10 Aug 2015
G10 currencies most sensitive to US yields - Nomura
FXStreet (Guatemala) - Analysts at Nomura explained that their prior research has shown that G10 currencies are more sensitive to US yields, when controlling for local rates.
Key Quotes:
"With foreign governments, particularly EM central banks, more likely to raise rates in response to Fed liftoff, we aimed in this piece to unify the local and USD rates into a single outlook for USD crosses."
"We found that in general, the currencies with low risk sensitivity have rates with low betas to US rates, which should dampen any potential offset and allow the US dollar to climb meaningfully against those crosses."
"A 25bp repricing at the US 2Y rate may move USD/JPY and USD/CHF by 2-3%. For CAD, AUD, and GBP, the sensitivity of local rates to US rates is higher (around 50%), which should help provide some offset and limit the increase in the USD crosses."
"For risk sensitive crosses, mainly EM countries, the beta to US rates are generally lower than for G10 countries, and the sensitivity of local rates to US rates is higher. However, the betas of the FX crosses to the local rates is very low, and often has the opposite sign, which suggest they provide little offset to the moves in the FX crosses due to the US rate increase."
"The difficulty with this analysis is that is predicated on a large sample with only a few monetary policy events. Therefore the true relationships may be hidden within a noisy environment with different dynamics, and any analysis attempting to isolate these events naturally becomes difficult due to the smallness of the sample."
"There will likely be biases on the betas of the local rates upward therefore, but even with an adjustment, the results suggest that USD is poised to gain broadly when the Fed liftoff becomes more fully priced."
Key Quotes:
"With foreign governments, particularly EM central banks, more likely to raise rates in response to Fed liftoff, we aimed in this piece to unify the local and USD rates into a single outlook for USD crosses."
"We found that in general, the currencies with low risk sensitivity have rates with low betas to US rates, which should dampen any potential offset and allow the US dollar to climb meaningfully against those crosses."
"A 25bp repricing at the US 2Y rate may move USD/JPY and USD/CHF by 2-3%. For CAD, AUD, and GBP, the sensitivity of local rates to US rates is higher (around 50%), which should help provide some offset and limit the increase in the USD crosses."
"For risk sensitive crosses, mainly EM countries, the beta to US rates are generally lower than for G10 countries, and the sensitivity of local rates to US rates is higher. However, the betas of the FX crosses to the local rates is very low, and often has the opposite sign, which suggest they provide little offset to the moves in the FX crosses due to the US rate increase."
"The difficulty with this analysis is that is predicated on a large sample with only a few monetary policy events. Therefore the true relationships may be hidden within a noisy environment with different dynamics, and any analysis attempting to isolate these events naturally becomes difficult due to the smallness of the sample."
"There will likely be biases on the betas of the local rates upward therefore, but even with an adjustment, the results suggest that USD is poised to gain broadly when the Fed liftoff becomes more fully priced."