Head of FX Strategy
Summary: Markets are expecting strong US jobs numbers today and USDCAD faces an interesting test as well with Canada also reporting jobs data. USDJPY has traded up to the very top of the multi-month range and looks keyed for a break higher, though the US-Japan yield spread will need to widen to support any break higher.
Yesterday brought another day of USD strength and strong risk appetite, with USDJPY this morning trying the very top of the range. As we note in this morning’s Market Call podcast, we have a curious situation with USDJPY relative to US-Japan bond yield spreads, as US treasuries are near the highs of the range, but the US-Japan 10 year yield spread, which has correlated so well with the action in USDJPY in the past, is far from the top of the local range due to the strong surge in yields at the longer end of the Japanese yield curve, which has taken 10-year JGB yields from deeply negative yields last August to about 0% – almost matching the rise in US yields basis point for basis point while USDJPY rose from 105 to now almost 110.. While USDJPY may continue to track higher enthusiasm for risk appetite and higher yields, unless eventual US yield rises begin to outstrip those from Japan, any further rise in USDJPY may be on borrowed time.
Both US and Canada report their December jobs data later today in an environment of a surging US dollar and USDCAD that has pulled back above 1.3000, if not quite reversing the latest price wave lower, which would require perhaps a move to 1.3150+. Bank of Canada governor Poloz was out yesterday with his latest “fireside chat” that failed to generate an overall dovish- or hawkish takeaway, as he both touted the strength in the Canadian labor market and fretted the risk of “froth” in the housing market and conditions that could lead to speculation there, while at the same time expressed longer term concerns on trade. Today’s US-Canada jobs report relative surprises are the next hope for providing a catalyst.
UK Prime Minister Boris Johnson and EU commission president Ursula von der Leyen met yesterday and drew up red lines that look to make for uncomfortable conditions for sterling traders for the balance of this year, as Boris wants less alignment of regulation, no European Court of Justice oversight, and a Canada-style free-trade deal by year end, while von der Leyen stated that without alignment on movement of people, environmental, taxation and state aid, no free deal is possible. A Bloomberg article suggests that this meeting is the “first clash of a negotiation set to be thornier than the fraught talks to secure Britain’s divorce from the bloc”. Let’s hope not for sterling’s sake, but sterling traders are rightfully cautious here.
Chart: USDJPY
USDJPY is classically a pair that is quite sensitive to US data surprises. It is a bit difficult to assess where we are with USDJPY after the distractions served up in recent weeks by the calendar year transition and US-Iran showdown, but the technical situation is clear, USDJPY is pounding on the top of the range amidst expectations for a at least reasonably . Given the positive US data points earlier this week, we may need a quite solid jobs data print to continue to drive risk appetite, yields and USDJPY notably higher here, while a surprisingly weak print (even if we have no reason to look for one) would be the more interesting test of this market’s convictions. Given our discussion of the US-Japan 10-year yield spread above, the ceiling on any break higher may prove rather low unless US yield rises being to strong outpace any rise in JGB yields.
The G-10 rundown
USD – on a strong NFP release today, we assume more of the same from this market, though at some point, US long yields breaking higher will be a gamechanger. In the meantime, this market would seem rather poorly set up for an ugly downside surprise today after so many positive data points and aggressive risk seeking this week.
EUR – the EURUSD struggling below the 1.1125-50 pivot area and keeping the needle pointed lower for a test of the next important level at 1.1000 if the US data cooperates with the USD bulls today.
JPY – as noted above, USDJPY the first major USD pair to trade at the cup of multi-month highs and we look at the US treasury market for confirmation if strong US payrolls today lead to a break higher.
GBP – sterling found support ahead of 1.3000 in GBPUSD, but that pair continues to coil within the range and could see a run on stops below 1.3000 or even below the nominal recent 1.2905 area lows on a fresh surge in the US dollar. EURGBP looks lifeless, suggesting traders are unwilling to take a stand here.
CHF – EURCHF trading heavy, but very constrained ranges and SNB leaning against.
AUD – all has gone quiet and AUD showing little reaction to data after the AiG services survey overnight saw a sharp dip. AUDUSD has reversed the recent rally move, but failing to show renewed momentum so far – and AUD weakening looking overdone in some of the crosses.
CAD – again, a pivotal day and price region for USDCAD as the 1.3000 area is the battleground ahead of jobs data. A move above 1.3150 cements the recent reversal from sub-1.30 levels.
NZD – a decent backup in AUDNZD, which still needs a leg higher to neutralize the recent sell-off.
SEK – the krona perhaps not liking the weak EUR and EURSEK may stay in limbo in the higher zone until we get a stronger policy signal from the EU or Sweden or both.
NOK – the EURNOK move has stalled out – not sure what the market looking for here as risk appetite backdrop looks supportive while crude oil developments only look negative due to the recent geopolitically inspired spike.
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