Dollar to retest ¥120 once global tensions ebb, says Schroder

The dollar is set to recover towards ¥120 as Treasury yields climb once anxieties surrounding North Korea and the French presidential election subside, according to Schroder Investment Management.The greenback will get a boost and US 10-year yields may rise above 2.60% if a centrist candidate wins the French election and there’s more clarity on the Federal Reserve’s balance sheet wind-down, said Rajeev De Mello, head of Asian fixed income at Schroder Investment in Singapore. However, it may be difficult for the dollar to make a “big upward move” as the global divergence trade that contrasted stronger US growth with weaker economies elsewhere appears to be over, he said.“We might test 120 on one of the rebounds but I don’t think we will start defining a new upward range,” De Mello, who oversees about $11.7bn, said in an interview this week. “We have sort of peaked out on the strength of the broad US dollar. It’s not a particular negative story about the US but it’s more than the other countries are catching up.”The US currency has slumped more than 8% from a high of ¥118.60 in January after President Donald Trump’s failure to enact health-care reforms and disputes within his own party cast doubt over his economic agenda. The dollar took a further beating this week as heightened tensions in the Korean peninsula and uncertainty over the French election outcome sent it below ¥110. The 10-year Treasury yield dropped below 2.3%.The recent decline didn’t stop Trump from saying that the dollar is still too strong, in an interview with the Wall Street Journal published last week. White House economic adviser Gary Cohn said last week Trump’s administration remains committed to passing a plan to overhaul the tax code this year. “The market may be underestimating what the new US administration can achieve in the fiscal area,” De Mello said.De Mello said the ECB is already tapering and will probably do more, but the Bank of Japan (BoJ) will hang on with their yield curve for a little bit longer”.The BoJ is set to adjust its strategy to hold the nation’s 10-year bond yield at around zero% only when yields globally start rising. About Indonesia, he said, “I still like Indonesia. It would be one of my tops”. “The real yield is high even if one expects inflation to go up to 4.5%”. Indonesia’s bonds will likely range-trade in April after last month’s rally. The 10-year yield has fallen to around 7.08% vs 7.97% at end-2016.Rupiah has been stable as Indonesia builds up its foreign reserves. About India, he said, India will offer “good opportunities” as a rising supply of state-government debt contributes to a selloff this month. The RBI is committed to its 4% inflation target and “is acting that language”.The yuan will be “broadly stable” as China is unlikely to weaken its currency during its 100-day plan with the US to address the trade imbalance. “The US and China’s interests might be aligned on the currency side”. China doesn’t want a depreciating currency that will exacerbate capital outflows, while the US doesn’t want an increasing trade deficit.