The continued growth in the yield of US government bonds makes market players very cautious about buying risky assets.
Investors began to take great care in deciding on the purchase of risky assets. First of all, we are talking about the shares of American companies, the dynamics of which directly depends currently on whether the yield of state bonds will grow further or not. The growth of profitability, while waiting the continuation of the interest rate hikes process, negatively affects the attractiveness of share purchases from the trading perspective with attracted cash (leverage), as this increases the value of money and significantly lowers the profitability of transactions. Proceeding from this, we believe that the US stock market will increase as the yield of government securities increases, signaling the end of almost a decade of growth after the acute phase of the 2008-09 global crisis.
Of course, in this situation, the dollar will receive support despite the large budget deficit. If earlier it was supported by the process of raising the interest rates by the Fed, as well as the breakthrough in the US Treasury bond yields to the risk zones above acceptable for the markets, the next factor is the beginning of the capital renewal of American companies from abroad to their homeland. Also, there are about 3.1 trillion dollars in various assets at the moment according to the latest data, including the Treasury which became another major reason for the growth of the dollar.
Assessing such prospects, as well as a clear fall in expectations that the Bank of England, the ECB and other world central banks will actively follow the Fed in resolving the tightening of monetary rates, it can be argued that the US currency is at the initial stage of a serious strengthening against major currencies and especially to EM currencies.
Based on opinions, a new wave of selling risky assets can be expected when the yield of the benchmark of 10-year Treasuries will overcome the level of 3.2%.
Forecast of the day:
The EUR/USD remains in the short-term downtrend. It is consolidating in a very narrow range, as investors expect further growth in the US government bond yields. We continue to hold the view that the pair has the potential to decline to 1.1735.
The GBP/USD is also moving in the «outset» on the wave of the factors listed in the article. The pair still has the potential to decline to 1.3450 after falling below the 1.3500 mark.
* The presented market analysis is informative and does not constitute a guide to the transaction.