FX Update: JPY and CHF diverging. What is driving the USD?

FX Trading focus: USD responds to yields only when risk sentiment also spooked

On Friday, the US jobs report suggested a US economy that is essentially at full employment (low payrolls growth combined with plummeting unemployment rate and hotter than expected earnings rises) and yet the US dollar largely shrugged off the development even as Fed expectations ratcheted a bit higher still, a move that has continued this week, together with fresh rises to new cycle highs at the long end of the US yield curve to new post-pandemic outbreak highs, even if yesterday saw a slight taming of the move. The latter comes ahead of key auctions for 10-year T-notes tomorrow and 30-year T-bonds on Thursday.  Yesterday seemed to show that the US dollar is only reactive to the rise in yields once it spooks risk sentiment more broadly, as the day saw a sharp deleveraging in equity markets (and risky assets like Bitcoin/crypto) that coincided with a USD rally before both developments reversed. The takeaway? The USD seems to only thrive at the moment during a liquidity/deleveraging pinch.

Elsewhere, the JPY has picked up a solid bid since it stumbled at the start of the year, especially noteworthy after its recent weakness that seemed linked to yield rises. More in the USDJPY chart discussion below. Elsewhere, the Swiss franc weakness is very interesting given the backdrop as the SNB intervened more heavily last week as seen in the most recent SNB weekly sight deposit data released yesterday. The sharp rally has possibly set up a cycle low in EURCHF on that front and has already challenged the key 1.1500 level, a major low from back in 2020 and the next level of note the August 2021 pivot low around 1.0700.

Chart: USDJPY
USDJPY burst above the 2021 high near 115.50 at the start of this year, but that upside has quickly faded even as Fed rate expectations and longer US treasury yields have pulled higher in recent sessions, an interesting contrast with the usual coincident behaviour. We’ll be watching how this develops as the yen, after yesterday’s broad rally, especially during the worst of the wobble in risk sentiment yesterday, seemed to be paying more attention to risk appetite than the normal lockstep reaction to US treasury yields. The 115.00 area looks pivotal. A number of other JPY crosses saw partial confirmation of bearish chart setups (EURJPY and AUDJPY, for example) yesterday – also watching these as the recent highs are important lines in the sand.