Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Global Head of Macro Strategy
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JPY on the rise again. What is the potential?
John J. Hardy
Global Head of Macro Strategy
Summary: The JPY has rallied sharply as the key US 10-year treasury benchmark dropped well below a key level yesterday and on hawkish BoJ talk overnight. Elsewhere, the Swedish krone has sprung to life.
Drop in long US yields drives JPY rally
US long yields were in focus yesterday as the US treasury released it latest quarterly refunding announcement. There was considerable trepidation ahead of this report in the event the treasury was set to remove guidance on the size of the coming Treasury auctions given the magnitude of US fiscal deficits. Longer maturity treasury auctions were of particular concern. But despite US Treasury Secretary Bessent’s criticism of his predecessor Janet Yellen’s use of large bill issuance (1-year and shorter maturity paper) to cover widening budget deficits, the Treasury made clear in the announcement yesterday that it will maintain course “for at least the next several quarters” with unchanged auction sizes for standard coupon and floating-rate treasury notes, and therefore absorbing additional borrowing needs with changes to bill auctions and other cash management measures. One change of note was the announcement that the Treasury will expand issuance of 5-year and 10-year TIPS (inflation-protected treasuries)– a reflection perhaps of the demand for such debt on long-term inflation concerns. This supported the drop in US yields as the 10-year treasury yield benchmark firmly took out the key 4.50% level. In FX, this saw a coincident drop in JPY crosses across the board, most heavily in USDJPY yesterday but spreading more firmly to JPY crosses overnight as the USD firmed broadly.
In an interview late yesterday with a TV channel, Treasury Secretary Bessent said that the Trump administration would like to see lower 10-year yields, not necessarily more cuts from the Fed. Delivering lower energy prices and lower deficits. Fiscal austerity will lead to lower US growth and combined with lower inflation would likely lead to Fed cuts anyway if successful, by the way, which would eventually prove a driver of USD weakness. But the tariff/trade issue and the USD upside risks from it are far from settled for now.
Chart: EURJPY
While USDJPY is always the primary focus for JPY traders and that pair is poised near its 100-day and 200-day moving averages in the 152.75 area, some of the JPY crosses are a bit more interesting technically, including EURJPY below. With the ECB possibly needing to step up its pace of rate cuts this year and the Bank of Japan set to deliver further tightening, we have an interesting story developing (although developments in longer yields tend to operate more forcefully on the JPY). Technically, the key trend line is quite well defined and we arguably have a large head-and-shoulder formation. A series of flat-line levels are not far apart either from the December low of 156.18 to the spike low in early August of last year on the great carry-trade unwind at 154.42.
Pep in the krone’s step as EURSEK breaks down
The Swedish krone has sprung to life over the last couple of days, a development that is hard to associate with any developments out of Sweden save for today’s far hotter than expected January CPI figures. But the move began on Tuesday and if we look at the news flow, it could be that the SEK strength is on the general relief that Trump is set to use tariffs as a negotiating tool, not a massive revenue generator for the US government. This is EU-positive if so, and the Swedish economy is leveraged to the outlook of the European economy. With an incoming German government set to open up the fiscal taps to at least some degree and Europe generally needing to stimulate domestic demand if its export outlook is challenged and we have a potentially quite potent positive story for SEK, which is extremely weak to begin with. In short, this SEK move could have legs. Watching how the pair behaves on a possible test of the major low near 11.25 from last September.
Bank of England incoming
Today’s Bank of England is up within hours of the release of this update, so anything said here will be quickly out of date, but my assumption is that the Bank of England will deliver a dovish cut and will see the market price in a further 25 basis point cut .n March (only about 20-25% priced by market ahead of the meeting). The more interesting question is the market’s reactivity here and whether the delivery of more BoE cuts than currently priced for the balance of this year will weigh much on sterling.
On the concerns of a trade war breaking out with Europe after this past weekend, EURGBP dropped all the way back to the 0.8300 area as Europe is more exposed on trade than the twin-deficit UK, which has not been a focus of Trump. Bringing some further relief for sterling is the drop in global yields that have eased fears that the UK is set to get caught up in a debt spiral (the chief driver of the sterling weakening episode in January). Regardless, the 1.2500-50 zone in GBPUSD is critical resistance after yesterday’s reversal, and for EURGBP to revive the upside view (my default expectation eventually if we get the dovish lean from the BoE today), the pair needs to rally back up into the 0.8400+ area in a hurry.
Given the BoE versus BoJ divergence risks here, GBPJPY may prove a popular expression for JPY strength and the technical setup there is quite interesting on a break below the 2025 low of 189.33 and then the early December low of 188.09.
Table: FX Board of G10 and CNH trend evolution and strength.
Note: the FX Board trend indicators are only on a relative scale and are volatility adjusted. Readings below an absolute value of 2 are fairly weak, while a reading above 3 is quite strong and above 6 very strong.
JPY and SEK strength are the stand-outs in the trending category outside of the strength in precious metals, with the Euro the weakling of the lot.
Table: FX Board Trend Scoreboard for individual pairs.
The recent volatility has disrupted the longer term trends almost everywhere – watching for new patterns to emerge and whether NOK can join SEK in trending against the Euro and possibly sterling in a durable way, as well as whether the JPY rally will have legs this time I key crosses.
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