Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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Yen bulls back in business, but what about USD bears?
John J. Hardy
Global Head of Macro Strategy
Summary: USDJPY is reversing back lower with momentum, impressive and JPY strength is quite broad even as we have higher long US treasury yields in the background. Next up on the calendar is the April US Retail Sales report today.
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Latest market moves:
The yen rally has been the main “shiny new thing” since the USD rally has lost steam, with USDJPY selling off more impulsively yesterday before backing up and then selling off once again overnight. One story driving this latest yen rally was a big spike in the South Korean won after Bloomberg published a piece yesterday morning indicating via unnamed sources that the US side is discussing the currency angle in trade talks with South Korea. Late yesterday, Bloomberg also cited US sources denying that the US will pursue currency policy pledges in its trade talks. The USDJPY sell-off last night was without any readily identifiable catalyst and is impressive when we just saw long US treasury yields rising to a new multi-month high close yesterday. The action in the JPY crosses is also compelling and supports the idea that we local low here in the broad JPY, though we’re not quite there yet.
USD picture outside USDJPY
The greenback isn’t putting up much further fight for now after the capitulation through key resistance to start the week. EURUSD rallied yesterday to test the former range low of 1.1266 without taking it out – would still need perhaps a rally and close well through 1.1350 to neutralize the sell-off and at least ensure us that we are set to stay in this newly established range. Until then we’re in limbo on whether the lows are in or whether we end up challenging 1.1050-1.1000 and beyond to the downside. For the USD index, the clearly etched chart levels are now 100 to the downside (nearly touched yesterday) and the 102.00 area that was the high on the USD rally at the start of this week.
Chart: USDJPY weekly
USDJPY is reversing hard here – will be very interesting to see the weekly candlestick after the pump all the way to 148.65. A close anywhere near current levels or a bit lower would create a rather compelling bearish shooting star candle that could take the focus back to the monumental 140.00 area. A rise and close back above that 40-week moving average, on the other hand, would discourage the longer term bearish holdouts.
Looking ahead: US treasury yields, busy calendar today.
The groundwork we have been looking for official support the US treasury market is now coming into view: the FT led with a story this morning that US authorities are set to announce a cut to the largest US banks' capital requirements, the supplementary leverage ratio. Such a move would allow the banks to leverage their balance sheets more, and many would see this initiative as aimed at the US treasury market to temper any further rise in yields, as banks could hold more US treasuries. Details are few, and one option might also be instead to simply exclude US Treasuries entirely from the bank leverage calculation. I’m surprised we haven’t seen a bigger reaction to this in the US treasury market, but to me this is a sign that the US Treasury will lean very hard against any further rise in treasury yields, a cornerstone of the longer term USD bearish case.
Today we have a raft of US data, including April Retail Sales, and it’s nice to hear from Walmart in its quarterly earnings report before the market open later today. The initial claims number is also important if it shows any big jump (not expected). Less important data include the regional manufacturing surveys, the Empire and Philly Fed, and Fed Chair Powell is out speaking shortly after the Retail Sales release at 1230 GMT.
Interesting to note Trump on the wires this morning from Qatar claiming that India is willing to drop all tariffs on US imports. He also said he doesn’t want Apple to move its production to India from China – clearly, he wants it moved to the US.
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.
A huge shift in JPY momentum over the last couple of sessions, though this does not yet change the trend – next couple of sessions key there. Elsewhere, gold is in correction mode in the big picture, and very weak in the near-term picture – note the key 3165 area on the chart there versus the USD. In general, though, note the very flat trend readings across the board – lots of uncertainty and the risk that things may take some time to sort out, with falling volatility.
Table: NEW FX Board Trend Scoreboard for individual pairs. Silver is on its back foot now, slipping into a downtrend. AUDNZD is trying to cement its new uptrend after a strong AU jobs report overnight, even if AUDUSD has wilted off the highs. EURCHF has teased local resistance and failed, just as the trend status looks pivotal!
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