The US treasury auction of 10-year notes failed to generate a decisive move in US long yields, from which USDJPY seems to be taking its cue at the moment. The auction showed rather weak demand, reversing the rally of the last two days, though that reversal in turn lost some steam later in the day and overnight, leaving us none the wiser on the direction for long US yields.
Today’s auction of the Treasury’s longest duration bonds – the 30-year T-bond – is the next chance to spark movement. At times in recent months, bigger moves in the treasury market seem to swing into gear before those for equity markets, hence our intense interest in the direction for long US yields here. A sell-off in US treasuries and rise in US equities, for example, likely keeps USDJPY and EURUSD as the more interesting ways to express USD strength, while risk off and lower US yields could see upside USD/EM trades in the spotlight.
Overnight, the kiwi was blasted for steep losses on a very weak Q4 jobs report. The employment growth disappointed at a 2.3% YoY rate versus +2.6% expected and most recent QoQ figure dipping to a paltry +0.1% vs. +0.3%. Even worse was the rise in the headline unemployment rate to 4.3% vs. an upwardly revised 4.0% in Q3 and compounding this, the participation rate dropped 0.1% as well. This is all lagging data, but the drop in the front end of the NZ yield curve is justified and the kiwi may have topped for the cycle here.
Trading interest today
• Lightening up on AUDUSD short exposure – taking off half below 0.7100 – bringing stops below 0.7200 and looking for 0.7000 for remainder.
• Maintaining EURUSD downside exposure for minimum 1.1300 but looking to retain exposure for downside break
• Maintaining downside interest in EURJPY short with stop above 125.70
• Maintaining AUDCAD shorts with stops above 0.9485
NZD slammed for steep losses overnight on the weak jobs report, catching fresh AUDNZD shorts from the previous day’s AUD rout off guard and seeing a pronounced reversal in NZDUSD. This sell-off looks like a rally neutraliser, resetting the chart to neutral at best and arguably pointing to a test of the early 2019 lows.
The 200-day moving average is the current focus but wasn’t much of a barrier in recent experience. Further out, we’ll need a sense of whether risk off drives a deeper dive to the cycle lows below 0.6500 or if a stronger than expected US economy first sees the market reassessing the US rate outlook, resulting in the same. As for New Zealand, the tumble in yields at the front end of the curve has been profound, and yet we have yet to actually price the first Reserve Bank of New Zealand rate cut for this year, although 2-year rates have fallen below the current 1.75% policy rate to 1.63%.