Head of FX Strategy
Summary: The JPY continues to slide in a historic weakening move as US yields press ever higher. The move even accelerated overnight despite fresh verbal intervention from Japanese officialdom. Elsewhere, it is interesting to see the USDCHF breaking the range highs stretching back to early 2020. This could be a delayed reaction to the recent brutal rise in US yields and bears watching, as the franc may have some catching up to do.
FX Trading focus: CHF finally joining the JPY in feeling the pressure from rising yields?
The slide in the JPY took on new energy overnight as USDJPY pulled all the way above 128.00, carving out new 20-year highs, with the next major chart point up at 135.00, the high from early 2002. The move was accompanied by a new modest rise in US long treasury yields, but it seems the situation has developed its own dynamic, and the market was almost thumbing its nose at Japanese officialdom, which overnight escalated its verbal intervention against JPY volatility. The Japanese Ministry of Finance’s Suzuki, who said that the ministry is “monitoring moves in the foreign exchange market with a strong sense of vigilance.” The pressure cooker is set to continue for the JPY until the MoF backs up that strong sense with a few tens of billions of USD in actual currency intervention or, more durably, until the Bank of Japan loosens up its commitment to capping 10-year JGB yields.
Elsewhere, as I discuss below, the Swiss franc is sharply weaker today, a move I can’t help but also attribute in part to the constant pressure from rising yields. Not sure why we are getting the delayed reaction to this now. I have been surprised at EURCHF’s complete lack of correlation with EURJPY of late and its return back lower below 1.0200 recently despite Switzerland joining other countries in sanctioning Russia. The latter seemed to be behind the strong lifting in EURCHF after those sanctions were announced, but then the pair settled back lower and the weekly sight deposits at the SNB have built strongly of late, suggesting that there is some residual safe-haven seeking in the CHF, some of it possibly linked to the French presidential election. If we clear this last hurdle with no Le Pen victory on Sunday and yields continue to lift globally, the CHF could be in for some “catch-up” weakening. For now, USDCHF traders may be front-running this and EURCHF even broke locally higher today.
Chart: USDCHF
Yes, the Japanese yen deserves the bulk of our attention of late as it continues weaker at a breath-taking pace, but the movement today in the Swiss franc is interesting as it may suggest that yield pressures are finally making their mark on the franc as well. Note that USDCHF has broken to its highest levels since early 2020 today, and even EURCHF pulled a bit higher. The next test may be the reaction to the French Presidential run-off on Sunday and whether this is the source of the apparent safe-haven demand into CHF. The weekly SNB sight deposit data showed almost no growth in deposits yesterday after a few weeks of strong builds (as SNB intervened to mute pressure on CHF to strengthen).
Elsewhere, the price action seems to be wrapped up in risk sentiment, with the USD rising and falling in negative correlation with equity futures. On that front, watching the technically pivotal USDCAD and AUDUSD. The USDCAD rate has backed up into the pivotal 1.2650 area and bears need to take a stand here or they risk capitulation back into the upper zone toward 1.3000. Similar is the case for AUDUSD, where the move off the early 2022 lows is on life support and looks in danger of a complete failure if the 0.7300 area can’t be held. It is still remarkable that EM is in its own world relative to prior market regimes – EM spreads are crushed back to pre-Ukraine war levels and the rate hikes across most of EM have impressed enough to maintain stability and better in all of the biggest EM currencies, TRY excepted (and looking awfully “managed” of late).
Table: FX Board of G10 and CNH trend evolution and strength.
Little new here, although we are tracking the status of the commodity currencies in coming sessions, given the pivotal levels noted above, as well as monitoring the situation in key CHF crosses now that USDCHF has broken higher. Also watching gold after its feint toward 2,000 was rejected overnight.
Table: FX Board Trend Scoreboard for individual pairs.
Watching the USDCAD and AUDUSD developments as a measure of the USD outside of the moves in the greenback against the lower yielding currencies, though in fact USDSEK and USDNOK look pivotal here as well.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
