US Dollar: Volatility sinks as carry trades hold – ING

ING’s Chris Turner notes that FX volatility is falling as investors appear comfortable with the Federal Reserve holding or potentially tightening rates in September. He highlights limited impact from upcoming US CPI on carry trades, but warns that higher US Treasury yields and heavy tech-sector issuance could threaten the benign backdrop. DXY is seen staying in a tight 99.50-100.00 range.

Fed risks and bond market supply

"Perhaps unsurprisingly, realised FX volatility is sinking in mid-August. The main risk event on the horizon is the Fed's policy meeting on 16 September, where the market prices exactly a 50% chance of a 25bp hike. Whether the Fed hikes or not will be determined by a few data points ahead of that meeting."

"Should tomorrow's US July CPI release nudge market pricing towards or against a September Fed hike, we doubt it would have much impact on the carry trade."

"The one wrinkle on the horizon is the bond market. Longer-dated US Treasury yields are at the top of recent ranges and the tech industry is planning a lot more issuance. Nvidia announced yesterday it would partner with six investment houses to arrange $500bn of debt financing for its customers."

"A sell-off in the bond market probably remains one of the key threats to a benign environment over the coming months."

"DXY looks set to continue trading in a 99.50-100.00 range into tomorrow's CPI release."