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Mazen Issa, senior FX strategist at TD Securities, suggests that as the market awaits key Fed events in the minutes and the symposium this week, the broad USD is off to a firm start and it  comes against a backdrop of suppressed Treasury (and global) bond yields.

Key Quotes

“We think this firmness can continue, at the very least on a tactical basis as we think the Fed will not be able to bridge the gap between aggressive easing priced into the curve and the Fed’s definition of a “mid-cycle adjustment”. As such, we see a risk that US yields adjust temporarily and tactically higher in the short-term in the coming days (a dynamic which we think will be met with inevitable demand).”

“We do not expect the USD to be immune to this adjustment and perhaps more durably than the rates market. There are some signs that the recent bid in the USD may persist for a while longer. For one, even with the rally in US 10s in recent weeks, the USD still remains the only game in town as far as carry is concerned (in the G10).”

“Dethroning this status will be very difficult to do without a return to aggressive balance sheet expansion we think. Here, the ECB is just much further ahead in this process. Taken in conjunction with US data surprises moving in the USD’s favor only serves to reinforce its its allure (although still healthily stable on a y/y trade-weighted basis).”

“Further to this, option markets are pricing in a modest premium in USD calls, and, after leading the move lower against the USD earlier this summer (but in line with the move in US10s), both the EUR and JPY have begun to diverge from the recent drop in 10yr yields. This suggests to us that the market requires a fresh catalyst to compel upside in these currencies vs. the USD, neither of which – with some caveats in the JPY – is compelling at the moment.”