US Dollar Keeps Strength towards NFP

A sell-off at the long end of the US Treasury market has cast a shadow over risk assets and hit cyclical currencies. The dollar has been the main beneficiary. Expect focus to remain on the US bond market very much into next week's quarterly refunding.

USD: Tracking Treasuries.

In Wednesday's session, the focus was on the US bond market and the significant sell-off observed at the long end of the curve. Notably, US 30-year Treasury yields saw a brief surge of 15 basis points. This movement was quite different from the previously observed benign and bullish diversion of the curve after the soft June CPI print. Instead, it resulted in a more negative bullish steepening.

The rise in risk-free rates had a notable impact on US growth stocks, with the Nasdaq experiencing a 2% decline. Moreover, this surge in rates also affected 'growth' currencies, including the commodity complex and the underappreciated Scandi currencies.

Yesterday's market movement was primarily influenced by the US fiscal situation. While the Democrat administration and its media supporters were critical of Fitch's decision to strip the sovereign's AAA status on Tuesday evening, there are legitimate concerns surrounding the US fiscal dynamics. Interestingly, it seems that the timing of Fitch's release was well-considered.

In addition to Fitch's decision, there was also a slightly higher-than-expected US quarterly refunding announcement, revealing plans to sell $103 billion worth of 3, 10, and 30-year bonds in the upcoming week. This further underscored the significance of fiscal dynamics in the market on that day.

The impact of these fiscal concerns was evident in wider US asset swap spreads, with Treasuries underperforming the US swap curve, and in the steepening of the US yield curve. These developments suggest that market participants were closely monitoring the fiscal situation and adjusting their positions accordingly.

As mentioned earlier, the rise in risk-free rates is causing headwinds for risk asset markets, particularly equities. This has also led to slightly higher cross-market volatility readings, which might prompt investors to reduce exposure to carry trade strategies. As a result, the Japanese yen and Swiss franc could benefit in these circumstances, while high-yield currencies may face challenges.

Today's attention is also drawn to the performance of the Brazilian real after Brazil's central bank initiated an easing cycle with a 50 basis points cut and pledged similar cuts in the future meetings. Given the current international environment, the currency could see a slight decline today.

The DXY could gradually move towards the 103.50 area.

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