FX Update: A nervous dance from here FX Update: A nervous dance from here FX Update: A nervous dance from here

FX Update: A nervous dance from here

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  With no further follow-on moves after the multi-sigma volatility acceleration in US treasuries last week, the market is trying to pick up the pieces and get back to where it was before that move, but there are hurdles to any quick return to normalcy. And a nervous dance is likely now between risk sentiment and real- and nominal bond yields in coming days and weeks as the market tries to feel out whether the central bank put is still there and its strike price.


FX Trading focus: a nervous dance after treasury trauma
The “treasury trauma” phrase is stolen from the headline of today’s Saxo Market Call podcast, in which we discussed where markets are looking for the next catalyst after the spike in US treasury yields administered a shock to markets, if one that has rapidly faded as there was no follow-on signs of market dysfunction. Markets are nervously trying to creep back to where they were before last week’s volatility, but I doubt if a full return is possible until the future of fiscal and central bank policy is more firmly established, particularly from the Fed.

Sure, perhaps yields can rise again and not necessarily derail sentiment, as long as the rise is very orderly? Is that even possible from these levels? Hard to discern, but as long as moves in the market are orderly, the Fed may avoid sending any signals for now, even if the Fed’s Brainard did take the trouble to note recent moves in the treasury market: “I am paying close attention to market developments…Some of those moves last week, and the speed of the moves, caught my eye”.

Looking at the big picture and the centrality of US treasuries to the entire situation, a Bloomberg article discusses the “$21 trillion Treasuries Mystery” that is “bedeviling markets”. At the center of the problem is US banks’ willingness and ability to hold every large amounts of treasuries, an issue that will only become more pressing late this year and beyond, when the overwhelming US treasury issuance that far exceeds the Fed’s current purchase pace. Let’s not forget that the proximate trigger of the treasury market volatility last week was weak demand at a 7-year Treasury auction. Also at issue is whether the Fed will extend the suspension of capital requirement rules, a measure it took last year to avoid financial system chaos. This rule suspension is set to expire at the end of this month if not extended, and Democratic Senators Warren and Brown have penned a letter asking the Fed and other agencies not to extend the rules. This issue must be solved or we will inevitably bump into more chaotic events before a technical solution or new Fed measures are inevitably enacted to enable the fiscal side to operate unimpeded by anything save for inflation (i.e., MMT and fiscal dominance). Already next week, the next test arrives in the form of 10-year US T-note and 30-year T-bond auctions.

So, given the above issue, and the fact that we have hit the 1.50% plus area in the US 10-year Treasury yield benchmark, that markets will engage in a nervous dance to figure out whether this issue will return before a solution is found, or if yields can progress higher again in orderly fashion without sending risk assets into a tailspin. The latter is likely only possible if inflation expectations rise persistently (and faster than long bond yields, i.e., real rates go lower.) It could prove a very nervous dance and we may have reached a post-pandemic outbreak inflection point that brings a lot more two-way volatility in asset markets. USD bears may have to sit on their hands until it becomes clear that the Fed is sitting more forcefully on the US treasury market and/or US real yields are hitting the skids more quickly than elsewhere in the world.

Another small news item:  today, Bloomberg sources at the ECB say that there is no need for “drastic action” at the moment to tamp down yields, despite a couple of recent prominent comments suggesting discomfort with recent yield rises. The Euro jumped a bit briefly on the news and EU sovereigns sold off quite sharply – a move worth about two basis points of drama in the German 10-year yield, which is still below -30 basis points after peaking out around -20 bps on Friday before the ECB’s Schnabel’s noting concern.

Sterling traders: watch for Chancellor Sunak’s spring Budget Statement today – a lot has been leaked ahead of time and the theme seems to be – max gas for now on handouts/furloughs/income support  and only hint at austerity to come much  further down the road (corporate tax hikes etc.).

Chart: AUDUSD and US Treasuries
This chart shows that the AUDUSD rally was entirely untroubled by steadily rising US and global yields (showing here in the declining price for the US 10-year Treasury Note future in blue) for quite some time prior to last week. But then came the sudden volatility last Thursday in the US treasury market, particularly as it involved a multi-sigma expansion in volatility for 2-year T-notes as well as the belly of the yield curve out to 7-year T-notes on signs of market dysfunction. This unsettled everything, triggering an across the board deleveraging that heavily impacted the likes of AUDUSD as the Aussie was one of the strongest currencies globally on the reflation theme as a commodity currency. Since the shock, AUDUSD and US t-note futures have become more positively correlated. We can only go back to the old lack of correlation if US yields can rise slowly without triggering further train wrecks. AUDUSD needs to re-achieve 0.7900 on a daily close to signal any neutralization of this sell-off or dump back below 0.7700 to send a directional signal lower again.

Source: Bloomberg

Upcoming Economic Calendar Highlight (all times GMT)

  • 1230 – UK Chancellor Sunak Spring Budget announcement
  • 1300 – ECB’s Panetta to speak
  • 1315 – US Feb. ADP Employment Change
  • 1500 – US Feb. ISM Services
  • 1500 – ECB’s Guindos to speak
  • 1530 – US Weekly DoE Crude Oil and Product Inventories
  • 1600 – UK BoE’s Tenreyro to Speak on Negative Interest Rates
  • 1700 – US Fed’s Bostic (Voter) to speak
  • 1800 – US Fed’s Evans (Voter) to speak
  • 1900 – US Fed Beige Book
  • 1930 – ECB's Schnabel to speak
  • 2015 – New Zealand RBNZ Governor Orr to speak
  • 0030 – Australia Jan. Trade Balance
  • 0325 – Australia RBA’s Kearns to speak
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.