State of The Markets | Yield’s Spread Kicked Dollar Flows


Yield’s spread kicked Dollar flows. Though global equities climbed higher Thursday, the yield’s spread between the longer and shorted dated US bonds was in increasing trend. Surging demand in the shorter dated bonds while leaving the longer dated bonds flat, suggested that capital markets were cautious and early flight to safety was observed despite the rise in global equities markets. The 10Y-2Y yield’s spread hit 103.46 bp on Thursday, the level seen in May 2017, few months before the Feds started to hike the interest rates on a gradual path.

Crude climbed further, closed above $56.20/bl after strong economic data pointed to economic recovery that would increase demand for the black gold. Friday’s non-farm payroll figure would be on a close watch as markets trying to figure the strength of the recovery. Subsequently, gold fell to the lowest in nine weeks to $1,785.09 before settled higher around $1792.26/oz as investors paused for the stimulus effects.

In the FX space, the early flight to safety saw more interest bearing Dollar demand than the negative yield Swiss and Yen, though Sterling and Loonie remain well bid across the board. Euro remains depressed as Aussie and Kiwi retreated in demand. Long term accounts suggested that markets are turning around and this trend will be around for some time.


Early flight to safety will benefit Yen and Swiss at some point. We observed that the Greenback has reached a point of inflection as investors paused to gauge the stimulus effects. Contingent upon the NFP figure today, we might see $1.9 trillion being released to the economy or something less, and that would mean lower Dollar. That would keep the equities markets float for a while, but the more markets contemplate upon the interest rate hike, the more gyration to the lower end we would see. That would still benefit the Dollar as players cashing out; as well as the negative and lower beta assets as markets trying to hedge the fall.

The last eight hours seen Dollar on offers in the Asian markets, capping the USD/JPY exchange rate below the ¥105.80 level as suggested by the derivative option markets. However, there is still risk that the Greenback would jumped higher to test the ¥106.00 major as high as ¥106.20 in the event of better NFP figure. At this point we have entered small shorts, but would wait until the dotted red trendline is broken before committing further exposure.

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