USD Strong All Around - BBH
Research Team at BBH, notes that the US dollar is rising against all the major currencies today.
“The Australian dollar is retracing a sufficient part of its recent gains to suggest that the current phase of the US dollar's recovery is not over. Given that the Aussie topped out a week before the other major currencies, it is reasonable that this is where the US dollar begins recovering first. AUD’s recent resilience was noted, but that has evaporated today with a 0.6% drop in early European activity.
We had noted the divergence between what appeared to a constructive technical condition and interest rate markets that were largely unchanged. The recent price action is providing more interest rate support for the dollar. Specifically, consider the Fed funds futures strip. The August contract can be used to calculate the odds of a June or July rate hike. The implied yield has risen 3 bp this week. It may not sound like much, but it is the difference between almost a 25% and 36% chance.
The December contract is also interesting. The yield has risen 6 bp this week. The implied yield now stands at 58 bp. If the Fed did not raise interest rates until December 14, fair value for the December contract is about 51 bp. The market has moved to discount one 25 bp move and about a third of another move.”