US Dollar to Keep Strong on the Short Term

USD: Higher US yields and diminished risk appetite to help dollar

The lack of yield decline following the US CPI report last Thursday underscores the strong backing for US yields, which is expected to persist in the near future. The support for yields has been buoyed by higher-than-anticipated PPI data on Friday. Additionally, the comments from Fed officials suggest ongoing divisions regarding whether the FOMC has concluded its tightening cycle.

Demand for US Treasuries remains robust after the three auctions held last week. However, the deteriorating budget situation now exerts more significant pressure on longer-term yields than before. This is especially true in the context of weakening growth, which could lead to increased downward pressure on the US dollar. The current budget deficit stands at USD 1.6 trillion over the first ten months of the fiscal year, a notable increase from the USD 726 billion recorded in the same period of the previous year.

The potential source of renewed volatility and risk aversion in the short term appears to be China. Ongoing economic data weakness, coupled with growing concerns about the property market, has intensified worries. These concerns were further heightened as a company linked to a major China private wealth manager (Zhongzhi Enterprise Group Co.) failed to make payments to three separate firms. These payments were related to maturing wealth products. Notably, Zhongzhi manages assets totaling CNY 1 trillion (USD 138 billion). Reports of missed payments within China's shadow banking system have the capacity to significantly worsen market sentiment. If yield differentials and carry trades are disrupted, the likely cause would be increased risk aversion stemming from China. This unfolding situation warrants close monitoring.

A significant uptick in long AUD positions among Leveraged Funds was revealed by the IMM data on Friday evening. The AUD/USD pair notably dropped until last Tuesday, possibly creating a buying opportunity for hedge funds. However, the implication is that if China's sentiment deteriorates further, these long AUD positions could be swiftly reversed, leading to more underperformance. The Hang Seng China Enterprise Index has recorded a 2.4% decline today, contributing to a 7.5% decrease in August. Heightened concerns about global growth are expected to reinforce support for the broad US dollar in the short term. This is especially true against higher-beta, global growth-sensitive G10 currencies.

LEVERAGED FUNDS’ LONG AUD POSITION LARGEST SINCE 2021

 Source: Bloomberg, Macro Bond & MUFG GMR

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