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: JPY twisting in the breeze on fresh US yield rise.
John J. Hardy
Chief Macro Strategist
Summary: The US dollar continues its rise and its strength could deepen and broaden if new highs in US Treasury yields at most key points along the curve unsettle risk sentiment in the days ahead. USDJPY is certainly one yield-sensitive pair to watch as the Japanese financial year draws to a close tomorrow, but EM and commodity currencies could join the rush lower versus the mighty greenback.
FX Trading focus: Fresh highs for most points on the US yield curve support USD, smash JPY
There seemed no specific trigger as US yields rose to their highest level for the cycle into this morning from all points between 5- and 10-years on the US treasury yield curve, helping to drive the ongoing resurgence in the US dollar, particularly against the lowest yielders and those countries whose bond yields are less responsive to the rise in US yields.
Given that the Bank of Japan recently declared a band only 25 basis points either side of zero for the permissible band for 10-year JGB’s (and especially given that 10-year JGB yields aren’t even pressuring the top side of that band – trading overnight just below 10 bps still), the JPY has proven the most sensitive to US longer yield rises and USDJPY has burst above the 110.00 level this morning, a day ahead of the quarter end and the Japanese financial year end. Some believed that the weakest quarter for US treasuries in over 40 years (assuming we don’t see a massive rally through tomorrow) might see significant portfolio rebalancing into quarter-end, but if that has been the case, it has failed to support the treasury market notably.
The key development to watch in the coming days is whether rising US yields begin to act as a strong headwind for yield-sensitive assets like growth stocks and risk sentiment generally, which could see the USD rise deepening and broadening, adding pressure on the downside for commodity currencies and especially EM currencies. There are signs of this development since this morning here in Europe. In this morning’s Saxo Market Call podcast, we discussed the treasury yield rise, together with the notable ongoing resilience in junk debt despite a torrent of issuance this year, something that continues to signal that financial conditions have yet to tighten meaningfully beyond the rise in treasury yields. Indeed, the Fed may remain dismissive of US yield rises as long as US inflation and especially employment data continue to improve materially in coming weeks and months and metrics like those credit spreads continue to suggest that all is quiet on the financial stability front.
Chart: USDJPY weekly
USDJPY breaking key resistance here ahead of the Japanese financial year-end tomorrow, with 110.00 unable to hold as US treasury yields from 5-10 years hit new highs for the cycle overnight. Tonight will be the final day of the Japanese financial year, but we will likely to see any dramatic pivot in the price action here if US yields continue to rise apace, given that the Bank of Japan has already moved to “cap” yields with its declared target of keeping yields within 25 basis points of zero.
Graphic: FX Board of G10 trends and momentum
In the FX Board we note the mounting USD strength again – likely set to deepen against EM- and commodity currencies if this latest US yield rise extends and unsettles general risk sentiment as was the case at times in the prior episode. Elsewhere, note that SEK seems to have joined the negative yielders EUR and especially JPY and CHF in the weaker column, while NOK has picked up speed again, with EURNOK facing down the cycle lows and the huge 10.00 level again. Interesting to see if that resilience can stick if oil prices dip again amidst a surging US dollar (doubtful). Momentum in CNH is waning as well, after yesterday saw the biggest move lower in the CNH versus the USD in several weeks.
Upcoming Economic Calendar Highlights (all times GMT)
- 1200 – Germany Mar. Flash CPI
- 1300 – US Fed’s Quarles (Voter) to speak on Financial Stability Board
- 1300 – US Jan. S&P CoreLogic Home Price Index
- 1400 – US Mar. Consumer Confidence
- 1830 – US Fed’s Williams out speaking on role of small businesses
- 0030 – Australia Feb. Building Approvals
- 0100 – China Manufacturing and Non-manufacturing PMI
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