ECB to beat Fed to taper? RBA dovish twist sets up AUD for new downside.

FX Trading focus: ECB to beat Fed to the punch. Rising yields a critical focus. RBA manages dovish twist.

EU sovereign bonds are under significant pressure today, adding to the weakness that was already under way since the end of August. A recent spate of more hawkish ECB jawboning and the spreading consensus that the ECB will have to adjust its staff projections and likely announce a tapering of asset purchases at the meeting this week (something that was really baked into the guidance anyway with the promises of “front-loading” purchases earlier this year) is driving the novel idea that the ECB could actually beat the Fed to the punch in announcing a taper of asset purchases. A sufficiently clear announcement and reading-between-the-lines in the new ECB projections for inflation could see a solid extension higher for the euro, even if Lagarde tries to soften the blow at the press conference.

The recent move higher in EU yields is far more directionally pronounced than the slight rise in US treasury yields, which have yet to break local range highs, although the consequences of, for example, the US 10-year treasury yield breaking above the clearly etched 1.38% level on the chart (double-top) could prove a crucial trigger across markets, with pressure on EU bonds helping in turn the notable pressure on US treasuries since the Friday lows. Any chance for a pickup in volatility this week is likely to come from sovereign reaction to the ECB meeting up on Thursday and possibly the 10-year US treasury auction already up tomorrow. As noted in this morning’s Quick Take as wel

And in the background, we also have the upcoming German election driving a new attitude on the potential for a more profound policy shift in Europe. A centre-left outcome is a gamechanger, we would argue for fiscal stimulus and a new direction commitment from Germany to the EU. A new poll today from Forsa for the German RTL television station shows the CDU/CSU coalition polling sub-20% for the first time, with the SPD at 25%.

Chart: USDJPY
We’ve covered EURUSD too much of late, even if the stakes are still high this week for EURUSD after the recent push on the 1.1909 resistance level and as we await the ECB and whether the US treasury yield level mentioned above falls. On that note, USDJPY could prove even more sensitive than EURUSD to new impulsive action from both EU sovereign yields and US treasuries, also as the price action in the pair has become impossibly compressed. As ever, if US yields are on the move, FX trader should consider the. And it’s worth noting that the JPY has failed to push back against the US dollar much since the April consolidation when US yields dropped sharply. Since then, lower yields have not helped the JPY here, while higher yields may drive more upside. Given that we will have an election soon in Japan, one that is anticipated to bring new stimulus and possibly new BoJ stimulus to cover it, a shift higher in US yields could drive another move higher here as well, so we’ll watch the 111.64 top if the 110.80 pivot high falls in coming days on a breakout higher in US yields.