FX Update: Yields, USD, JPY crosses and risk sentiment moving in synch

In the UK, parliament is suspended for the next five weeks, and there is still no clear path forward for UK Prime Minister Boris Johnson and the EU in achieving Brexit. A Bloomberg article gives a sense of four rather divergent paths that the situation could take, including a miraculous change of position by both sides leading to a pre-Oct 31 deal, Johnson trying to force a No Deal anyway if he can’t get the required concessions on the existing deal (least likely?), Johnson agreeing a delay despite his avowal not to and seeking elections in December before a new January deadline and finally, that Johnson simply resigns.

Johnson throwing up his hands and saying that others have tied his hands and forced the delay and an election later this year seem to me the most likely scenario, but my ability to call the twists and turns of Brexit give me little confidence in that view. For now, sterling traders seem rather complacent and GBPUSD has a bit more wiggle room to work higher without triggering a technical reversal (1.2500 an important area).

As we mentioned yesterday, the safe haven currencies are having a tough time of it as yields back up sharply and risk appetite managed to stabilize late yesterday after a small wobble over the previous session (though note market internals are throwing off interesting signals, like a sudden collapse in momentum stocks yesterday. Our Peter Garnry (@petergarnry on Twitter) asks if these momentum stocks, which are generally very long duration growth stocks, are especially sensitive to developments in yields. (In other words, eventually higher yields wouldn’t be a side effect of improved risk sentiment but could serve to drive a repricing of risk assets – remember late 2018?)

US yields have backed up a full 25 basis points from the recent lows in the 2-year benchmark and 10-year benchmark yields are up slightly more, helping to drive USDJPY within shouting distance of 108.00 into this morning. Yesterday’s US treasury auction of 3-year debt went off without a hitch, today sees an auction of 24-billion in 10-year T-notes and tomorrow an auction of 30-year T-bonds. So many moves of late are correlated with the consolidation in the bond market, including risk currencies, JPY (opposite direction, precious metals and more. Beware the correlations across positions in your portfolio.

Tomorrow’s ECB meeting is clearly the market’s next most important test of market sentiment and confidence that this new easing cycle from central banks will continue to drive the comeback in risk appetite. We think the ECB is pushing on the string if the string is the economy, but if the ECB moves to support asset markets, their efforts could yet impress in the near term. Certainly we have two way risks on swirling stories that the ECB is setting in motion a plan to buy stocks on the one hand, while on the other, some ECB hawks are apparently pushing back against Draghi’s dovish desires.

Chart: EURAUD

A Euro cross like EURAUD shows more emphatically that the market has priced in a reasonably impressive easing from the ECB tomorrow and could serve as a more accurate barometer than EURUSD for whether the ECB brings enough to the table to meet the market’s expectations.