Longer-dated US Treasury yields have fallen by around 10–15bp in the week since Treasury Secretary Scott Bessent’s market intervention, a move accompanied by softer volatility across interest rates, FX and equities. Oil has also eased, with prices down 8% since last week, and the calmer energy backdrop has supported risk appetite as carry trades remain in favour. In G10, the Australian dollar drew fresh support after July CPI surprised on the upside, lifting expectations of a Reserve Bank of Australia rate hike in November.
Attention now turns to a run of US events that could test the long end of the curve: today’s US PCE inflation release, tomorrow’s $44bn 7-year note auction, and Friday’s Jackson Hole speech from Fed Chair Kevin Warsh. A 0.2% month-on-month core PCE outcome is expected to leave the Dollar broadly steady, although the benign backdrop could still allow some slippage. On that view, DXY is seen capped near 99.00/10 and edging back towards 98.60.
Favorable Environment for Carry Trades and the Australian Dollar
We see a highly favorable environment for carry trades as US 10-year Treasury yields have slipped about 15 basis points, pushing FX volatility indexes to multi-month lows. Historically, when global currency volatility drops below key averages, yield-seeking carry strategies generate steady, positive returns. We recommend that derivative traders take advantage of this quiet market regime by selling premium on major currency pairs.
We should focus heavily on the Australian Dollar, which is getting a strong boost after July CPI surprised on the upside. This high inflation print makes a November interest rate hike by the Reserve Bank of Australia much more likely, which would widen its yield spread against other currencies. We favor buying AUD call options, particularly against lower-yielding currencies, to capture this growing interest rate divergence.
Outlook for the US Dollar and Near-Term Trading Strategies
We expect the US Dollar Index to stay capped under 99.10 and gradually slide toward the 98.60 support level. This expected downward drift is supported by predictions of a mild 0.2% month-over-month US core PCE inflation print. We advise traders to set up range-bound option structures, such as short-dated iron condors, to profit from this limited dollar upside.
We must remain cautious as we approach major milestones this week, including the $44 billion 7-year Treasury auction and the upcoming Jackson Hole speech. Any hawkish surprises from Fed Chair Kevin Warsh could quickly push US yields back up and spike volatility. We suggest using tight stop-losses on all short-volatility trades to protect capital from sudden market shifts.
