FX Update: Move in yields – and FX – may be overdone here

Yesterday saw a fairly large intraday reversal in this recent spike in bond prices and at some point, a parabolic move like this has to reverse. If it does, I would suggest that some of the largest moves in response to such a reversal might be found within the G10 currencies, where the moves have been extreme and on a scale rarely seen before. A brief rundown of the current status of the G10 currencies if bonds suffer a climax reversal here or soon:

• Overdone strength: CHF and JPY
• Overdone weakness: NOK, SEK, AUD, CAD
• Somewhere in between: EUR and USD

We hesitate to add NZD to the “overdone weakness” category due to the recent dovish blast from the RBNZ’s Orr and company, as the RBNZ is a bit fresh in getting more  determinedly on the devaluation warpath. GBP is in its own category as well as the weakness there is down to a unique driver, Brexit.

In EM, the curious TRY rally through all of this begs the question of whether TRY strength was a product of manipulation or a symptom of the consensus that  TRY is the most troubled of the more liquid EM’s and it has been a no-brainer to short the currency versus the rest of the EM space, which has mostly struggled badly recently (RUB, MXN, ZAR, etc.)

Chart: SEKJPY monthly
Note that SEKJPY is approaching all-time lows as it slips towards the 11.00 level. This is one of the many trades within the G10 that has pushed to remarkable extremes – especially the CHF- and JPY- crosses. This is not to say that a reversal will happen now, but the long-term present starkly asymmetric risk-reward and any immediate reversal in the bond rally could see a strong reversal in these trades as well.

Chart: EURUSD
Not as stretched within the G10 space as other pairs, but still interesting, EURUSD is trying to turn higher here on the logic that the Fed will be forced to ZIPR and QE again while the ECB has less policy room to work with. The pair has managed a relatively shallow consolidation over the last few trading days. We will continue to focus higher as long as the pair stays north of 1.1100, though ideally the consolidation lows back to 1.1150 are already in.

Given the recent spike in bond and equity markets since the July 31 FOMC meeting and the tit-for-tat of Trump tariffs and China allowing USDCNY to poke above 7.00, risk sentiment and the status and sustainability of all of these recent moves is the chief driver here. Cross market correlations are a particular danger that can enhance both losses and profits in a traders’ portfolio of positions. In other words, be careful out there – this feels like a very correlated, headline-prone, nervous market.

Upcoming Economic Calendar Highlights (all times GMT)

• 0800 – Norway Norges Bank Q2 Lending Survey
• 1230 – Canada Jun. New Housing Price Index
• 1230 – US Weekly Initial Jobless Claims
• 2330 – Australia RBA’s Lowe in semi-annual testimony to Parliamentary committee.
• 2350 – Japan Q2 GDP estimate
• 0130 – China Jul. CPI
• 0130 – Australia RBA Statement on Monetary Policy