USDJPY floored by FOMC minutes, US yield drop USDJPY floored by FOMC minutes, US yield drop USDJPY floored by FOMC minutes, US yield drop

USDJPY floored by FOMC minutes, US yield drop

Forex
John J. Hardy

Head of FX Strategy

The spin from yesterday’s release of the Federal Open Market Committee minutes was somewhat different than it was after the changes to the official FOMC statement released at the early May meeting. Back then, the Federal Reserve’s introduction of “symmetric” to describe the inflation target was perhaps seen as an attempt to not scare the market into believing that the Fed would respond too zealously to further rises in inflation now that the 2.0% inflation target is properly coming into view. This time around, at least judging from the reaction in US yields and the unwinding of Fed rate hike anticipation, the language in the minutes was seen as more dovish, as the Fed is seen as more willing to tolerate inflation on the high side of 2% for a “sustained” period before hiking further.

The takeaway is that the US central bank seems to want to err on the side of not cutting the recovery short and being fully convinced that inflation will stay within the target zone.

As well, other language suggested that many Fed members are concerned about the shape of the yields curve and that the Fed is reaching an inflection point on forward guidance, with the policy rate soon reaching a level at which it begins to act as a restraint on the recovery. The June FOMC meeting is shaping up as an important one for that forward guidance, and the odds of only one more hike after a June hike (which is still priced near 90% certainty) have picked up sharply since yesterday.

In FX, the fairly sharp reaction in US yields to the downside has been fairly muted outside of USDJPY, which suffered a fresh, powerful sell-off leg overnight that took the pair to new local lows and well back below 110.00. The action suggests that 110.00+ was a bridge too far for USDJPY, and the top could very well be in for that pair if US yields have also topped for now.

Note that the 10-year benchmark, having recently launched a break of the critical multi-year range at 3.00-05% dropped back below 3.00% overnight, although arguably, the key local break is closer to 2.95%.

Across markets, the takeaway for the moment in the wake of these FOMC minutes may be that it is time to re-engage the “Goldilocks” scenario, as European Central Bank tapering plans are sidelined for the duration by low inflation, weaker data, and Italian politics, while the Fed now appears to want to decelerate responsiveness to inflationary data.

For risky assets worldwide, the lower long US yields are an important boost, and it doesn’t hurt that the Turkish central bank finally responded to the meltdown in the lira and jacked the interest rate by 300 basis points yesterday, while the political leadership in Ankara were also cowed by the recent weakening of the currency and has sent the right signals as well.

Other EM currencies have also rallied in relief on the combination of lower US yields and the TRY relief.

Chart: USDJPY

The USDJPY rally turned hard over the last few sessions as US yields did likewise. The pair may have topped for now if long US yields have done likewise – the jury still out on the latter. Resistance now comes in the at the 110.00-25 zone that was the focus on the way up.

USDJPY

The G-10 rundown

USD – yesterday’s FOMC minutes are a strong setback for the US dollar until either the market’s interpretation is proven wrong, or strong US data pushes back against the Fed’s stance on policy. 

EUR – EURUSD didn’t achieve much of a bounce on the US-yield negative developments late yesterday, but hard to see powerful new lows for the cycle here unless something in Italy sees a new aggravation of EU peripheral spreads.

JPY – the JPY, not surprisingly, proving the most responsive to the shift in the yield outlook, as US short rates saw the most sizeable drop in some time yesterday. If markets indulge in the Goldilocks trade, however, the JPY may not appreciate across the board if risky assets rally, even if USDJPY has topped for now.

GBP – sterling in a better place despite yesterday’s slight CPI miss if risk appetite returns. A decent data point and a sharp single day rally in GBPUSD could suddenly alter the tactical outlook for GBPUSD as it would offer a reasonably compelling divergent momentum setup, but let’s see.

CHF – EURCHF put in a bounce later in the day yesterday and closed near the 200-day moving average. We have likely reached or are near reaching the SNB’s intervention zone, and EURCHF may not decline much further anyway if the Italian political situation can’t produce a further peripheral sovereign yield spread widening.
 
AUD – The AUDUSD situation in limbo at the moment, though still leaning lower, if needing a fresh sell-off to prove the point. To the upside, the rising trendline break is perhaps the dominant feature and is the key focus for whether the downtrend is maintained. That trendline is above the also important former low around 0.7650, so we’ll call the 0.7650-75 are the key pivot zone for now.

CAD – USDCAD is fibrillating in a tight zone between 1.2730 and 1.2900+, with the latest developments less supportive for the USD and oil still elevated. The outlook very much in limbo until the pair can engineer a break.

NZD – the AUDNZD rally very much intact, but needs to draw fresh blood to the upside to convince that 1.1200+ is achievable. NZ yields have been a negative pull on the currency in recent weeks after the Reserve Bank of New Zealand’s dovish statement at the May meeting.

SEK – 10.20-25 has held back the sell-off in EURSEK, the key pivot area for whether the zone to 10.00 will open up here. To the upside the 10.35 area is the first one of note, followed by 10.50.

NOK – EURNOK teasing with a break to new lows before shying away – still the chart points lower unless the pair backs up sharply into the old range.

Upcoming Economic Calendar Highlights (all times GMT)

   • 0815 – US Fed’s Dudley (Voter) to Speak in UK
   • 0830 – UK Apr. Retail Sales
   • 0830 – ECB’s Praet to Speak
   • 1130 – ECB Meeting Minutes
   • 1230 – US Weekly Initial Jobless Claims
   • 1400 – US Apr. Existing Home Sales
   • 1435 – Fed’s Bostic (Voter) to Speak
   • 1700 – UK BoE’s Carney to Speak

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.