USD is under-loved as a risk-hedge


TD on the US dollar

TD on the US dollar

TD Research flags a change in the USD correlation dynamics with risk which should keep the USD bid over the coming weeks.

“Treasuries have become more correlated with the SPX over time. But
with rates on the move, the equity market needs to recalibrate to the
new reality of higher US yields and growth.  This is accompanied by a
move higher in real rates, which is a key prerequisite for a risk
drawdown. A taper is still premature, but the risk will linger, keeping the market on edge and the path of least resistance for real rates higher,” TD notes. 

“The correlation between SPX/TYs suggests that the market now lacks a
traditional release valve for ‘safe-haven’ demand. It also suggests
that the USD is an under-loved risk hedge. Higher nominal yields should
come off the back of a real rate adjustment. This should keep the USD on the offensive for now, as long as the yield back-up is US-led,” TD adds.

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By Jonathan Prop

Jonathan Prop is an independent financial advisor. He has been working in finance for the last 20 years. After retiring early in his 40s, Jonathan decided to help others get to grip with financial markets, particularly his area of expertise - forex!

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