FX Update: USDJPY reversal attempt ahead of US treasury auctions
Head of FX Strategy
Summary: The US dollar has been under broadening pressure lately, but USDJPY has rebounded sharply ahead of a series of large US treasury auctions this week and rebounding US long yields. Elsewhere, we wonder when resistance will arrive, if ever, for this run-up in US megacap equities and risk sentiment that has helped keep the USD on its back foot.
The most interesting change of recent behavior we note today is a sharp rise in USDJPY back above 107.00, arguably an incipient sign of a bullish reversal even if a bigger move is needed to more firmly reject the recent sell-off wave. More on USDJPY below. A likely key driver for that pair will be this week’s US treasury auctions of unprecedented size for the maturities on offer, including a $42 billion auction of 3-year notes today, a $32 billion auction of 10-year notes tomorrow and a $22 billion auction of 30-year T-bonds on Wednesday. Yields rose on Friday, but the range in the longer yields has been extremely tight. The auction outcomes and their interpretation could be important for the US dollar this week, which has fallen to interesting support areas in pairs like AUDUSD and USDCAD.
A strong auction results would seem to point to strong ongoing demand for safe haven debt and is USD positive, all other things equal (I.e., assuming other markets pay attention, which they may not if yields merely remain orderly and rangebound). A very weak result at these auctions would be a bit more interesting as it could suggest less international appetite for US debt. Sure, the Fed will keep the situation and yields under control with an eventual move to yield-curve-control in all likelihood, but any sense that the world is having a hard time absorbing the torrent of approximately $3 trillion in US treasury issuance over the next few months would be an interesting test for the USD.
Wrapping up Friday’s US and Canadian jobs reports, the headlines may hint at “not as bad as expected” but we find hardly any reason for cheer from these terrible numbers. In the Canadian case, the “expectations” seemed wildly pessimistic at -4 million, which population-adjusted would be the equivalent of about -40 million jobs lost in the US. As it was, the more than 2M jobs lost in Canada is bad enough and approximately at the same clip as the losses in the US. The market continues to ignore current data for the moment, no matter how bad, and it may not be until the June data cycle or later that we start to draw longer term conclusions on the shape of the recovery. As for the US average hourly earnings growth rising to 7.9% in April, this is clearly also misleading, as the new average is based on higher paying salaried positions that are left as it was a vast swath of lower-paying service jobs that were the first to go.
The week ahead looks important for the USD for the treasury auction angle, but may also have plenty of opportunity for inputs from the Fed, with two FOMC voters out speaking tomorrow (the very dovish and very concerned Kashkari and the Philadelphia Fed’s Harker) and Chair Powell himself speaking on Wednesday. Given the long wait for drawing conclusions on the shape of the recovery we note above, another key potential issue will be any new rise in US-China tensions, and any a-ha moments on the US election if polls begin to show a more persistent tilt against Trump’s fortunes (with those two issues possibly somewhat intertwined, as many GOP strategists favour an explicit anti-China strategy.)
USDJPY has executed something of an about face against the US dollar after the pair slid to a recent low, however a low that coincided with relative JPY weakness elsewhere and no signs of distress in the options market (USDJPY risk reversal showing an persistent, relatively rapid evaporation of premiums for puts). This move above 107.00 today looks tactically interesting, but arguably we need a bigger move above 108.00 and the 200-day moving average to excite more interesting in upside potential. We also watch US yields this week over the incoming auctions noted above and broader risk sentiment. Strong auctions resulting in sharply lower US yields and weak risk appetite could keep the pair rangebound or slow any upside potential as the JPY and the USD would likely prove safe haven currencies in those conditions.
The G-10 rundown
USD – turning a bit stronger after weakness against the smaller currencies this morning – this week feels like an important test for whether the USD maintains support.
EUR – very pressing medium- and longer term questions on EU existential concerns as new fronts open up between the German Constitutional court and EU institutions, but pricing this for the short term difficult. Watching EURJPY resistance around 116.00 and for a possible EURUSD breakdown if the price moves below 1.0750.
JPY – US yields an important factor here and risk reversals continue to remove the premium for USDJPY puts. But still suspect JPY in broader terms would firm on any new downdraft in global risk sentiment and thus carry trades.
GBP – tensions around the post-Brexit transition period terms of trade are creeping back into the headlines, and the next few weeks should produce a further sense of where things are headed there, though still somewhat early days with Covid19 fallout distractions as far as the eye can see. EURGBP seems very unwilling to break down for now.
CHF – the latest sight deposit data showing SNB still intervening, but at a slower pace – looks like 1.0500 in EURCHF is the line in the sand for now.
AUD – AUDUSD had a go at the 0.6570 resistance overnight and has stumbled rather quickly toward session lows as of this writing – momentum beginning to roll over if we see a weak close today – watching US-China tension risks on top of correlation with general risk sentiment.
CAD – That 1.3850 twice-touched area in USDCAD an important support for bulls keeping the focus higher, with weeks of rangebound price action meaning we need a very large impulse move and rally above 1.4250 to excite interest in further upside potential.
NZD – easy to argue for long term AUDNZD upside on the RBNZ’s more aggressive style and the secular rise in Australia’s current account surplus, but US-China tension headline risk could drive a sudden setback at any moment. Options, anyone?
SEK – EURSEK appears to have completely a major topping move by having retraced as far as 10.57 from the top over 11.20 (the highest daily close) , but plenty of room for a throwback rally if risk sentiment ever consolidates
NOK – EURNOK still hasn’t taken out the 11.00 area and arguably needs a longer term crude oil price break-up to get the ball rolling.
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.