Optimism for USD – Nomura

The dollar continued its bounce-back this week on the back of optimistic testimony from Fed Chair Jerome Powell, points out the research team at Nomura.

Key Quotes

“His most important comments discussed how the economic outlook has evolved since the December FOMC meeting and the appropriate policy response:

“What we’ve seen is incoming data that suggests the strengthening in the economy. We’ve seen continuing strength in the labor market. We’ve seen some data that will, in my case, add some confidence to my view that inflation is moving up to target. We’ve also seen continued strength around the globe, and we’ve seen fiscal policy become more stimulative.”

“This did not lead to USD following yields once again; USDJPY’s decline is a good example of that. Instead, the market traded from a risk-off stance. From a more medium-term perspective, we’ve been wondering why the yield differentials have stopped driving the dollar. We’ve considered several arguments about why US yields in particular have lost some of their power in explaining the dollar. But it still feels like we are missing something. Rather than looking at the yield differentials of various tenors and comparing with the dollar, we look at the steepness of the curves. It turns out that 2s5s correlates quite well to the dollar.”

“FX markets seem to have become very forward-looking, shrugging off near-term hikes and instead focusing on hikes further down the line. Part of this may be due to the use of QE and other points on the yield curve as policy tools by central banks. So the curve captures shifts in the expectations of changes in these tools as well as the usual rate hikes.”

Courtesy : FXStreet