US Dollar Dethroned, Japanese Yen Soars as US Rates Implode
- US Rates Implode Extending US Equity Rout
- Carry Compression Supports Euro and Japanese
- Currency Volatility Catching Up to VIX
Uncertainty remains rife across global equity markets as US yields implodes. The 10yr Treasury yield hit an all-time low after briefly dipping below 0.70%, in turn, US equity futures continued to head lower with the S&P 500 falling 2.6%. Yesterday, we highlighted that cross-asset volatility remains elevated and thus keeping equity markets tilted to the downside. At the same, currency volatility (Figure 1) has also played catch up with the volatility observed in the equity market. Subsequently, the Euro, Japanese Yen have been among the outperformers against its major counter parts. Keep in mind, that these two currencies had been heavily shorted among traders, therefore short unwinds have exacerbated recent gains.
Figure 1: Currency Volatility Beginning to Follow the VIX
US Dollar Capitulation as Euro and Japanese Yen Surge
Despite an emergency 50bps Fed rate cut, money markets have continued to aggressive price in additional easing with another 50bps cut expected at the March meeting. The Fed appears to be backed into a corner, in which the Fed is forced to ease further in order to counter unwarranted tightening of financial conditions from not acting. Alongside this, with the Federal Reserve attempting to get ahead of the curve with an inter-meeting cut, this has done little to dispel market uncertainty. Alongside this, with other G10 central banks with limited policy space, a sizeable compression in yield differential have subsequently pushed the US Dollar lower, most notably against the Euro and Yen, which broke through 1.1300 and 1.0500 respectively.
Source: Refinitiv, DailyFX
US Coronavirus Cases to Spike?
Risks remain tilted to the downside for equity markets and with coronavirus cases beginning to pick up in the US. Safe-havens may continue to outperform the broader with gold prices attempting to challenge $1700. That said, those playing close attention to the US treasury curve would have noticed that the recent bull-steepening, typically an ominous sign for risk appetite.
--- Written by Justin McQueen, Market Analyst
Follow Justin on Twitter @JMcQueenFX
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.