Global Head of Macro Strategy
Summary: The US dollar found new sellers to kick off the week, renewing the bearish case ahead of a key string of data through this Friday’s January US CPI print. Elsewhere, Japan’s Takaichi now has her strong political mandate and has moved to reassure markets on fiscal stability. Can this JPY comeback find legs?
USD bears retake control. The US dollar outlook was finely balanced early last week after the critical EURUSD pair had reversed all the way back below the pivotal 1.1800 area from its spring the prior week to 1.2100+. Alas, the USD bears survived the challenge and yesterday’s smart EURUSD rally and broad USD sell-off helped revive the USD bear case. Sure, there is plenty of suspense for the remainder of this week with US January Retail Sales up today, the delayed US January employment report up tomorrow and the January CPI data on Friday, but the direction of travel looks clear without major positive shockers.
Helping kick off the USD sell-off yesterday was China discouraging its banks from holding US treasuries at the start of the week. China seems to be signaling that it wants a firm and steady repricing of its currency higher to boost its prestige and to encourage its use in trade transactions and possibly as a store of value. There is enormous room for further CNH strength on the USDCNH chart without challenging any historic levels. China may pursue a sure and steady approach to further declines, but possibly checking the action at some point to discourage excess speculation.
Japan’s election – market buying the fact and more to come? In Japan’s election this weekend, PM Takaichi’s gambit to boost her power paid off handsomely as her party achieved a super-majority of two-thirds in the lower house, its strongest standing ever. This was supposedly the result that should have weakened the JPY the most and spooked the JGB market as it reward Takaichi with the strongest of mandates. Alas, she and her team are well aware of the risks and are moving to reassure markets. On Tuesday, Takaichi said she would look to build trust with markets and would not grow JGB issuance to fund sales tax cuts. The longest JGB’s have found strong buying interest since the election Sunday, with the 30-year and especially 40-year benchmarks plunging overnight. The latter hit is lowest yield in a month. Being bullish the JPY has been the widow-maker trade of the last year, so we won’t try to call a strong turn here, but the backdrop of JGB stability looks supportive and at worst, Japanese officialdom likely wants to discourage new lows. USDJPY still has a lot of work to do to look bearish – staring with a move below that 152.10 low from two weeks ago, followed by a break below the 150.00.
Chart focus: USDJPY
The back-up in USDJPY found resistance in the wake of the Japanese election and as PM Takaichi was out attempting to reassure markets overnight. While the longest JGB’s have found strong support this week, the JPY comeback still looks a bit feeble- with a lot more work to do before USDJPY joins the broader bearish USD story. The first key would be a takeout of the 152.10 pivot local pivot, but 150.00 is the bigger psychological level to the downside.
Other notes:
Sterling volatile on politics, Alphabet bonds. Sterling took a turn higher last week on a surprisingly dovish Bank of England turn as another rate cut was only avoided by one vote and Bailey waxed dovish on the guidance, but also as the market fears that Starmer’s days at 10 Downing Street may be numbered, with his replacement possibly further to the left. Still, key Labour figures voiced support for the embattled PM. Yesterday’s sterling bounceback may have been triggered in part on Google-parent Alphabet’s plans to issue 100-year and other bonds in sterling, a new “risk free” asset in sterling with incredible duration.
Hot Norway CPI figure supports NOK. The NOK rally of late found fresh support from Norway’s January CPI data this morning, which came in very hot at +0.3% MoM and 3.4% YoY for the “underlying” core data, versus expectations for -0.1%/3.0%. NOKSEK has posted a strong reversal and is testing its 200-day moving average – suggesting a massive double-bottom is now in place or that pair.
FX Board of G10 and CNH trend evolution and strength.
Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board.
USD weakness is back as a broader theme now – though plenty of drama as we await whether USDJPY can participate. The relative strength of the CNH compared to the USD is a very loud signal from Chinese officialdom – in most past regimes, the CNH passively tracks USD direction. AUD strength is remarkably stretched.
Table: NEW FX Board Trend Scoreboard for individual pairs. I tried to call the fall of the incredibly old (241 days and counting) EURJPY bull trend last week, even if it might fail to trigger a sustained new downtrend (often major new trends require a false signal or two before becoming entrenched). Alas, it hung in there and is still in place. I won’t try to call the end to this trend again, but it can’t and won’t last forever. Elsewhere, the EURGBP reversal is likely about to trigger a new up-trend signal, with a clear overhead line of resistance just below 0.8750. Note the pronounced strength in the USDCNH downtrend.
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Global Head of Macro Strategy