Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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FX Update: Is the JPY finally ready to roar?
John J. Hardy
Chief Macro Strategist
Summary: The backdrop has increasingly weighed in support of the JPY as safe haven seeking in sovereign bonds has eroded the negative implications of the Bank of Japan’s yield-curve-control policy. And speculative positioning is very short the Japanese currency. Last week’s brief blow-up in the JPY crosses may have been a trial balloon for a far larger squeeze on JPY shorts.
FX Trading focus: JPY focus on supportive backdrop
The market action yesterday and overnight was at times rather out of synch with recent cross-market correlations. Yes, the worst day in two years for US stocks did see the US dollar rallying in most places, but only modestly so relative to the negative energy in risk sentiment that has been the "norm" in recent months. One possibly source of this was the big mark-down in USDJPY intraday yesterday, which shows that attention may be shifting more towards the old safe-haven role of the Japanese yen on the latter’s traditional sensitivity to the strength in safe-haven bonds, which picked up a powerful bid yesterday, flattening the US yield curve and suggesting a weaker economic growth/inflation outlook. Since much of the early USD buying in the aggravated rally in the greenback since late February was in USDJPY due to the rise in US long treasury yields, any further fall in these yields will likely continue to support the JPY the most among major currencies. A potential “after-burner” for the risk of a tremendous bout of JPY volatility here is market positioning, with the US futures speculative positioning at historically stretched levels. That’s it for today’s update – JPY volatility is likely to dominate for the coming sessions if it is properly unleashed.
Chart: USDJPY
USDJPY poking at the important local 127.50 support and other JPY crosses on the verge of (EURJPY and AUDJPY) or already having broken down (GBPJPY and NZDJPY) through some key support levels. The next obvious focus here could be the 125.00 round-level area, but when the yen works up a head of steam, it has a tendency to overshoot – so potential to 120.00 can’t be ruled out if equity markets are suffering a real liquidity event and safe-haven seeking in US treasuries sends the US 10-year yield benchmark, for example, back to 2.50%.
Table: FX Board of G10 and CNH trend evolution and strength.
Holding breath here for JPY volatility potential – and with USDJPY under so much pressure, it could block the USD from serving as a safe haven in the crosses.
Table: FX Board Trend Scoreboard for individual pairs.
Apropos JPY crosses – USDJPY is on the verge of crossing over to negative finally if it closes near or below the 127.50 trigger level.
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