Dollar Goes Bid as Yields Rise Above 5%

Dollar Goes Bid as Yields Rise Above 5%

A wild night of trade in the currency markets as dollar was bid across the board after US 10 year yields rose to 5.24% their highest value since July 2006 and both pound and euro were liquidated in a frenzied round of selling. The pound lost more than 150 points despite relatively decent Industrial Production data while the euro was down by more than 100 points after German Industrial Production data  printed far worse than expected.

UK Industrial Production printed in line with expectations rising 0.3% vs. 0.2% forecast but the month prior was revised downward to 0.2% from 0.3% initially reported. The pound which was sold furiously before the event actually stabilized after the news as the data was not nearly as bad as the market feared. However, relief was short lived for sterling bulls as the unit resumed its plunge as momentum selling overwhelmed the night’s economic data with traders strictly focused on sharply higher US yields.

In Euro-zone the sell off was exacerbated by much worse than expected German Industrial Production numbers which contracted by -2.3% versus 0.6% - their worst reading in six years. The fall was precipitated by sharp decline in consumer durables and suggests that the high exchange rate of the euro may be finally having a negative impact on region’s manufacturers – a development that does not bode positively for further ECB rate hikes because it indicates a potential slowdown the critical sector of the Euro-zone economy.

Although the yen did not suffer as badly as the other major currencies, it did not escape dollar’s wrath. Tonight’s story was clearly all about dollar’s strength rather than simply carry trade liquidation. Nevertheless most of the yen crosses declined as well as the bump in US yields in likely to weigh on US equities which in turn will create new bouts of risk aversion and further unwinds in the carry trade.