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The slide in the US dollar and US interest rates faded in the North American session on Monday.  US participants also had a fairly relaxed initial response to news that after years of complaining, the Republicans could not agree on an alternative to the Affordable Care Act.

Many observers experience the currency market to be buffeted by many different forces.  Perhaps, because, unlike other assets, currencies in their pure form do not generate a yield stream that can be modeled, they seem to be more subject to market fads.  However, our work continues to show the strong relationship between the dollar and interest rate differentials.  This remains our anchor.

The chances of Turnaround Tuesday materializing for the dollar will be bolstered if US interest rates stabilize.  The US 2-year yield approached 1.22% yesterday before recovering.   The link between the rate the Federal Reserve targets (Fed funds) and the two-year note is stronger than at the long-end of the coupon curve.  The two-year yield seems unreasonably low at 1.25% with a Fed funds target range of 75-100 bp unless one does not expect more than one hike over the next seven quarters.  During this period, the median view of Fed officials is for five hikes over this period.