USD extends the strength, exerting downward pressure over stocks, commodities and emerging market currencies

• Equity market in both the US and APAC faced a tough trading day
• 10-year Treasury yields climbed to 1.15% on a rising inflation outlook

DXY US Dollar Index rebounded from a 2.5 year low to 90.50, exerting downward pressure on stocks, commodities and emerging market currencies. After closing at two-year lows last Tuesday, DXY has since climbed about 1.2% and currently in the momentum to reach 3-week highs. Over the past 12 months, DXY and S&P 500 possessed a negative correlation, when one goes up the other goes down. This correlation is affecting equities in APAC as well, such as ASX 200 and Nikkei 225, which may face tough trading days ahead.

Longer-term Treasury yields are rising continuously ever since Democrats gained control of the Senate. Over the last week, the 10-year yield surged more than 20bps to 1.147%. The 20- and 30-year yields also climbed to 1.685% and 1.885% respectively. Treasury bonds are “risk-free” in a sense that they are backed by the credit of the US government. Rising yields means rising risk-free rate, which effectively pushes up the required rate of return for holding equities. Thus, more capital has been transferred from the equity market to the bond market in pursuit of higher returns. Similarly, the relationship exists between the Treasury bills and other markets as well. As the bills become more attractive, investors will demand more of them, which further pushes up the yields. Unsurprisingly, investors are also more likely to spend their USD to buy those bills rather than commodities or other currencies.

This Wednesday, we will have USD inflation rate coming up as part of the December US inflation report. It is expected to show continued moderation in price pressures, and the consensus on the core inflation rate is at +1.6% YoY.