The FX market has been only slightly affected by the equity market rout of the last few days; although the same cannot be said of the bond market. Indeed, it seems that investors’ panic reaction has been contained to the equity and bond market as investors dumped stocks to rush into bonds.
On Monday, US Treasury bonds rallied sharply – no matter the maturity – as equities were on fire sale. The US 2-year sovereign yield dropped 20bps to around 1.95%, the 5-year one slid 26bps to around 2.35%, while the longer-end of the curve the 10-year fell 23bps to 2.65%. On the equity side, the S&P 500 was off more than 5%, while the Dow Jones fell 6%.
Meanwhile, the FX market reacted in a very limited manner. Obviously, the Japanese yen strengthened as the risk-off sentiment spread, but the rise was quite limited as USD/JPY fell only by 1.60%, down to 108.50, before stabilising at around 109.20.
On Wednesday, financial markets are still in recovery mode with European equities trading in positive territory and Treasury yields grinding higher. The VIX is still hanging around 31, suggesting that investors have not let their guard down yet. In the FX market, the greenback is better bid against all of its peers, with the exception of the Japanese yen. We believe this is just a matter of time before investors give up their risk-off stance.
After all, the US inflation outlook looks great and the solid jobs report, released last Friday, only add fuel to this rhetoric. We think that the US dollar is oversold right know and that it is just a matter of time before the greenback catches up.