US yields drive dollar recovery

The US jobs report was a mixed bag, with payrolls beating impressively for the January cycle at over 300,000, but much of that surprise gain offset by a hefty downward revision of the December data. As well, the participation rate rose to its highest level since 2013, suggesting that some of the long-term unemployed or “discouraged workers” are returning to the workforce.

The meagre average hourly earnings gain of 0.1% failed to add to immediate inflation concerns. The immediate market reaction to the jobs report – a slight dip in US Treasuries – was quickly erased but then fresh selling came on board to drive US yields sharply higher.

This suggests some sort of pivot point in the Treasury market’s mentality, perhaps that is has driven the 'dovish Federal Open Market Committee shift' theme a bit too aggressively of late . We also have another trio of large treasury auctions this week, including for three-, 10- and 30-year US Treasuries from Tuesday through Thursday. 

We argued late last week that both US bonds and US stocks can’t rise at the same time when the Fed is unwinding its balance sheet and the US Treasury is in the midst of an issuance blitz while net foreign purchases are nil or worse. It looks as if Treasuries are the weak link, and eventually, if the weakness continues, confidence in the US equity rally could falter. 

Trading interest to start the week

An update on our thoughts from Friday. One prominent risk this week is that, with the key issue of US-China trade negotiations possibly on hold and China’s markets closed for the week, volatility potentially fizzles. Still, the move on Friday in US Treasuries and key AUD event risks could drive notable developments this week:

EURUSD short: holding now with stop above 1.1500 for a dip well below 1.1400, tactical only.

USDJPY long: long (as Friday closed above 109.25) and looking for a break of 110.00 and perhaps test of 200-day moving average above 111.00. Stops below 109.25.

AUDCAD short: looking to sell half around 0.9500 and more after the Reserve Bank of Australia if the central bank waxes dovish. Stops above 0.9575. 

To this we add:

One-week AUDUSD puts near spot or 20-30 pips below to save on premium. 

We got another very weak Building Approvals number overnight for December. If the RBA comes in dovish tonight, fresh longs may head for the exits and drive another test of the 0.7000 area again.

GBP: put and call spreads our preferred way to trade for Brexit scenarios post March 29 – we will refresh some ideas later today.

Chart: USDJPY

USDJPY has posted the sharpest comeback among USD pairs on the sharp reversal in US yields, and USDJPY is already back challenging the 110.00 resistance area in early trading this week and if that level can’t hold (as resistance levels in other JPY crosses are also under fire or have fallen, for example in EURJPY) we would shift the focus higher to at least the 200-day moving average above 111.00.