Yield Differential Lifts Dollar to Multi-year Highs


The dollar’s yield advantage continues to increase against the euro and yen, with the 10-year yield differential climbing to 155 basis points and the yield differential above the JGB moving to a robust 190 basis points. This move in US yields relative to its counterparts caps a two week period of notable shift, sparked by firm data out of the U.S., and the BoJ’s unexpected expansion of its QE program, and the ECB’s evolving path toward expanding asset purchases. The T-note versus Bund differential has lifted by nearly 25 basis points over this period. The dollar has concomitantly rallied to 27-month highs versus the euro and a six-year peak against the yen over this period.

In economic news out of Europe Germany posted trade surplus of EUR 18.5 billion in September, up from EUR 17.5 billion in the previous month. The better than expected result left the accumulated trade surplus at EUR 58.2 billion in Q3, up from EUR 52.4 billion in the previous quarter, which points to a positive contribution from net exports to overall GDP growth, although lower oil prices will have played a role in the nominal number. Exports rose 5.5 month over month, but this didn’t compensate fully for the 5.8% month over month contraction in August and imports jumped 5.4% month over month, after two months of contraction. Unadjusted data showed a trade surplus of EUR 21.9 billion, up from EUR 20.1 billion in September last year. The current account meanwhile widened to EUR 148.3 billion in the first nine months of the year, from EUR 129.9 billion in the corresponding period 2013.

German industrial production rose 1.4% month over month in September, less than expected, although the contraction in August was revised up to -3.1% month over month from -4.0% month over month reported initially. Still production is down over the year now and the weak trend, coupled with the drop in confidence readings highlights that the manufacturing sector in particular is being hit by the sanctions against Russia.

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