Dovish Fed speak: some Fed officials believe year-end hike not required. Global equities benefit from treasury yield pullback, US 10yr through 4.65%

By Stuart Talman, XE currency strategist

Positive risk sentiment has punctuated price action through the first two trading days of this week, the market looking through the tragic developments in Israel, risk assets buoyed by the notable pullback in global bond yields following dovish comments from FOMC members. 

With cash trading in US treasuries closed yesterday in observance of the Columbus Day holiday, US bond yields have logged considerable declines through Tuesday, the yield on the benchmark 10-year now trading over 20bps lower from Friday's peak near 4.88%.

In turn, the dollar's remarkable 11-week rally has ended, the dollar index's (DXY) peak through 107.30, last week is evolving as a pivotal turning point as the DXY logs a fifth consecutive intraday loss, plunging through 106.50.

Gaining around a quarter-of-a-percent, the New Zealand dollar's five-day advance has lifted NZDUSD into a critical 0.6000/50 resistance zone that has thwarted multiple topside breakout attempts over the past 7 weeks.

Bid a couple of pips through 0.6040 during the Asian morning, the Kiwi eased back to 60 US cents through the early stages of European trade, rebounded some 20pips to again test 0.60 support through the New York morning.

Price action has marched higher following the opening of US equity markets, NZDUSD bid back through 0.6040, setting up to breakout above the 0.6000/50 resistance zone. 

So, what's driving the bond yields and dollar's reversal?

Via comments from Fed presidents Lorrie Logan (Dallas, voter) and Raphael Bostic (Atlanta, non-voter) over the past 24 hours and other Fed officials, last week, a contingent of FOMC members have appeared, subscribing to the view that the recent surge in long dated US treasury yields has sufficiently tightened financial conditions to the extent that the additional rate hike that was projected via the September dot plots is no longer required.

Assigning a circa 30% implied probability to a 25bps hike at the 01 November FOMC meeting, market pricing has now fallen below 15%. Similarly, the odds of a hike at either the November or December meetings has fallen from around 50% to circa 30%.

Equity markets across the globe are benefitting from the shift in market dynamics.

European equities as measured via the Euro Stoxx 50 (comprised on 50 stocks across 11 countries) advanced over 2% through Tuesday.  With a couple of hours remaining in US trade, the S&P500 and Nasdaq are both up over 1%.

S&P500 price action, last week, formed a notable base around 4220 given 4200 presented as a pivotal technical support level, that many believed would crumble, leading to a pronounced downswing should US bond yields continue to track higher, specifically the 10-year breaching the psychologically important 5% mark.

From Friday's intraday low, the S&P500 has rebounded ~4%, raising expectations the seasonal year-end rally is evolving.

Should this seasonal trend again emerge, supported by a Fed target rate that has already reached its peak at 5.25% - 5.50%, look for risk sensitive assets, including the New Zealand and Australian dollars to track higher into year-end.

Of course, there are other factors to consider outside of the Fed, most prominently, geopolitical developments in the Middle East and China's growth outlook. 

Turning our attention to the day ahead, the procession of central bank speakers continues. One of the more closely followed speeches will come from uber-hawk, Neel Kashkari. A couple of weeks back, the Minneapolis Fed president commented that a soft landing was more likely than not and that he assigned a 40% probability the Fed will need to meaningfully raise rates to return inflation to target.

It will be interesting to note if, like his FOMC colleagues, Kashkari references the recent tightening in financial conditions.

On the data front, German CPI and producer prices for the US are released, the latter presents as the potential market mover.

On track for a fifth consecutive up-day, the Kiwi may halt its advance through Wednesday if the market slips into wait-and-see mode ahead of Thursday's headline event for the week: US CPI for September.

We suspect the Kiwi has more work to do in the 0.6000/50 resistance zone before a potential topside breakout. Range trading between 0.6000 and 0.6040 expected through Wednesday's sessions.

Stuart Talman is Director of Sales at XE. You can contact him here.