FX Trading focus: Long treasury, Bunds yields pop. Pivotal German election Monday
The reaction to the FOMC meeting largely fizzled yesterday as the market was able to absorb a sharp, if relatively modest adjustment higher to Fed expectations for the approximate time frame of liftoff (June 2022 EuroDollar STIRs are unchanged relative to before the FOMC meeting, Dec. 2022’s are down about 7 ticks around and Dec 2023’s are down around 11 ticks). Risk sentiment decided that the FOMC meeting outcome was sufficiently benign to dive back into recent beaten down equities, the US dollar headed sharply lower versus the usual risk-on crowd of currencies.
Later in the day and overnight, however, a jolt higher in US treasury yields at the long end of the curve after a long period of range bound limbo has suddenly seized our attention and has sent the Japanese yen into a tailspin. Sympathetic moves were seen elsewhere in German Bunds and UK gilts, with the yields for 10-year Gilts poised at a key resistance level after the massive shift higher all along the UK yield curve yesterday after the BoE meeting, and the German 10-year Bund yield now up through what looks to be a pivotal -0.25% yield level. The German election outcome discussed below will potentially add further energy to the yield moves in Europe.
For now, whether this yield move is merely the beginning of a further rise in yields to come should dominate our attention, as any sort of momentum will keep a negative spotlight on the JPY and potentially CHF and will inevitably impact risk sentiment at the margin and quite broadly if we poke back all the way to the highs for the cycle in the US 10-year Treasury yield at 1.75%.
Chart: EURJPY weekly
EURJPY launched a sharp rally yesterday on the risk in long yields, which also affect EU fixed income, as Bund yields. The stronger the mandate the likely center-left coalition gets in the German election outcome, the greater the potential for EU yields to rise and EU yield curves to steepen, supportive for the euro and a headwind for the JPY, especially as Japanese fiscal plans are seen as less JPY supportive and more likely to crimp Japan’s real yields, which have so far somehow escaped the developments elsewhere, but can’t defy gravity forever if energy prices continue rising. In any case, EURJPY deserves watching here as a function of the ability of the EU yield curve to continue to steepen in sympathy with any possible developments in the US yield curve and as a function of the German election outcome. We present the weekly bar as today’s close offers could see a weekly hammer candlestick.