In the last couple of days, market participants have been predominantly focused on a sharp rise of US Treasury yields, which dents risk appetite and results in a corrective US dollar bounce. One of the side effects is a sharp turn of Bitcoin which briefly traded over 25% lower than last Friday when all-time highs were set in the 42,000 USD area.
The 10Y US yields advance to the 1.15% handle, level last observed in March. The move which exceeds 20 bp from the beginning of the year supports the US dollar. Traditionally, in the G-10 space, the Japanese yen is strongly impacted. The USD/JPY pair reclaimed the 104.00 mark on Monday and continues to trade above that level. The EUR/USD exchange rate slipped to the 1.2150 to reach levels more than 1.5% lower than in last week's long-term peak.
The performance of the most important emerging markets currencies varies as idiosyncrasies push the rand and real much lower, but local factors support the zloty. The first two currencies have already sold off around 5% against the US dollar since the beginning of the year. The South African rand is hurt by the introduction of new measures aimed at containing the spreading of COVID-19 virus and lack of progress in securing a sufficient number of vaccine doses whereas the Brazilian real is under the pressure of renewed political tensions. It is worth noting that both currencies were among top performers in the fourth quarter of 2020 and have recently been giving up those gains. Contrary, the Polish zloty plunged in the wake of the central bank's interventions and has been retracing losses since the beginning of the year. However, further gains seem unlikely as the closer the EUR/PLN pair gets to the 4.50 mark, the more probable both FX interventions and rate cuts.
Back to the dollar and US Treasuries markets: recent shakeup should be perceived as temporary. Firstly, the Federal Reserve would do utmost to stop market interest rates from rising. Secondly, the upcoming US data, meaning retail sales and consumer confidence (both due on Friday) should paint a worrisome picture. In December, strict restrictions were sustained in numerous important states, including the most populous California. Therefore, we assume that the US dollar should turn lower again soon.