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OUTLOOK: MNI analysis shows that the recent breakdown in correlation between
average and maximum carry in G10 FX space is a risk-off signal:
-Higher US yields and narrowing yield differentials are not only starting to
favour the USD, but the accompanying spike in global asset market volatility
also suggests the potential for broader disruption to investor risk appetite and
high beta currencies.
-The MNI Market News Dynamic G10 Carry Indicator shows that the average carry in
the G10 remains steady, while the maximum carry available among the G10
currencies is still close to cycle lows abd only fractionally above US yields.
-USD based investors, therefore, have little incentive to take on currency risk
when international returns are below those at home. The USD could benefit from
both higher US yields and the increased risk associated with external
alternatives, namely increased volatility among high-beta currencies.
-The current renewed and sharp divergence of yields and equities is consistent
with a risk-off environment and represents a challenge to investor sentiment.
-See 'MNI Exclusive Analysis: Dollar Disruption' email.