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Andreas Zanin
Analysis | February 18, 2021

USD – Bond Yields To Support the USD

Speculators remain heavily short the USD holding their largest position since 2011 and we expect shorts to exit the market and trigger a major rally in the USD and as we noted at the start of the month the odds of a rally to the upside are high as bond yields will support the USD. Bond yields have already moved up and the USD has found support from bond market strength. We expect bonds to continue to firm and send the USD higher.

While the Fed have promised to keep rates low for the foreseeable future and provide ample accommodation and stimulus – the bond market is indicating higher inflation and higher interest rates ahead. As the yield on US bonds rises money will flow into bonds and boost the USD as we have noted in previous posts. The Yield is already up to 1.3% and we expect it to rise further up to the 1.5% level or higher.

Bond Yields to Strengthen the USD

The rise in bonds is already providing support to the USD which can be seen on the chart of the DXY (US Dollar Index) below which measures USD strength or weakness against a basket of currencies.  We have good support at 90.00 and a break of 91.00 sets up a move to 94.00.

Inflation is on the rise but the market still remains generally bearish of bonds – we expect rising inflation and a squeeze on short positions to push both bonds and the USD higher.

According to Nomura’s Masanari Takada, if funds correct their short bond position this could push the 10yr yield to above 1.5% and forcing US equities (the S&P 500) to adjust down by 8% or more and at the same time push up the USD.

A warning of higher inflation is the copper gold ratio its soaring higher and we would expect the 10 year bond to play catch up.

In terms of inflation expectations are at there highest levels in over 8 years as we can see on the chart below.

The majority in the market see the USD falling further but it hasn’t also the majority remain bearish of bonds moving lower but they haven’t they have actually firmed. We are looking for a shorts to exit in bonds and also in the USD. The risk to reward on long USD trades at present is low against  potential upside in our view.

 

Research provided by LearnCurrencyTradingOnline.com

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