Saxo Bank: JPY beating USD in race to bottom
By Trend
The yen is very weak, as EURJPY and other JPY pairs have pulled to new local high here in apparent acceptance of the Bank of Japan’s loud message that it is not interested in standing down from its yield-curve-control policy, Head of FX Strategy / Saxo Bank John Hardy told Trend.
He said that this means that further increases in yields elsewhere transmit directly to the Japanese currency rather than to JGB yields.
“The 10-year German Bund/JGB spread is stretching to new highs since 2014 over the last few days and weeks, with the market finally responding now with more JPY selling as hopes for an eventual BoJ shift away from the YCC stance have been dashed,” he said.
He said that US yields deserve plenty of attention across markets as the entire US yield curve lifts and the 30-year yield finally dragged to new highs for the cycle above the symbolic 3.00 percent level.
“The 10-year US yield benchmark is now within shouting distance (about 20 basis points) of what many agree is a massively important 3.00 percent level – the six-year highs are a hair above and we haven’t posted a 6-year high in US 10-year yields since 1981,” the expert said. “The last major multi-year highs was in – ahem – June of 2007, when the rate was briefly above a local high at 5.25 percent, and thus at the highest level since early 2002.”
Hardy said that today’s focus squarely on US jobs and especially earnings data.
A large number of states have higher minimum wage levels that went into effect on January 1 and investors are also wondering whether pay packages have been impacted by the recent tax reform. Upside surprises over the last year have been rarer than hen’s teeth, but it will be an interesting test of the market’s conviction on the weaker USD if we see the data beating by more than 0.1 percent. Payrolls change is expected at +180k, but this data will likely be a secondary consideration barring massive surprises.
Next week should keep G10 and EM currency traders on their toes, with plenty of macro data and with nine G10 and EM central banks of note out with rate decision. Among the G10, the focus will be on the guidance from the Reserve Bank of Australia next Tuesday (first rate hike still looks very far over the horizon), and on Thursday the Reserve Bank of New Zealand (ditto) and especially the Bank of England (rising odds of a hike in May). The only major EM central bank expected to shift policy is Russia’s, which makes its decision known next Friday after cutting more than many expected at the prior meeting (50 basis points – consensus is for a 25 basis point cut this time).
He said that EURJPY pulls to new highs as global yields stretch higher and leave the yen out in the cold as the BoJ keeps the 10-year capped at/below 10 basis points.
“At some point, this will have diplomatic implications, but for now, any further rises in yields – barring ugly risk-off behavior which could shift the focus – may continue to transmit into higher levels,” Hardy said.
The G-10 rundown
USD – what can lift the US dollar when rising yields don’t? USD move could be set to continue for now on in-line US employment data today. Note that EURUSD 1.2600 is a major chart point, the 61.8% Fibo of the last major selloff wave from 1.4000 in 2014.
EUR – the single currency continues its charge and the close above 1.2500 in EURUSD yesterday keeps the focus higher, possibly for a shot into 1.3000 eventually.
JPY – as discussed above, the yen may remain the weakest currency here as long as bond yields continue to rise and at the same time if risk appetite doesn’t shift to panic mode.
GBP – sterling was trying to get something going against the euro, but this latest bounce beginning to unravel the tactical bearish pattern setups, so we’re left in limbo between 0.8690 and 0.8800-25, waiting for guidance at next week’s Bank of England.
CHF – the franc is top of the heap, maintaining strength versus a strong euro. The market is repricing Swiss rates out the curve as well – with the 10-year Swiss government bond moving to a positive yield of 15 basis points – highest since mid-2015.
AUD – the Aussie really struggling on recent developments and a short end of the yield curve that isn’t playing ball with the global narrative – note the strong rally in EURAUD.
CAD – USDCAD pushing back lower with little velocity, mostly driven by a weak USD – next weeks macro data picks up for Canada. AUDCAD downside an interesting alternative for expressing relative CAD strength as yield expectations have taken off for the BoC over the last two months.
NZD – RBNZ up next week, as is the Q4 employment data. AUDNZD bears on the prowl if we break below the 1.0850 range low and now 200-day moving average.
SEK – the Swedish yield curve lifting more aggressively than that for Europe, but the market not impressed as EURSEK trades well away from the downside pivot near 9.75.
NOK – oil remains perched near 70 dollars/barrel and Norwegian rates have been outperforming Swedish rates at front end – can NOKSEK finally make a proper break above the 200-day moving average (1.0220) after a long pause around this level.
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