FX Trading focus: Amidst the noise in risk sentiment, the signal is high US treasury yields.
US equities rose some 9% from the lows at the start of this week at one point yesterday, a move that coincided with a few wobbles in the US dollar, especially against the usual risk-correlated currencies. USDJPY, on the other hand, has hardly wobbled outside of an intraday spasm yesterday, as the focus there remains on higher US yields, with the 10-year Treasury benchmark posting a modest new cycle high just this morning. And well they should, in fact USD traders should keep both eyes on treasuries, because risk sentiment will not likely sustain any further recovery if yields remain here or head higher.
Overnight, rhetoric from Bank of Japan Governor Kuroda did nothing to bring the weak JPY any support, as he pushed back against “excessive” and “one-sided” moves in the JPY while at the same time saying that a weak, stable JPY is a net positive for the country. Another BoJ official defended the current negative short rate and yield-curve-control (YCC) policy, predicting that inflation would fall back even if it is set to persist rising through the end of this year. That leaves all of us to guess at what point the USDJPY rate is deemed too one-sided and excessive and will see futile billions thrown at the market – best guess is somewhere not far above 150.00, but let’s see.
Elsewhere in Asia, the broadening CNH weakness is notable, as we see USDCNH posting new cycle highs today, and well on its way to doing so earlier in the session before today’s USD rally got under way in earnest. A look at other CNH crosses shows that the currency is on the move, and an expansion of this move could unsettle global markets as it drives concerns that China is exporting deflation.
GBPUSD correcting back lower, as the last two rallies found resistance just ahead of 1.1500 and more recently, just below 1.1450. The next focus lower is the 1.1150 area and then the psychological 1.1000 level and 1.0923 nominal low. Any new broad, risk-off move could see 1.0800 and lower levels coming quickly into view, as we have argued that the fundamental outlook for sterling has been stabilized, but that stability doesn’t necessarily lead to strength.