The U.S. dollar and Treasury yields are trending higher as investors foresee an interest rate increase come December.
Pricing in this anticipated Fed hike comes after the central bank stayed its hand last month following an episode of market turmoil. You could forgive investors for having a sense of déjà vu, as this backdrop across a number of asset classes is similar to what transpired during the second half of 2015.
But there’s a difference this time around that has big implications for foreign exchange, according to Société Générale global strategist Kit Juckes.
“This time, I suspect that we have seen the low for government bond yields on average for the cycle,” he wrote in a note to clients Oct. 14. “Bond investors are suffering from fatigue as policy-makers question the usefulness of further rate cuts and as inflation stops falling.”
The upshot here is that so-called carry trades might go comatose.
