FX Week Ahead: It's a risky strategy banking on the Phillips Curve coming good - ING

Analysts at ING argue that global markets have been characterized by the theme of rising bond yields and they expect this to continue in the week ahead.

Key quotes:

"While the latest driving force has been the break out in 10-year Bund yields, robust US inflation data - as well as Chair Yellen raising the prospects of a September balance sheet policy announcement during her semi-annual testimony to Congress - should see the steepening bias in global yield curves persist. A data-driven move higher in the US 10-year yield should be USD supportive; although we saw a goldilocks payrolls report, with the +222k job gains surprising on the upside and stable 2.5% YoY wage growth disappointing expectations, confirmation that all is not lost in the US economy has been enough to provide some support to a beleaguered dollar this week. USD/JPY is our preferred vehicle to play any short-term US recovery theme, though the negative correlation between bond yields and equities - consistent with a global monetary tightening shock - will need some monitoring; a sharper bond market rout could see a more pronounced correction in equity markets that weighs on risky currencies. We like NZD/USD downside as a hedge here, with any positioning adjustment fuelling a move back to 0.71."

"The Phillips Curve will remain in vogue next week for G10 markets; the Bank of Canada are likely to point to a more constructive (forward-looking) view on the output gap as justification for a rate hike. Still, we think this CAD rally has been too fast, too furious for the economy's liking and see risks of a dovish hike - and a buy the rumour, sell the fact reaction - pushing USD/CAD back to 1.30. In the UK, slowing wage growth dynamics will likely come as a disappointment to MPC hawks who are largely hanging their hat on the Phillips Curve coming good at some point. This is a risky strategy for any central bank, as well as investors."