USD outlook and forecast: The impact of Bond Yields

In previous posts, we have looked at bond yields and noted they were likely to go higher and this would help the USD to strengthen. We have seen bond yields move up and so will the USD and we expect this to continue.

In the US we have stimulus from the Fed and we will also have fiscal stimulus from the Government and inflation is starting to rise. Bond traders are thinking ahead and pushing the yield on US debt up because – there will be more spending with the stimulus package announced by US President Joe Biden which means bigger deficits, more [Treasury] supply which should push interest rates higher.

As yields rise money will flow into the USD to buy bonds also the yield on US bonds is attractive compared with other major bond markets the USD. The USD is also very oversold and speculators hold their biggest short position since 2011 which points to a major rally to the upside.

The 10 Year Note

Below are 3 charts. The first shows the 10 Year Note which has support at 1.400 and resistance at 1.600 – If we can breakout above the 1.600 level we expect the USD to gain traction to the upside. The second shows the 10 Year v the NASDAQ inverted – If the Note continues to firm then this will pressure stocks which is bullish the USD on its reserve currency status and the final chart shows the impact of rising yields in the real world with mortgage rates moving above 3%.

USD The Big Short

Speculators have sold the USD hard as we can see on the chart below and we expect this big short position to unwind and trigger a major rally.

USD Dollar Index DXY

In terms of the US Dollar Index which measures the USD against a basket of currencies we have seen some strength but expect more and the size of the short position points to a rally up to the 94.00 level

What Individual USD Pairs are the Best?

We like EUR/USD and AUD/USD short in the majors which we covered in a previous post this week and we also like the emerging market currencies with USD/ZAR being our favorite – A break of 1.600 in terms of USD yields will see the volatility in all USD pairs increase and the risk to reward on USD longs is very attractive against the risk in our view.

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