After soaring continuously for the last 10 days in anticipation of this week FOMC meeting, US rates are taking a breather. The monetary policy sensitive 2-year yield rose more than 12bps since September 8th and stabilised slightly below 1.40% on Tuesday morning. Similarly, 5-year and 10-year yields consolidated gains after a rally of 0.21bps and 0.22bps, respectively.
The recovery in US yields was of little help for the US dollar as this is part of a broader move as rates across the globe also increased in anticipation of tighter monetary policies from most central banks. Although the Federal Reserve should keep the federal funds rates unchanged tomorrow, market participants are looking for a starting date of the balance sheet runoff. It is hard to say when the Fed will start to unload its massive holding, most likely October or December this year, but it will act gradually and with extreme caution in order to avoid a sell-off in bonds and therefore an uncontrolled surged in yields that could be extremely damaging for the US economy.
The USD has been trading broadly lower today, falling more than 0.20% against the single currency and around 0.30% against the Aussie and the Kiwi. Investors will most likely avoid taking too much risk as the risk for disappointment should not be underestimated. Nevertheless, given the fact that the market is mostly short USD, we think the risk should be skewed to the upside.
By Arnaud Masset