Chief Macro Strategist
Summary: The USD rise accelerated steeply yesterday as Fed Chair Powell largely shrugged off the move higher in US treasury yields. And USDJPY went nearly vertical overnight on intervention against rising yields at the long end of the yield curve. The US dollar is now strong across the board and the countdown to the next Fed intervention is underway, but the USD wrecking ball will likely do more damage first.
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.
Chart: USDJPY
USDJPY upside action accelerated again overnight as BoJ Governor Kuroda rejected the notion that the Japanese yield curve should be allowed to lift, which smashed long JGB yields back lower. To me, the pace of recent gains in USDJPY is getting to be too much too fast and will inevitably hit a brick wall at some point down the road – either once the Fed steps in with something to counteract the move in yields (a longer term inevitability), or, perhaps more likely in the near term, when the move higher simply exhausts itself of its own accord. A reversal in all JPY crosses would prove most climactic if asset markets tank badly and finally trigger a bid into bonds. But for now, traders shouldn’t dare step in front of an onrushing train and should consider JPY call option strategies for any contrarian trading notions to the present trend – with a measure of patience and building a position over multiple sessions. Next big round level is 110 here.
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