Developments over the past 24 hours have meant that US 10Y breakeven is now at its highest for more than a month. Importantly the level highlighted yesterday at 2.38% has given way. The setup now argues for a move to 2.55% – close to the trend highs seen in May
Unless nominal yields rise by more than 15bps, real yields are either going to stay unchanged at low levels or move even lower into negative territory, as they have started to do again today
At the same time developments in China’s equity markets remain bearish which is now beginning to feed through to the currency.
With Chinese and European authorities both on the dovish side, is this the time for the Fed to stay on the fence or be hawkish? Instead, could a dovish Fed provide the trigger for a weakening USD (perhaps ex USDCNH) and ultimately a rise in Gold?
We are not expecting the FOMC meeting tomorrow to be market-moving. Having said that, with the (negative) correlation between the US dollar and EM currencies the highest since 2012, any implications for the dollar from the meeting tomorrow would ripple through EM currencies. This impact is likely to get exacerbated by the rising correlations within the EM FX universe, which implies that we are currently in a “risk-on/risk-off” period.
Separately, the attached file is a snapshot of the EM currency market in which we seek to identify the leaders and laggards among currencies by comparing the performance of each to its history as well as to other currencies based on their respective betas to an EM currency index.