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We have updated the heat maps from our FX Flow Monitor and include the summary table below. The most notable observation from the latest heat map is that the portfolio flow backdrop for the USD deteriorated significantly in the three months to June. The data suggest that the very low level of US yields may be taking its toll on investor demand for US securities.
Portfolio flow analysis is necessarily a backward-looking exercise, but the heat map helps us to understand the USD’s chronic weakness in Q2 and provides a strong indication of what has been ailing the dollar in Q3 so far as well. US real yields have fallen to levels where foreign investor flows have slowed, while US investors are once again motivated to search for yield in foreign markets.
US monetary policy is not anchored at zero now, and US real yields have the capacity to recover quickly if the Fed resumes rate hikes in the months ahead. Our expectation is that the hawkish message from Fed Chair Yellen last week will pave the way for a September hike, which should help the USD recover some ground.
We remain positioned via derivatives for a limited recovery in the USD versus the EUR, JPY, GBP and AUD. However, we do not expect the Fed to signal or embark on a series of rate hikes, which should limit the extent to which US real yields can recover from current low levels.
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