Chief Macro Strategist
Summary: Currencies seem very passive to developments across other markets here, and the market providing the most interesting forcing is the safe haven bonds, with JGBs registering another big sell-off overnight and the US 10-year benchmark approaching big levels. How long will EM in particular but risk appetite in general be able to remain complacent in the face of rising yields?
Markets remain in a complacent mood and currencies seem rather passive and merely reactive to what is going on elsewhere, with the minor exception of sterling (more below). The market that is providing the most driving force here is the safe haven bond market, where yields have been on a tear higher, particularly out in Japan, where the 10-year JGB yield nearly managed to reach 0% overnight. There is something big afoot in global long bond yields and at some level this has to begin working its way through the equity market and risky assets, where a good deal of the recent runup has been built on the stimulus of lower rates and the implications for multiples more than on prospects for a global growth rebound. We had a great discussion on this morning’s Market Call podcast on the rise in yields and high levels of market complacency.
Besides keeping an eye on yields – especially with US markets fully back online today – and outside of the specific stories mentioned in the G-10 rundown below, it is a busy week for US President Trump, who will be out speaking today before the New York Economic Club. The market will be highly reactive during this speech to any hints of his stance on the ongoing US-China trade negotiations, with any comments on tariffs particularly important. Then tomorrow, the first hearings of the impeachment process will be held in the House, with more to follow on Friday. Millions across the US will be tuning in to these hearings and could affect Trump’s odds in the Senate if some of his base wobbles (doubtful) but certainly also affect the slice of independent voters in next year’s elections, which will weigh heavily on markets all next year because of the starkly different policy direction of a Trump second term versus especially a more progressive Democrat.
Chart: JGB yields keeping up with US counterparts
Here, just want to point out that the sell-off in JGB’s has been so vicious of late that it has largely managed to keep up with the moves in US yields even in nominal terms – something that hasn’t normally been the case (the yield spread for the 10-year benchmarks shown in red in the chart). Of course, with the US banking holiday yesterday, there could be some catchup in store for US yields today, but this is a remarkable development that likely constrains the upside potential for USDJPY if it continues.
The G-10 rundown
USD – the US dollar continues to come out on top as the US yield curve – and curves globally – bear steepen. There is the added uncertainty of the US-China trade deal status that could further boost the USD if Trump comes out hawkish on China today.
EUR – euro may outperform against riskier currencies if complacency yields to more concern, but specific EU-positive catalysts needed to spark an isolated rally.
JPY – USDJPY pushing on resistance once again, but the massive rise in longer Japanese yields keeping the JPY from feeling the pressure one would normally expect as yields rise.
GBP – sterling catching a strong intraday bid yesterday on the news that the Brexit party’s Farage will not run candidates in Tory districts, but that bid has faded a bit as odds are still touch and go on whether Boris Johnson can realize a majority.
CHF – the franc marching to the beat of its own drummer – possibly as the euro has taken over as a preferred funding currency for carry trades, which could mean upside down behavior from historic patterns over risk off events – but too early to tell. In defense of the resilient CHF here – 10-year Swiss government bonds now yield -38 bps vs. -112 bps at the lows!
AUD – the Aussie looking vulnerable and could get very much more so on the perfect storm of a belligerent Trump on trade (not our call, but a risk), and any mishap in the upcoming data – particularly Thursday’s employment data .
CAD – USDCAD progressing higher again as the yield spread at the short end of the curve between US and Canada has moved over 15 basis points in the former’s favour. Technically, looks like one of the better pairs for expressing a strong USD view, particularly if Trump breaks
NZD – a big decision tonight from the RBNZ as the bank’s official cash rate approaches the effective lower bound. A 25-bp move is widely expected, but how the RBNZ spins its decision and guidance will carry more weight. Generally inclined to believe that Orr defaults to the dovish side - but not much more policy room to work with. Yet another signal that CB's handing over the reins to the government?
SEK – EURSEK in limbo here after the obvious 10.60 support area was tested but not broken. In general, stronger risk appetite and positive economic news both at home and abroad are needed to rekindle SEK upside. Riksbank has done its part by signaling the move away from the negative yield era.
NOK – the EURNOK sell-off taken right to the top of the pivotal 10.05-00 zone as we await further developments.
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