FX Update: Odd race to bottom for NZD, JPY and USD

The turmoil across markets earlier this week – most likely triggered by a steep back-up in US yields across the curve and enhanced by a train wreck of position unwinding in the overbought precious metals market – showed that FX remains a laggard in responding to market stimuli, extending the evidence of the same since the post-March and April panic phase of the COVID-19 crisis. The strong rise in US yields was a chance for the US dollar to shine, but it largely failed to do so, merely backing up slightly before over again yesterday and into today as risk appetite staged a comeback and the slide in bonds and especially precious metals prices yielded to a bounce. Yesterday’s monster $38 billion 10-year treasury auction went off smoothly and is followed later today by a large 30-year auction.

Elsewhere, the rise in yields has proven more decisive for the Japanese yen, as USDJPY has now fully rejected the recent breakdown attempt (only placing it back in the range limbo higher and needing some heavy lifting before we can call this anything but a neutralization of downside threat). With the euro beating a path higher again this morning, this has EURJPY on a rocket launch trajectory and at its highest levels since early 2019, a move I find a bit mystifying. EURUSD for its part is launching a fresh bid at the cycle highs as we discuss in the chart comment below.

On the strong side, we find NOK leading the G-10 pack higher, followed by CAD, both of which are soaring despite only modest support from a bounce-back in oil prices (though many may see vaccine hopes feeding most quickly into oil prices on the assumption that a supply shock could await if demand normalizes more quickly than expected.)

Not sure where to look for a catalyst or fresh developments, but the USD bears are having a hard time finding fresh momentum, EURUSD looks crowded, and NZD downside interesting on the AUDNZD break higher and the RBNZ on the warpath against its own currency.

Chart: EURUSD
The strength in the euro has broadened notably – particularly in EURJPY, but EURUSD deserves focus on its fourth attempt today back toward the key 1.1900+ area highs. The latest currency futures positioning data shows speculative longs at a record +181k contracts, a very extended position. Sometimes, extremes in positioning coincide with extremes in price, but there have also been examples in which the trend continues with narrower participation – this was most notable in the July 2012 low in EURUSD, where positioning had contracted notably from the June extremes even as EURUSD trended to new local lows ahead of Draghi’s famous “whatever it takes”. The largest net positions in history have been on the short side – as large as -227k contracts. Technically, the 1.1700 area has corralled the sell-offs effectively on two occasions and that leaves us sandwiched between 1.1900 and 1.1700 awaiting developments, with the ultimate trend test in the 1.1500 area lower if 1.1615 fails. Fundamentally, we are struggling with the immediate catalyst for further USD weakness to extend here without some more notable catalyst.