FX Update: EURJPY overextended if EU outlook sours again.
Head of FX Strategy
Summary: The rise in yields after a weak T-bond auction yesterday has largely been erased in pre-New York trading today as risk sentiment soured in Europe, possibly on COVID-19 news flow combined with weak employment data. The euro is under modest pressure and EURJPY looks a bit over-extended to the upside if we are set for a bout of concern on the EU growth outlook.
Yesterday saw bond yields edging higher still after a weak US 30-year T-bond auction that saw the lowest bid-to-cover ratio (2.14) since 2019, but the move lower from the closing price on Wednesday was already almost entirely erased by late morning in Europe this morning, so volatility around the move has been fairly muted – USDJPY had a go at 107.00 but has eased back lower and most other FX pairs are boxed into narrow trading ranges. One exception to that in JPY crosses is EURJPY, where we wonder if the pair is overextended to the upside, given fresh COVID-19 breakout fears across much of Europe and the very weak Q2 employment numbers, which registered a -2.9% drop year-on-year, the worst ever, despite EU countries’ furlough and other programmes aimed at keeping workers nominally employed.
The Aussie could hardly muster a reaction overnight to RBA Governor Lowe indicating to a parliamentary committee that the latest outbreak is hampering the recovery and that he would like for the Aussie to be lower. Clearly, the RBA will have to up its game if it wans to keep a lid on the Aussie when iron ore prices are within 10% of their highest price stretching back to 2013 (when the CNY was some 10% stronger, by the way). The market is rightfully taking the RBNZ at its word on currency as it has a history of intervention and touted its “active preparation” for a negative rate policy. This has helped keep AUDNZD well clear of the recent 1.0865 break that could be opening up for a major move higher to 1.12-1.13. New Zealand’s renewed struggle with a COVID-19 outbreak after no new cases for months is another factor weighing on the NZD.
As for US yields, we continue to watch closely as a critical market input, but recognize that a challenge of perhaps 100 basis points in the US 10-year yield benchmark (currently 70 bps), for example, may be needed to set the market on edge.
US weekly claims data was rather positive yesterday, with the initial claims registering a chunky >300k drop to 865k and the continuing claims posting a 600k drop to below 15.5M. Today we have a look at US Retail Sales data, which gets increasingly interesting from here with the attenuation of the generosity of the CARES act payments after the end of July. The stimulus thrown at the economy during the lockdown was so generous that Retail Sales almost managed to bounce back to a new all-time high in June despite a cratering economy in Q2.
Action in EM is a bit more engaging than what we are seeing in G-10 currencies, as USDTRY edges above the highest close for the cycle and the lira has now devalued some 5% beyond the perceived 7.00 level in USDTRY. The Turkish central bank will meet to set rates next Thursday and the government there has already pulled back from some of its credit stimulus excesses in recognition of the curency’s plight. Much more – and likely a series of rate hikes so despised by the country’s leadership – is needed to stabilize the currency. Elsewhere in EM, MXN is actually stronger against the USD after the expected 50-bps rate cut to 4.50% yesterday. The central bank’s statement positioned any further cuts on developments in inflation, which has rebounded back above 3.0%, so we’re likely close to or have just seen the last cut for the cycle. For Russia and the ruble (RUB), meanwhile, we are eyeing the situation in Belarus, where there are widespread protests against the election results – also with the participation of factory workers. Russian involvement if the Belarusian government comes under pressure could bring with it the risk of sanctions and a therewith a threat to the ruble.
CAD and NOK have moved rather aggressively higher over the last week, clearly in part on crude oil prices trading near recent highs and perhaps as well on hopes that an imminent vaccine will encourage a demand rebound for energy that could meet some degree of supply shock in the months ahead after some production and especially investment has been shut down due to the collapse in prices over the COVID-19 crisis. USDCAD took out the major 1.3350-00 area on the way down, a bearish development. The bears are in good shape with a bit of fresh momentum over the prior two sessions helping avoid a “triple divergence”, but the outlook lower could hinge on new highs in oil prices and equities that haven’t been forthcoming today – quite the contrary. Stay tuned – the bulls still need a strong comeback above 1.3300-50 and then some to signal any trend reversal potential, while bears will continue to eye the next major hurdle at 1.3000 if risk sentiment and oil prices avoid any sizable consolidation.
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.