US: Yields continue to drift higher – MUFG

Derek Halpenny, European Head of GMR at MUFG, notes that the DXY index is up only very modestly this week – the euro is broadly stable but the yen and Canadian dollar have weakened – but the movement in short-term yield spreads points to upside risks for the dollar.

Key Quotes

“The US-EZ 2-year swap spread is falling quickly toward levels suggesting a clear break below the 1.1000 level.

The key event in that regard will of course be the FOMC meeting next week. The statement from that meeting is all the markets will have to go on and certainly based on the flow of economic data, we should expect a more upbeat assessment of the economy from the FOMC. The Bloomberg Economic Surprise index continues to soar and is now at levels we haven’t seen since the end of 2014.

Real consumer spending could well be above 4.0% in Q2 with overall GDP growth over 3.0%. We are not so sure that pace of growth can be sustained as political uncertainty escalates ahead of the presidential election. But for next week, the Fed’s statement should certainly be supportive for the dollar near-term.”