The Dollar and US treasuries struggle to avoid further losses

Markets

US President Trump on Wednesday announcing a pause in the roll‐out of reciprocal tariffs beyond the 10% base rate (expect for China) apparently wasn’t the game changer and confidence reset that the government hoped for. Yesterday’s price action indicated instead investors took it as an opportunity to sell America on up‐ticks. US equities fell prey to a substantial retracement on Wednesday’s historic rebound (Nasdaq ‐4.31%). Developments in the US Treasury market are even far more worrisome. Softer than expected US March CPI inflation were only a footnote. The US yield curve again steepened. The 2‐y easing 4.6 bps was no more than technical trading, assessing ongoing Fed guidance that the stagflationary impact of tariffs is a reason to stay on hold for longer. However, red alert is still flashing at the very long end of the US Treasury curve. The closely watched 30‐y US Treasury Auction showed decent bidding metrics. So far the good news. The auction however, in no way was able to arrest the intraday slide in US long bonds. In the end, the 30‐y yield again added 13.75 bps. Also remarkable: the rise was driven by a sharp move in the real yield. In the current environment, this suggests a higher risk premium, rather than anything else. Even more striking. The divergence with the performance of German Bunds couldn’t have been bigger. ST German yields rise marginally (a limited easing of ECB rate cut bets), but as the day proceeded, the Bund contract soon captured a solid safe haven bid. The 10‐y yield more than fully reversed the rise at the open to close even 1.1 bp lower. Investors looking for a new safe haven alternative in German Bunds? Something to watch out for. Even so, the underperformance of Treasuries/outperformance of Bunds is currently going hand‐in‐hand with aggressive USD selling and a strong outperformance of the euro. The yen (USD/JPY 143.5 area) and the Swiss franc (EUR/CHF 0.927) also attracting safe haven buying interest. Red alert also in the DXY index (100.4). The 2023/2024 lows (99.6/101.15) are already under test. A break of 98.98 (62% retracement of 2021/2022 rise) would signal a further sharp deterioration. Similar narrative for EUR/USD. EUR/USD 1.1276 (2023 top) is at risk of breaking. Another indication of the sell‐Amerika on (quasi non‐existing) upticks.

Risk sentiment in Asia this morning remains fragile (Nikkei ‐3.6%). The dollar and US treasuries struggle to avoid further losses. Regarding the data, University of Michigan consumer confidence will be closely watched. Another jump in inflation expectations (already expected at 5.2% 1‐y ahead and at 4.3% for 5‐10 y) would give (US Treasury) investors a highly uncomfortable feeling going into the weekend. We don’t fight the sell America trade, not in US Treasuries and not in the dollar. A confirmed break in EUR/USD would in a first instance bring the 1.1495 2022 intermediate top in the picture. The 2021 top stands at 1.2349. In the UK, February production data this morning were better than expected. It’s doubtful this will change fortunes for sterling (against the euro). The EUR/GBP pair already tested the 0.87 barrier. In the UK, the focus also remains at the long end of the Gilts curve with the 30‐Y yield still uncomfortably high at 5.43%.

News and views

Hong Kong‐based newspaper the South China Morning Post reported that to EU officials are planning to make a visit to China for a meeting with Chinese president Xi Jinping in late July. People familiar with the matter indicate that EC von der Leyen and European Council President Costa agreed to the summit which breaks with protocol since the EU and China previously met in China as well. In more signals that the hawkish US trade policy is improving ties between the two blocks, Handelsblatt yesterday reported that they started talks on abolishing EU tariffs on Chinese EV’s while Spanish PM Sanchez concluded his visit to the country by calling for mutually beneficial relations and to promote balanced trade and investments.

Bank of England governor Breeden commented on the escalating trade war and the unravelling of leveraged trades in the US Treasury market. Regarding trade, she singled out a potential weakening in the UK currency as key in defining the inflation outlook by making UK imports more expensive. It has not happened yet, but “that could change”. On the turbulence in the Treasury market, she said that it’s not obvious that the right thing to do is to intervene in the gilt market. The long end of the UK curve underperformed as well with the UK 30‐yr yield reaching its highest level since 1998 and bringing back the echo of the Truss‐Kwarteng crisis. “What we can do is be aware of what’s going on and have repo facilities, ways of providing liquidity to the system to try and ensure that whatever trading happens, happens as smoothly as possible.”.

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