FX Update: USD pops anew on shrug of Powell’s shoulders

FX Trading focus: USD rally accelerates on Powell and Kuroda comments

As we thought was likely, Fed Chair Powell failed to signal a sufficient level of concern on rising US treasury yields yesterday to soothe this market, which threw another tantrum, sending treasuries lower and yields soaring, and sending equities into a new tailspin while the US dollar went nearly straight up. As our Steen Jakobsen writes in his piece today, the Fed will eventually act, but only once financial conditions are sufficiently dire to give him the cover to do so, as he can argue that sharply weaker financial conditions would feed through to Main Street USA and present disinflationary and labor market risks. And as we pondered on this morning’s Saxo Market Call podcast, the Fed may be happy for some measure of speculative froth to come out of this market rather than to be seen riding too quickly to the rescue. For now, it is worth noting that the USD has taken out new local highs against every currency in the G10 now save for CAD and NOK, where oil prices spiking on Saudi Arabia’s taking a stand on not increasing production at yesterday’s OPEC+ meeting has kept the petro-currencies divergently resilient.

And overnight, the Bank of Japan’s Kuroda made comments rejecting the notion in a parliamentary hearing that the BoJ is ready to expand the range of trading for Japanese government bonds. The 10-year yield was smashed back lower to around 0.07% after rising as high as 0.15% recently. (let’s recall the irony that the original YCC from the BoJ was intended to prevent the 10-year from going too negative to avoid excess damage to the financial system). More observations on USDJPY below.

Today, we watch and wait for whether the market is sufficiently interested in US employment data to bother reacting to it, and whether we have a paradoxical setup today in which terrible data would be celebrated for the implications for the Fed and treasury yields and great data would be fretted with further risk off.

Stay careful out there – the weekly close will be an important determinant for whether this market can pull itself together of its own volition or will continue to deleverage until central bank action is forthcoming. It is certainly a different ballgame for many portfolio managers this week, who have seen significant losses on their equity holdings, with no offsetting gains on their bond holdings. That positive correlation in equities and stocks at time this week – especially yesterday – is a game changer for trillions of dollars’ worth of money under management that has been based on the assumption that bond and equity prices normally move in negative correlation as they have for much of the last more than twenty years. Historically, they are more often positively correlated.

Graphic: G10 FX Trends
The latest update of the FX Tradeboard, which shows the trend strength in the G10 currencies (a prop measure of the strength of the trend relative to an exponential moving average of the recent trading range). Note that today I have added the momentum shift readings (the delta of the trend reading from two days ago and from five days ago), which shows how quickly the US dollar and NZD have shifted the most in trending terms over the last five days. Readings over an absolute value of six or higher are quite remarkable.