Are spillovers for the FX market from the global bond market sell-off getting bigger?

So the selloff in global bond markets has continued to be the main development in financial markets over the past week with long-term yields in major bond markets rising above highs prior to the global financial crisis in two thousand and seven.

How is this spilling over into the FX market?

Yeah, definitely over the last week we've seen kind of bigger spillovers into the FX market.

Um, one kind of clear channel is through the performance of the US dollar, which has continued to strengthen this week, um, rising to fresh year-to-date highs.

That's despite the fact that we have seen, um, the market paring back expectations for a hike from the Fed, uh, later this month.

Um, in terms of the data that we've seen from the release from the US over the past week, it has definitely helped to dampen the need for the Fed to deliver a back-to-back rate hike.

We've seen softer, uh, inflation data.

The core PCE deflator after the downward revisions to prior months is definitely pointing towards more progress in terms of underlying inflation pressures slowing over the summer period.

Uh, and then earlier today as well, the latest payrolls data, uh, did disappoint to the downside as well.

Um, which, yeah, definitely gives, uh, more credence to the comments that we've had from, um, earlier this week from New York Fed President, uh, Williams and also Vice Chair Jefferson, um, over the past day who both indicated that they're not in an urgent need to tighten policy right now.

So for us, it kind of backs up our view that we think they'll keep rates on hold in October, but then look to hike again, uh, in December before the end of, of this year.

Um, the second channel through which we have seen, um, spillovers from the bond market into the FX market is through, um, pickup in, uh, FX volatility.

Uh, that's happened particularly in, in the emerging market FX space where volatility has picked up, uh, more sharply than for G ten currencies.

Uh, and with that pickup in volatility, uh, happening, uh, that has triggered a-an unwind of some of the kind of popular, uh, carry trades, uh, in the emerging market space.

Uh, the Mexican peso has kind of stood out.

That's definitely been hit the hardest with dollar max, uh, rising sharply over the past week.

Uh, and to us that, that makes sense if you look at the latest positioning data from the IMM.

That did show that long, uh, peso positions that had been built up by leverage funds had increased to the highest level since the end of twenty twenty two, uh, prior to the Fed's hawkish policy meeting last week when they, they ra-- Uh, last month when they, they raised rates for the first time.

So it, it does make sense that we have seen a, a forced liquidation of those elevated peso positions, which has reinforced the, uh, the selloff for the peso.