US Dollar Climbs to New Record High


  • Treasuries are finding a bit of a bid this morning after what has been a rough couple of weeks, but we suspect smooth seas will be brief as the market contends with several forces.


  • Corporate supply has been heavy following Labor Day and that is not unusual. What may be different this time is the proximity to the September 21 FOMC meeting and corporate treasurers wanting to get issuance done before that looming event risk. So, a little front-loading of corporate supply could keep pressure on Treasuries via deal hedging.


  • And while the FOMC meets in two weeks, other central banks are getting on with rate hikes this week. The Bank of Canada is expected to follow their previous 100bps hike with a 75bps hike today. That would push their overnight rate to 3.25%. That decision is due at 10am ET.


  • That tightening will be followed by the ECB hiking tomorrow by an expected 75bps as well. Being a little late to the tightening party tomorrow’s hike will only push their overnight rate to 1.25%, but they also must consider the energy dilemma for Europe as winter approaches and Russia playing hardball with gas supply. It will be a tricky course to traverse successfully.


  • Speaking of rate hikes, a WSJ article this morning says the Fed is leaning towards a 75bps hike in two weeks. The market is pricing high odds on that happening and it seems logical that the Fed will take the offer as they dearly would love to get to a terminal rate by year-end and see how 2023 plays out with the fed funds rate around 3.75% -4.00%.


  • Fed speak continues today with three officials talking on the economy and policy. As we’ve mentioned recently, don’t expect any nuance from them on matters economic right now. They don’t want to give any impression that a dovish pivot is coming so expect continued tough talk on inflation and the need to get higher rates in place.


  • Realistically, the only thing that could possibly derail a 75bps hike would be a very soft August CPI report due next week. Some softness building on July’s cool report is expected (overall -0.1% expected vs. 0.0% in July and core 0.3% matching July’s). The YoY levels are expected to drift lower on the overall (8.1% expected vs. 8.5% July) but remain sticky on the core (6.1% expected vs. 5.9% in July) which is what we’ve mentioned would be the case for a few months.


  • Rate hiking has also contributed to dollar strength, and it has reached record levels against other major currencies (see graph below). That will make the inflation picture easier on imports, but exports will be more expensive for multi-nationals selling goods abroad. Dollar strength spells trouble too for emerging markets that often trade in dollars making everything more expensive for them. So, it adds to the global slowing story which should eventually ease the pressure on higher yields (see dollar graph below).


Source: Bloomberg


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 3.51 3.63 3.65 3.72 3.87 4.22
0.50 3.50 3.60 3.59 3.61 3.72 4.11
1.00 3.49 3.57 3.55 3.57 3.63 3.98
2.00 3.56 3.50 3.49 3.52 NA
3.00 3.44 3.45 NA
4.00 3.41 NA
5.00 3.37 NA
10.00 NA
Tags: Published: 09/07/22 by Thomas R. Fitzgerald