US dollar rises, supported by yields in anticipation of Fed - Westpac

Analysts at Westpac noted that the US dollar rose against major currencies, supported by higher yields as investors appeared to position for the Fed policy decision to tilt to the hawkish side. 

Key Quotes:

"The euro fell steadily from 1.2340 in the London morning to 1.2250 late NY. Data didn’t help. ZEW March surveys for Germany and Eurozone showed a sharp fall in their expectations (Germany: 5.1, prev 17.8, Eurozone; 13.4, prev 29.3). Although the more closely watched current conditions only dipped slightly (90.7, prior 92.3), the expectations have a closer relationship to hard data and suggest a lower, but still solid, profile for regional growth than the outperformance of late-2017. The prospect of trade wars is a likely explanation for the slide in expectations.

AUD followed the broad trend, falling from a high around 0.7720 to 0.7679 – a low since 21 December. Underperformer NZD fell from 0.7240 to 0.7177 – a one-month low, perhaps reflecting expectations regarding the RBNZ’s OCR Review and new PTA. The dairy auction produced little change in whole milk powder prices. AUD/NZD bounced off an eight-month low of 1.0636 to 1.0700.

USD/JPY was choppy at times but overall up 0.4% with help from US yields, probing 106.50. The G20 meeting of finance ministers and central bank governors in Buenos Aires concluded with a carefully airbrushed communique with familiar language on open trade etc. But separate remarks by officials were more candid e.g. US Treasury Secretary Mnuchin saying the US is not afraid of a trade war. 

UK inflation was weaker than expected in Feb. Notably headline (2.7%y/y, exp 2.8%y/y) and core (2.4%y/y, exp 2.5%y/y) CPI undershot expectations by 0.1%. Although welcome, the impact is unlikely to alter the BoE’s decisions in the near term or relieve households' negative real income. The data punctured GBP/USD’s rally to above 1.4060, sparking a decline that extended to below 1.3990 in NY trade.

The US 10yr treasury yield rose from 2.85% to 2.88%, while 2yr yields rose from 2.31% to 2.33% (a fresh 10-year high). Fed fund futures yields were slightly firmer for distant meetings, continuing to price three more hikes by end-2018 (including tomorrow) but now almost two hikes in 2019. It seems the late money is on a more hawkish Fed outcome."