Quarterly Outlook
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Charu Chanana
Chief Investment Strategist
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Japan’s MoF beats US Treasury to the punch in taming its bond market.
John J. Hardy
Global Head of Macro Strategy
Summary: The JPY sold off overnight on a Reuters story reporting that Japan’s Ministry of Finance sent around a survey to market participants in JGB on issuance amounts, which suggest the MoF is set to tweak the supply of bonds to avoid a further blowout in JGB yields. A massive rally in long-dated JGBs saw the JPY weaker and USD rallying overnight.
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Latest market moves:
The recent fragility in the Japanese Government Bond market seems to have justifiably spooked Japan’s Ministry of Finance into action, as Reuters reports that the MoF sent around a questionnaire related to issuance amounts for JGB’s. The 20-year JGB yield benchmark plunged more than 20 basis points overnight to below 2.35% on the inference that this means tweaks to policy to manipulate the supply of bonds to the market. In FX, the JPY weakened sharply across the board overnight, just as USDJPY had hit new local lows.
While my focus has been on what the US treasury would do given the persistently high real yields and large US deficits as far as the eye can see (to be made even worse by the bid, bad bill making its way through Congress), Japan’s MoF is being forced to move more quickly as its debt situation is even more dire and the “bond vigilantes” were clearly on strike beyond the 10-year maturity in JGB auctions. It’s impossible to tell where we head from here on this – eventually the US will be forced into a similar course of action, which is USD negative – but when is eventually?
Before the rally in the US dollar overnight, the USD bears had managed to keep their case intact yesterday, with EURUSD rallying back above 1.1400 again overnight and GBPUSD pulling as high as 1.3587 before easing back. AUDUSD, our focus yesterday because it managed new highs for the year, disappointed with a retreat back below 0.6500, but in none of the USD pairs is the USD comeback threatening a full reversal – we need today’s North American trading session to get a read on whether the USD bear case is supported or rejected here in the near term. A stick above 1.1400 in EURUSD on the daily close today boost the case for EURUSD upside remaining the focus.
Chart: USDJPY
USDJPY and all JPY crosses backed up overnight on the volatility in the Japanese government bond market on signs that the Ministry of Finance is being forced into action to control yields at the long end of the yield curve. Relative to the recent sell-off, the rally overnight is quite modest and could easily extend to the first Fibonacci retracements before finding resistance – keeping an eye on 144.60 (38.2%) and the psychological 145.00 resistance in that regard. The rally would have to extend all the way back above the broken trendline and/or the 61.8% retracement to begin rejecting the bear case here.
The RBNZ is up tonight with a 25-bp rate reduction fully priced and the July RBNZ meeting priced as likely to deliver another cut, but not fully priced, so some ability to move the NZD in the crosses. Again, for relative NZD levels, focusing on the AUDNZD pair and whether the upside comes back into play after the charge at the key 1.0925-1.1000 zone fell short there.
FX Board of G10 and CNH trend evolution and strength.
Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board.
Nothing has changed materially since yesterday outside of JPY being on tilt here. Gold is awfully quiet given that the Japanese MoF story overnight is like the first baby steps toward more financial repression.
Table: NEW FX Board Trend Scoreboard for individual pairs. Again, the near term drama in the USD pairs is whether this tentative extension in USD weakness becomes a full blown trending move – as European session gets going, USD is struggling a bit. In JPY crosses, it’s about whether we can find any direction at all.
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