The 3% Quandary

The FOMC Minutes led to a whipsaw in US dollar trading Wednesday and exposed a dilemma. The US dollar was the top performer once again while the Australian dollar lagged. China returns from holiday in the day ahead. 9 Premium trades are currently in progress, 2 of which in indices.

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The FOMC Minutes didn't offer much in the way of surprises but  offered plenty in the way of market moves. The US dollar fell 30-40 pips across the board on the headlines only to make a complete recovery 30 minutes later and finish at the highs.

In the lead-up to the release, there was fear about an especially hawkish set of minutes but that didn't materialize. Instead, there was the predictable optimism about growth along with hints at upside risks to inflation.

At first, it seemed fears in the market were soothed. The US dollar dropped and stock markets rallied. But bond traders pushed yields further in a sign of jitters about four rate hikes this year.

A short time late, stocks joined bonds lower and USD rallied. The looming level is 3% in the 10-year note. It rose 6 bps to 2.95% Wednesday – the highest since 2014. Along with the big figure, the 2014 high of 3.06% is a major level of resistance.

At this point, other markets are beginning to get worried about the reaction to higher borrowing costs. We get the sense that many are heading to the sidelines to see how it will shake out. Ultimately, 3% is just a number and it's not a magical line in the sand that's going to torpedo borrowers' finances so there might be a sigh of relief once it's breached. But until then, expect further jitters to continue.

If you're in London this week, you can attend Ashraf's full assessment for FX, yields and indices on Thursday evening at GKFX London HQs and on Friday at the London Forex Show.

Looking ahead, the Asia-Pacific economic calendar is light but it includes the return of China after a week of holidays. That's likely to add a bit of volatility and certainly some flows. Further down the agenda, the Fed's Quarles speaks at 0515 GMT along with French CPI, German IFO sentiment data, UK GDP and Canadian retail sales. All that should make for plenty of action.