The yen, Australian dollar and Mexican peso are the currencies most vulnerable to an increase in U.S. bond yields and the dollar, according to an analysis by Societe Generale SA.
Chile’s peso, the Norwegian krone and the Russian ruble will be the most resilient, strategists including New York-based Michael Haigh and London-based Kit Juckes said in a Feb. 21 report. Treasury 10-year yields reached a 10-month high on Feb. 14 and are predicted to increase 34 basis points by year-end from today’s level amid signs the Federal Reserve may be considering slowing its asset-purchase program. A basis point is 0.01 percentage point.
“One of the major themes for the coming year will be a reversion to a rather more normal state of affairs, when U.S. economic recovery leads to speculation about when the Fed will stop buying bonds and start to normalize monetary policy,” the analysts wrote. “When that happens, good news will drive Treasury yields higher and the dollar will rally.”
The Dollar Index (DXY), which IntercontinentalExchange Inc. uses to track the greenback versus the currencies of six U.S. trading partners, yesterday touched 81.508, the highest since Sept. 5.
Treasury 10-year yields were at 1.98 percent and reached 2.06 percent on Feb. 14, the most since April 10.
Several Fed policy makers said the central bank should be ready to vary the pace of its $85 billion in monthly bond purchases amid a debate over the risks and benefits of further quantitative easing, minutes of last month’s meeting released Feb. 20 showed.
U.S. unemployment may drop to 6.5 percent by the middle of next year from 7.9 percent in January and prompt policy makers to raise benchmark interest rate from near zero, Bank of St. Louis President James Bullard said yesterday.
Japan’s policy shift under Prime Minister Shinzo Abe has probably changed the yen’s previous relationship to U.S. yields, where the currency was among those least affected by increases, Societe Generale said. Japan’s foreign-exchange and monetary policies are weakening the yen, resulting in a vulnerability to U.S. rate increases, it said.
The yen has dropped 10 percent against the greenback since Abe won elections on Dec. 16 and traded at 93.22 per dollar at 9:45 a.m. in Tokyo.
Mexico’s peso may suffer because the nation is vulnerable to a flight of capital given that volatile portfolio inflows account for most of the foreign funds in the country in the past few months, Societe Generale estimates. Chile and Brazil, on the other hand, benefit from having more stable foreign direct investments, the bank said.
Australia’s dollar will suffer on multiple fronts as monetary policy and capital flows will both work against the currency along with higher U.S. yields, Societe Generale’s analysis showed.
Reserve Bank of Australia Governor Glenn Stevens said today sustained strength in the so-called Aussie, which has remained above parity with the greenback since June, spurred policy makers to lower borrowing costs. The governor said he was surprised the currency hasn’t fallen more.
The Australian dollar weakened 0.2 percent this week to $1.0280 and has declined 1.1 percent this year. Mexico’s peso has fallen 0.4 percent since Feb. 15 to 12.7442 per dollar.
Societe Generale analyzed nine currency pairs which are linked to commodities either through their exports or imports.
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