FX Update: USD poking at first supports as yields ease lower

Yesterday, I went through the challenges for the ECB to do much to aid the economy with monetary policy, which can’t move the needle at these levels of accommodation. The EU will remain the last major economic bloc to accomplish the transition to fiscal dominance because of the unstable multiple sovereign/single currency and central bank foundations. Still, the ECB could do enough to keep the euro weak if it panics and signals a desire to keep long EU yields capped today or in the near futures. This likely only serves as a notable catalyst for downside pressure on the euro, if US and other yields resume their recent rise to new highs for the cycle. Regardless, after an “orderly” US treasury auction yesterday and yields tamed for the moment, EURUSD is consolidating back into the key zone of resistance that must cap if the bears are to rule the day – the 1.1950-1.2000 shown in the chart below. With yields at the longer end of the curve in Europe also quite orderly, the ECB may be tempted to skip signaling any intent to do much higher. Lagarde and company would do well to rattle the EU commission’s and member governments’ cages on the need to expand fiscal stimulus.

Graphic: FX Board of G10 trends and momentum
USD momentum flagging badly here (biggest two-day negative shift in momentum), and gold momentum reversing as well as we await next week’s FOMC meeting, likely the chief arbiter of near term USD direction, together with US Treasury yields, with EURUSD already in a pivotal technical area today as noted below. Note as well the ongoing weakness in CHF (slowing downtrend, however, ) and JPY (not slowing) as well as NOK showing still positive momentum and the strongest rally reading.

NOK as EURNOK nears a critical threshold at 10.00.
Yesterday, I noted NOKSEK as an interesting pair to track for further upside potential on the EU’s sluggish vaccine roll-out and restricted fiscal impulse relative to elsewhere, while NOK is enjoying a high-flying resurgence in oil prices. EURNOK is certainly worth adding to the list of NOK crosses to watch as the pair nears the critical 10.00 level, a notable psychological one and actual chart point on many occasions in recent years. The Norges Bank is expected to be one of the world’s first among DM’s to hike rates and a rapid normalization of economic activity globally that boosts the oil price higher from here could send EURNOK well south of 10.00, to perhaps 9.50 later this year if oil trades to 75 or higher. NOK 2-year swap rates have risen some 30 bps since the beginning of the year to just shy of 90 bps.

Bank of Japan want to have and eat some cake
The Bank of Japan is in an increasingly awkward position as global yields rise – somewhat similar to the case for Europe. The rise in yields recently pulled the 10-year JGB to 18 bps, slightly above its highest levels since implementing a yield-curve-control (YCC) policy back in 2016. Let’s recall the reason that the BoJ originally implemented that YCC policy: it was an effort to ensure that long yields didn’t go to low – not too high, the opposite concern the bank has now. According to a Bloomberg article discussing those in the know on the Bank of Japan policy review, the bank is hopeful that it can have some cake and perhaps eat a little bit of it too by somehow engineering more dynamism in bond trading at the longer tend while ensuring that yield moves will have to remain constricted. Good luck. The one thing for certain is that the JPY has been supremely weak and getting weaker on the commodity reflation and rising global yields focus and the Bank’s final announcement on March 19 could have major implications if the bank decides to keep yields capped (and yields elsewhere then resume their rise). Mixed signals from Governor Kuroda and Deputy Governor Amamiya have rattled longer maturity JGBs – the bank needs to send a clearer message.

Upcoming Economic Calendar Highlights (all times GMT)

• 1245 – ECB Meeting
• 1330 - ECB President Lagarde Press Conference
• 1330 – US Weekly Initial Jobless Claims and Continuing Claims
• 1830 – Canada Bank of Canada’s Schembri to speak