(21 FEBRUARY 2018)DAILY MARKET BRIEF 1:From now on, it will cost to short the buck

Despite the lack of news on both the political and economic sides, the US dollar erased almost completely last week losses, which sent the Dollar Index down to 88.25 – another multi-year low. The buck started the week on a solid footing even though US investors were off for President’s Day. Since then, the greenback kept grinding higher supported by rising US rates, especially on the short-end of the yield curve. Indeed, the US 2-year Treasury yield inched higher to 2.25% amid rising inflation expectations; the 2-year breakeven inflation hit 2.03%.

Looking at interest rate differentials, one observes that US rates are rising faster than its G10 peers. For the FX market, this has immediate consequences, as forward points on AUD/USD are now positive (beyond 2 months maturity). This is the first time since March 2001 that 1-year forward points moved above the neutral threshold. It will now cost around 20bps per year to go long AUD against USD. The situation is almost similar with the New Zealand dollar. 1-year forwards points are not in positive territory yet, but are about to cross the line.

The implication of this new situation are significant for investors. From now, it will cost investors to go short USD against those currencies and it could really act as a disincentive for investors to speculate on a weaker dollar. In other word, this new set-up up should benefit the greenback.

The agenda is quite light today. However, traders will be watching closely the minutes of the January FOMC meeting, looking for clue regarding the Fed rate path. The statement released on January 31st was considered as slightly hawkish. It will therefore be the opportunity to validate this point of view. We believe those minutes won’t have a big a big impact on market, as trades have already priced in a March rate hike. The market will have to wait until then to get updated forecast. This could be a game changer, especially if Fed members revised to the upside the number of rate hike for 2018.

By Arnaud Masset