Dollar Divergence Evident as AUD Steadies, EUR, GBP Stumble
- GBPUSD at lowest levels since August 2013.
- AUDUSD back above 0.8100.
- See the DailyFX Economic Calendar for Tuesday, January 6, 2015.
The strong end of 2014 and start of 2015 has produced 'more of the same' for the US Dollar, with EURUSD moving back below $1.1900 today and GBPUSD below $1.5200. However, there is little to say about the greenback's influence in the latest downside push in European FX; the moves have occurred in a 'risk-off' environment, characterized by the 10-year US Treasury note yield falling below 2% today for the first time in three-months.
Although tenuous at best, the relationship between the US Dollar and yields has proven to be an important one over the past 12-months. In 2014, US Dollar rallies were accompanied by flat or upwardly-biased yields, and falling yields produced modest, countertrend selloffs.
Even as speculative futures positioning in the Euro and the Japanese Yen has eased from their extremes in Q4'14, the potential for weaker US yields may serve as a deterrent for new entrants in USD-pairs. Net-short speculative positions in US Treasury notes are now at their highest level since early-2010. It's worth noting that the market has entered each New Year since 2010 with heavy net-short UST exposure, only to unwind those positions and drive yields lower through the first half of those years, respectively.
If Q1'15 is shaping up to be a repeat of recent history in Treasury markets, then the greenback may have some headwinds over the coming weeks in the run up to the late-January fireworks: Greek elections, a European Central Bank meeting at which QE is expected, and a Federal Reserve meeting in which a hawkish tone is expected to be retained.
--- Written by Christopher Vecchio, Currency Strategist
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