Rising treasury yields keep EUR/USD under pressure

US 10-year yields hit the 5.3% mark, highest level since 2002 forcing equity markets lower and the dollar higher. Asian equity bourses are also in the red this morning, but with the Chinese market in the positive, carry trade currency pairs rebounded. Today sees the release of US import prices and retail sales and bond yields have the potential to push higher.

Ex Fed Chairman Greenspan said yesterday historically low premiums on emerging-market debt won’t be sustained. As China and other developing economies grow faster “all of a sudden interest rates go back up” as they buy fewer Treasuries and invest more in their infrastructure, he said at an event hosted by the Commercial Mortgage Securities Association in New York.

Greenspan pointed out that it was yet hard to conclude whether the bond market sell-off was a cyclical change or the beginning of a long-term trend. At present, the sell-off in the US bond market seems to be the result of mortgage players. It is difficult to infer what foreign interest there has been in the UST market.

For one, the Treasury’s USD8bn reopening of the 10-year auction saw a very weak indirect bid, at only 11% compared to 44.3% at the previous month’s sale, according to BNP Paribas.

This yield environment is clearly not going to bode well for the US housing market. In fact, a real estate data firm, RealtyTrac, said that US May home foreclosures had risen 19% m/m in May with the y/y rate now at 90%, noted BNP Paribas, adding tha technically, the USD index looks set to break the 100-day moving average to the top side with down trendline resistance currently intervening at the 83.05 level.

On EURUSD, we see a break below $1.3260 opening the way for a test of $1.3230 and perhaps $1.3190, which is a major support line on the Financial Mirror charts and is expected to hold. If in fact, the 1.3190-1.3230 support zone is seen and holds, and subsequently the euro closes above $1.3265-85, then a reversal may be in place calling for a minimum rebound back to 1.3425 area.