Week Ahead: Dollar Rally Continues as US Yields Rise

Fundamental analysis of Forex market

The taperless tantrum could continue across financial markets now that it seems clear Fed Chair Powell won’t react until he sees disorderly market conditions or if financial conditions tighten further. Positive economic, such as this past employment report might continue to fuel optimism about the economic outlook and that could raise expectations that the Fed will raise rates sooner.



Financial markets will have their hands full trying to balance the impact on another massive relief bill, an improving labor market, and a bond market selloff that appears to have no signs of slowing down.  The dollar has been running wild following the move in Treasuries and most signs are suggesting that move could continue.

Democrats are close to finalizing the terms of President Biden’s COVID relief bill, while some states are already reopening.  Pressure is on for Democrats to quickly deliver this relief bill and to quickly move onto infrastructure spending.  Texas will completely reopen on Wednesday and lift the mask mandate, which means more states will be right behind them.  Virus variants remain a short-term risk, but so far it is not slowing down the reopening theme for many states.

The Fed is fully prepared for a temporary jump in prices, but the bond market might use that as an excuse to drive bond yields higher and move forward Fed rate hike expectations.  On Wednesday, the February headline annual CPI reading is expected to increase from 1.4% to 1.7%.


EU debt markets have tightened again this week but the noise from officials seems to indicate they are not comfortable with government bond yields rising. With Jerome Powell seemingly taking an opposite view, risks are rising that EUR/USD could fall next week. It is testing support at 1.1960 and targets 1.1800 initially, possibly 1.1600.

On that note, the latest ECB rate decision on Thursday assumes greater importance. If the bond tantrum continues ECB officials may send a strong signal that the ECB will increase the pace of bond buying if necessary, to cap rate increases. Negative Euro.


The UK budget was generally well received with the inevitable future tax rises expected to fall on the business sector. In the near term the government will keep the fiscal stimulus taps fully open until September. UK GDP and Industrial Production on Friday could surprise and be less worse than expected which will be supportive of equities and the Pound.

Sterling has fallen this week back into its rising 6-month channel. It is outperforming the Euro as BoE officials stay silent on rising Gilt yields. Only a fall through 1.3800 by GBP/USD suggests a deeper correction to 1.3500 could occur. The faster pace of vaccinations and a widening yield differential will keep EUR/GBP under pressure and it could fall through 0.8500 in the coming week.


The Lira has continued falling versus the US Dollar and is acutely vulnerable to an EM inflation tantrum if US bond yields keep rising. Rising DM yields leave countries such as Turkey, with high inflation already, weak currency accounts and high levels of foreign currency denominated debts in a tenuous position.

If the US bond tantrum continues next week the Lira will come under sustained pressure and could fall towards 8.0000 if the EM trickle turns into a flood. In such a scenario the central bank will likely intervene to sell USD/TRL and if that doesn’t work, spring a surprise rate hike or reserve requirement increase on markets. That may staunch the losses but will only be a short-term fix.

Turkish Industrial Production on Friday will be subsumed by events elsewhere, notably the US.


The National People’s Congress has reinstated a GDP growth target of 6.0+% and ramped up spending in technology R&D to increase self-reliance. On the margins this has supported China stocks as markets suffer from the bond tantrum globally. More importantly, they have signaled an interest in joining ASEAN’s RCEP which was positive for Asian equities including China. Markets in the coming week though will be vulnerable to EM bond market developments, and rising oil prices threaten to crimp growth slightly.

Given the attention on inflation globally at the moment, China’s inflation release on Wednesday will be the week’s data highlight. A higher than expected print will be a negative for China equities in the currency climate.

The PBOC has kept the USD/CNY fixing almost unchanged around 6.4600 this week, despite signs of Dollar strength in the DM space. It raised the fix to 6.4900 today though and a move by USD/CNY above 6.5000 in response to the US bond-tantrum this week could set off a cascading sell-off of regional Asian currencies.


A quiet data week with bank lending released on Friday. India’s markets will move to the nuances of the US bond market though in the coming week. With a fragile banking system, high debt levels and inflation, and a weak current account that will be pressured by the rise in oil prices, the Indian Rupee is one of Asia’s most vulnerable currencies to a taper-tantrum, along with Indonesia. Equity markets will not escape a rapid fall by the INR.

USD/INR is testing its 100-day moving average at 7.5900, having already fallen heavily in the past two weeks. A full-blown EM rout in the coming week could see USD/INR rise quickly to 8.0000 prompting central bank intervention.

Australia & New Zealand

Australian and New Zealand bond yields have also spiked, notably in Australia, in response to the hikes seen in the US. That has put downward pressure on both stock markets which is likely to continue into next week. Excellent Australian economic data over the past few days has been completely ignored, as have strong commodity prices, highlighting that bond market developments are the most important directional driver at the moment.

Reserve Bank of Australia Governor Lower speaks on Thursday with the data calendar of both countries second-tier. His remarks will be closely followed given developments and markets will be searching for any hint of more aggressive bond market intervention, or an acceptance of inflationary pressures. The speech gives Australian equities a strong binary outcome.

US Dollar strength has left both the AUD/USD and NZD/USD teetering on multi-month support today at .0.7700 and 0.7150 respectively. A weekly close below there this evening signals 200+ point moves lower for both in the coming week.


Heavy data week with Coincident Index, Current Account and GDP. the effects of high oil prices may show up in the data this week and will be a negative at the margins for equities. Japan has extended its Covid-19 state of emergency, another negative.

The Nikkei 225 has broken 4-month support  at 29,300 as equities globally retreat. With Japan investors amongst the most heavily invested and exuberant, the Nikkei is in danger of a material fall in the coming week if bond rates elsewhere continue moving higher. Even if they don’t, the technical picture remains very negative. The Nikkei can fall to 27,000 in quick time this coming week.

A widening US/Japan rate differential spurred USD/JPY to climb to 108.00. BoJ officials have expressed concern about potential rises in JGB yields, with the benchmark nudging the top of the BoJ yield control band. Assuming the BoJ caps rates and US ones continue to rise, USD/JPY can move higher to 110.00 in the week ahead.



The aftermath of the OPEC+ surprise decision not to raise output next month could support much higher crude prices.  The oil market is poised for a strong tightening of the market as OPEC+ supply will lag demand over the next few months.  The Saudi prince doesn’t seem to be worried about US shale and that means oversupply concerns for this year are gone.

Saudi Arabia’s decision to restrain production and maintain the 1 million b/d voluntary production cut has become a ‘whatever it takes’ moment.  Brent went from overbought to it’s time to buy more.  Brent forecasts will be seeing massive upgrades over the next week.  The US is reopening the economy a lot faster due to COVID vaccine success and that will trigger a strong pickup in fuel demand over the next couple of months.

The enthusiasm in the energy market got another boost from a stronger-than-expected nonfarm payroll report that shows that Americans are closer to pre-pandemic behavior that will drive strong demand for crude.  WTI crude is over the $65 a barrel level and the momentum could be there for prices to target the $70 level next week.


Gold is still in the danger zone and if the dollar has a massive move over the next week or two, that could trigger a $100+ drop. Gold bulls are counting on the Fed to eventually push back over the rise in yields.  The Fed doesn’t meet until March 17th so with the blackout period upon us, the bond market might want to test the resolve of the Fed and that could drag gold down.


Bitcoin has relatively been an easy trade over the past few months, rising on big-money demand and selling off when the broader markets have some panic-selling, but that could change now that regulatory fears are creeping back.

Many crypto-watchers are concerned over how the Biden administration will handle Trump’s anti-money laundering effort that would force to reveal identities of cryptocurrency holders.  If Treasury Secretary Yellen moves forward with the regulation to keep records on who owns cryptocurrencies, that would be a major blow to Bitcoin, possibly triggering an immediate 20% plunge.  The opposition is strong for this regulation and will likely be dragged over a lengthy evaluation process.

Biden’s SEC Chair pick Gary Gensler will also have a big impact on regulation, and he is still viewed as crypto-friendly, so probably not likely delivering a crushing blow that cripples the cryptocurrency market.

Key Economic Events

Saturday, March 6

  • The annual session of China’s National People’s Congress resumes in Beijing

Sunday, March 7

  • No calendar events today.

Economic Data:

  • China foreign reserves

Monday, March 8

  • BOE Governor Bailey discusses the economic outlook

Economic Data:

  • US wholesale inventories
  • Japan BoP, bank lending, bankruptcies, leading index
  • Germany Industrial production
  • Spain Industrial Production
  • Norway Industrial Production
  • Greece GDP

Tuesday, March 9

  • The Organization for Economic Cooperation and Development posts its interim economic outlook.

Economic Data:

  • Mexico CPI
  • Hungary CPI
  • New Zealand manufacturing activity, ANZ business confidence,
  • Australia NAB business confidence/conditions
  • Japan GDP, cash earnings, household spending, money stock, machine tool orders
  • China money supply, new yuan loans, manpower survey
  • Eurozone GDP
  • South Africa GDP
  • Germany trade
  • Italy industrial production

Wednesday, March 10

  • Reserve Bank of Australia Governor Philip Lowe gives a speech in Sydney.
  • EIA crude oil inventory report

Economic Data:

  • Canada rate decision: Expected to keep interest rates steady at 0.25%
  • US CPI, monthly budget statement
  • China PPI, CPI
  • New Zealand REINZ house sales
  • Industrial production: France, Estonia, Slovenia
  • Australia Westpac consumer confidence
  • Russia CPI
  • Czech CPI
  • Norway CPI
  • Denmark CPI
  • Turkey unemployment

Thursday, March 11

  • Bank of Canada Deputy Governor Schembri speaks
  • Norway central bank Deputy Governor Bache gives a speech about digital central bank currency
  • Swiss government updates economics forecasts.
  • OPEC monthly Oil Market Report includes demand forecasts and production estimates.

Economic Data:

  • US initial jobless claims
  • ECB Rate Decision: Expected to keep interest rates unchanged
  • New Zealand food prices
  • Trade balance: Israel, Hungary
  • Japan PPI
  • Sweden unemployment
  • Current account: South Africa, Turkey
  • South Africa manufacturing production
  • Russia gold and forex reserve

Friday, March 12

Economic Data:

  • US University of Michigan consumer sentiment, PPI
  • Canada unemployment
  • New Zealand Manufacturing PMI
  • UK GDP, industrial production, trade
  • Hong Kong PPI, industrial production
  • Eurozone Industrial production
  • India Industrial Production
  • UK Industrial Production
  • Turkey Industrial Production
  • Mexico Industrial Production
  • German CPI
  • India CPI
  • Spain CPI
  • Russia Trade data
  • Spain retail sales

Sovereign Rating Updates:

  • Austria (S&P)
  • Norway (S&P)
  • Portugal (S&P)