they played second fiddle to FX and bond markets in terms of signal over noise. In currencies, King Dollar is under attack from all sides. I am no chartist, but it’s looking grim for the dollar. EURUSD is about to complete a break-out from an inverted H&S, GBPUSD is making higher lows, USDJPY is flirting with a break lower from a long and tight range, and USDCNY similarly looks poised to re-test its lows. DXY traded with a 91 handle in a few sessions last week, tagging its Q3 lows.
On that occasion, the dollar stepped back from the brink in part due to intervention from the PBoC. With rumours swirling that China is losing its taste for U.S. treasuries - it makes sense given a dwindling CA surplus - we should be watching whether the PBoC is willing to draw a line in the sand, again, at 6.45. I suspect it will because I doubt that it will want to invite further scrutiny about what happens if or when the economy opens up an external deficit.
You would probably think that the dollar’s lousy performance be associated with lower yields and narrowing rate spreads with the rest of the world. Au contraire, U.S. bond yields have been rising, which has led analysts to argue that yield differentials have ceded to other macroeconomic fundamentals.