MNI: Exclusive Market Analysis: Dollar Disruption

By Ian Stannard

     LONDON (MNI) - The acceleration higher of US yields over the past couple of

weeks has now pushed the USD firmly into the high yield currency bracket within

the G10 environment. 

     US 10-year yields are rapidly approaching the 3% level (hitting 2.88% twice

so far in February), an area last seen back in 2013 and early 2014. 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.

--CARRY EROSION

     The US-G10 (ex US) yield differential is currently running at its most

positive during the current cycle. 

     Meanwhile, the MNI Market News Dynamic G10 Carry Indicator shows that the

average carry in the G10 remains steady around the 2.00% area, while the maximum

carry available among the G10 currencies is currently still close to cycle lows

at 3%, only fractionally above US yields. 

     In an environment of increased volatility this makes G10 carry trades

relatively unattractive from a risk/reward perspective. USD based investors 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.

--CORRELATION BREAK DOWN SIGNALS RISK-OFF

     The latest acceleration of US yields to the upside has coincided with the

sharp correction lower in equity markets. In recent months, yields and equities

became correlated - with the previously more gradual increase of yields allowing

the equity market rally to continue. 

     However, the current renewed and sharp divergence of yields and equities is

consistent with a risk-off environment and represents a challenge to investor

sentiment. Again, this could prove favourable for the USD.

For full story with graphical charts, please see email version sent at

1402GMT/1102ET.

--MNI London Bureau; tel: +44 203-586-2229; email: nick.shamim@marketnews.com