Bonds Keep Dollar Bid, But For How Long?

US yields rose for a record tenth consecutive day, underpinning the US dollar, but the rally may be due for a break. The Australian dollar lagged Tuesday on worries about a China slowdown. Asia-Pacific trading is quiet but the Feds Kocherlakota hinted at an exit strategy.

The ten-session rise in US yields is the most since at least 1985 and underlines sentiment about the US recovery but the climb fell short of the late-October high of 3.42%. At the same time, USD/JPY has been unable to definitively break above 84.00. Japanese fiscal year-end is often a negative for the pair and a small move down is likely before a further rally, unless yields break out.

News flow was light in US trading. Housing starts were a minor disappointment at -1.1% compared to the +0.1% expected but building permits were strong. The theme of worries about a China slowdown carried over from Asia and percolated, especially in early trading. Comments from Bernanke were academic.

The lone indicator in the Asia-Pacific region was New Zealands current account and it was virtually in-line with estimates at -$2.76B. The Feds Kocherlakota said that if necessary, the Fed could contain inflation by hiking interest paid on reserves, in a hint at the FOMCs exit strategy. He said officials could move away from zero interest rate policy as soon as 2012 or 2013 if conditions permit.

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