- Sentiment recovers slightly as yields take a breather
- DXY near highs, but could see mean reversion on pullback in yields
- Equities bounce, but VIX above 200DMA keeps markets cautious
Benchmark yields across major economies pulled back slightly during today’s European trading session, as bond prices turned green on the day. This has been positive for risk sentiment, as yields have been the main reason for the recent risk-off move.
The DXY has remained pinned near recent highs, but could see some mean reversion on a pullback in Treasury yields. However, it is important to keep in mind that the other driver for USD upside has been US exceptionalism, so we would need to see really bad US data to really get the DXY moving lower.
Equities have seen a bit of a marginal bounce this morning as yields have seen a bit of a marginal pullback. Even though falling yields is good for equities, markets are always keenly watching the VIX, which is still trading above its 200DMA. As long as that remains the case, markets will be cautious.
The USD is once again leading the major currencies to the upside, but it is important to watch yields for possible pullbacks. The AUD is the weakest of the majors as CPI this morning printed in line with expectations and as Copper and Iron Ore remain pressured.
The economic calendar is very light this week and today is no exception. The only highlight will be US Durable Goods orders. Usually not a big macro release, this means that the deviation in the data would have to be something spectacularly bad to make it worth trading.
With Treasury yields at cycle highs, and the DXY at its highest levels since Dec 2022, the risk to reward of chasing the DXY higher at these levels, even if the data comes in better-than-expected is not worth it.
The other asset to watch is gold as a big miss in the data could give gold a decent nudge higher if both the USD and yields pull back a bit.
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