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.