US Dollar Looks to Debt Sales to Gauge Fed Rate Hike Transmission

Talking Points:

US Dollar May Rally Anew if Yields Rise 3-6 Month, 2-Year Bond Auctions
Euro Gains, Aussie and Kiwi Dollars Fall on Risk-Off Dynamics Overnight
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A muted economic calendar is likely to put the outcome of a round of US debt auctions in the spotlight. Three- and six-month bills as well as two-year notes are up for auction. Traders will look to the outcomes to gauge the degree of policy transmission from the onset of Fed stimulus withdrawal earlier this month into real-world borrowing costs.

Prevailing yields on shorter-term paper topped out and began to edge lower at the last two offerings of analogous maturities, staring with the auction held just ahead of December’s FOMC meeting. This presumably reflected broad-based expectation of dovish rhetoric accompanying the first post-QE rate hike. Two-year notes were last sold in late November, with yields rising to the highest in almost six years at 0.948 percent.

Renewed tightening at the shorter end coupled with another push higher at the two-year yield threshold are likely signal the markets are on-boarding the Fed’s marching orders. This may add fresh fodder to bets on widening monetary policy divergence between the US central bank and its G10 counterparts, offering a boost to the US Dollar.

The anti-risk Euro and Swiss Franc traded higher while the sentiment-geared Australian and New Zealand Dollars faced selling pressure at the start of the trading week. The moves played out alongside weakness on the Asian equities front. While regional bourses gapped higher at the open, prices traded downward intraday, seemingly setting a “risk-off” tone market-wide.

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