So what now? First, while the JPY has consolidated back to the strong side, I am somewhat surprised that it has not appreciated more – this may be down to still quite calm EM markets (carry trades, etc, with exceptions noted below) and solid risk sentiment in general. Arguably, the correction in yields can deepen a bit – perhaps taking the US 10-year benchmark back toward the 1.50% level, and thus provide a further nominal further boost for the lowest yielders, but I have a hard time seeing why yields should drop beyond that level unless we are in some unforeseen new bout of risk aversion, so the market will likely soon have to move on to other themes. As well, one of the indicators I like to watch for yield sensitivity is gold, and there, the consolidation was sharp initially but has failed to do much over the last couple of sessions, a bit of a head-scratcher, as the recent past would have seen far peppier gold upside on a chunky drop in US yields.
A key point from here is whether a firmer US treasury market is signaling an agreement with the Fed outlook on inflation and growth, i.e., that we are set for a brief surge of inflationary over-heating, but that the anticipation of a lack of fresh fiscal impulses of notable size beyond this quarter will see the effects wane rapidly – a kind of “stop-start” risk pattern that has been visible in some of this data series. If this is the narrative that begins to win out, a bit of consolidation across the commodity space and even into risk sentiment could mean we continue to see outperformance of the low yielders and the US dollar secondarily, while the traditionally more pro-cyclical currencies come in for some rough sledding.
Note that the FOMC minutes and a bevy of Fed speakers are on tap for later today.
A USDCHF correction has set in, one with somewhat greater amplitude relative to the recent rise than the correction we are seeing in the US treasury market, though the latter is clearly the driver. But the late rally has altered the structure of the chart, neutralizing the former down-move, so whether here, or in USDJPY, we’ll be looking out for support to come in sooner rather than later. With a correction back to 1.50% for the US 10-year benchmark, the USDCHF pair may move back to something like 0.9200 or perhaps even 0.9100, the 200-day moving average.