Market wrap: Yellen dovish yet dollar rising – Westpac

Analysts at Westpac offered a market wrap.

Key Quotes:

"Global market sentiment: The US dollar and US interest rates rose sharply during the last few hours of trading, after Fed Chair Yellen hinted the economy could be allowed to heat.

Interest rates: US 10yr treasury yields slipped from 1.78% to 1.75% after a mixed set of data releases plus Fedspeak from Rosengren, but bounced to 1.80% (highest level since June) post-Yellen. 2yr yields fell from 0.86% to 0.82% and only recovered to 0.84%, thereby steepening the curve to a one-month high. Markets interpreted Yellen’s comments to mean the Fed may keep the Fed funds rate lower than it needs to be in order to allow the economy to heat up, which in turn would produce inflation – a recipe for a steeper yield curve.

Earlier, Fed dove Rosengren felt rates may need to rise faster than market pricing is implying, and also discussed the idea of changing the composition of the Fed’s balance sheet to steepen the curve, although there was little market response. Dudley expected one rate hike this year.

Currencies:  The US dollar index closed on Friday around 0.5% higher, indeed it was the highest close since 1 March. EUR fell from 1.1025 to 1.0971 – a 2 ½ month low. USD/JPY ranged between 103.80 and 104.48. AUD outperformed, rising from 0.7580 to 0.7648. NZD ranged sideways between 0.7080 and 0.7116. AUD/NZD rose from 1.0680 to 1.0765 – a three-month high."

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