FX Update: JPY twisting in the breeze on fresh US yield rise.

Forex 4 minutes to read
John Hardy

Head of FX Strategy

Summary:  The US dollar continues its rise and its strength could deepen and broaden if new highs in US Treasury yields at most key points along the curve unsettle risk sentiment in the days ahead. USDJPY is certainly one yield-sensitive pair to watch as the Japanese financial year draws to a close tomorrow, but EM and commodity currencies could join the rush lower versus the mighty greenback.


FX Trading focus: Fresh highs for most points on the US yield curve support USD, smash JPY

There seemed no specific trigger as US yields rose to their highest level for the cycle into this morning from all points between 5- and 10-years on the US treasury yield curve, helping to drive the ongoing resurgence in the US dollar, particularly against the lowest yielders and those countries whose bond yields are less responsive to the rise in US yields.

Given that the Bank of Japan recently declared a band only 25 basis points either side of zero for the permissible band for 10-year JGB’s (and especially given that 10-year JGB yields aren’t even pressuring the top side of that band – trading overnight just below 10 bps still), the JPY has proven the most sensitive to US longer yield rises and USDJPY has burst above the 110.00 level this morning, a day ahead of the quarter end  and the Japanese financial year end. Some believed that the weakest quarter for US treasuries in over 40 years (assuming we don’t see a massive rally through tomorrow) might see significant portfolio rebalancing into quarter-end, but if that has been the case, it has failed to support the treasury market notably.

The key development to watch in the coming days is whether rising US yields begin to act as a strong headwind for yield-sensitive assets like growth stocks and risk sentiment generally, which could see the USD rise deepening and broadening, adding pressure on the downside for commodity currencies and especially EM currencies. There are signs of this development since this morning here in Europe. In this morning’s Saxo Market Call podcast, we discussed the treasury yield rise, together with the notable ongoing resilience in junk debt despite a torrent of issuance this year, something that continues to signal that financial conditions have yet to tighten meaningfully beyond the rise in treasury yields. Indeed, the Fed may remain dismissive of US yield rises as long as US inflation and especially employment data continue to improve materially in coming weeks and months and  metrics like those credit spreads continue to suggest that all is quiet on the financial stability front.

Chart: USDJPY weekly 
USDJPY breaking key resistance here ahead of the Japanese financial year-end tomorrow, with 110.00 unable to hold as US treasury yields from 5-10 years hit new highs for the cycle overnight. Tonight will be the final day of the Japanese financial year, but we will likely to see any dramatic pivot in the price action here if US yields continue to rise apace, given that the Bank of Japan has already moved to “cap” yields with its declared target of keeping yields within 25 basis points of zero.

Source: Saxo Group

Graphic: FX Board of G10 trends and momentum
In the FX Board we note the mounting USD strength again – likely set to deepen against EM- and commodity currencies if this latest US yield rise extends and unsettles general risk sentiment as was the case at times in the prior episode. Elsewhere, note that SEK seems to have joined the negative yielders EUR and especially JPY and CHF in the weaker column, while NOK has picked up speed again, with EURNOK facing down the cycle lows and the huge 10.00 level again. Interesting to see if that resilience can stick if oil prices dip again amidst a surging US dollar (doubtful). Momentum in CNH is waning as well, after yesterday saw the biggest move lower in the CNH versus the USD in several weeks.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1200 – Germany Mar. Flash CPI 
  • 1300 – US Fed’s Quarles (Voter) to speak on Financial Stability Board
  • 1300 – US Jan. S&P CoreLogic Home Price Index
  • 1400 – US Mar. Consumer Confidence
  • 1830 – US Fed’s Williams out speaking on role of small businesses
  • 0030 – Australia Feb. Building Approvals
  • 0100 – China Manufacturing and Non-manufacturing PMI
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.

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 and Product Disclosure Statement 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.

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.