- Developments in the news have all boosted the appeal of US Treasuries, which have sent US yields tumbling in recent weeks.
- Retail crowd positioning has blown back out to extreme levels in USD-pairs once again.
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Having been out of the office for the past week on annual leave, it always piques my interest to return to markets after an extended period away. Unfortunately for the US Dollar, nothing significant has changed over the past 10 days: the can was kicked down the road on the US debt limit; the ECB still hasn't admonished the Euro's rise; and ultimately, US Treasury yields have continued to press lower.
Developments around the Federal Reserve, lack of progress on fiscal reform by the Trump administration, and elevated tensions with North Korea have all boosted the appeal of US Treasuries, which have sent US yields tumbling in recent weeks. As outlined in the August 29 research note, as long as US real yields are falling, the US Dollar's appeal would be limited and both Gold and the Japanese Yen would continue to outperform.
Falling US real yields means that the spread between Treasury yields and inflation rates are decreasing, decreasing the penalty for holding a low yielding asset. If Gold yields nothing, has an estimated cost of carry of -2.4%, and only can return capital appreciation, it would best suited to rally when US real yields fell.
As we concluded back on August 29, the same remains true today: "This is a poor environment for the US Dollar to rally in, and as long as US real yields are dropping, Gold and the Japanese Yen can still outperform versus the US Dollar." Technically, we're still very much in a downtrend on the charts, and fundamentally, the greenback is still unmoored thanks to deteriorating fundamentals.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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