USDJPY heavy on weak US data, falling yields USDJPY heavy on weak US data, falling yields USDJPY heavy on weak US data, falling yields

USDJPY heavy on weak US data, falling yields

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  The greenback fell yesterday on weak flash May Markit PMI survey readings. US yields dropped sharply all along the curve, taking USDJPY sharply lower and engineering a reversal from new lows in EURUSD.


EURUSD bears took the pair to new cycle lows by a few pips on the weak German IFO survey and weak Eurozone and German Manufacturing PMI survey numbers yesterday, but later a very surprising drop in the US flash May Markit PMI readings (the composite reading was 50.9 versus 53.0 expected) saw the pair reversing sharply to close at a six-day high close near 1.1180. The move looks impressive relative to recent moribund volatility, but the day’s trading range still fell just short of 80 pips – so a trimming of too crowded speculative shorts is the only narrative we can put together there for now. 

The weak US surveys moved US yields rather impressively, with the market now pricing 50-50 odds that the Fed cuts rates in September – the highest odds for the cycle. Long US yields matched the drop in short US yields on yesterday’s weak US news, which means the US yield curve remains remarkably flat. It will take considerable doing – a rapid move of 100 basis points perhaps – for the Fed to steepen the yield curve. Seems the market continues to underprice the risk of a 100 bps of easing before year-end if economic data remains tepid or worse and inflation weakens. A flat yield curve suggests a still-tight Fed.

Equities bounced back late yesterday after intraday losses widened and Asia managed to put in a solid session overnight, so it appears complacency may be trying to make a comeback here – there is virtually nothing of note on the calendar today and we have a three-day weekend ahead for the US and UK. On the trade war front, Xi Jinping has evoked the “Long March” to describe China’s resolve in the showdown with the US over policy (a reference to the legendary Chinese Communist forces’ retreat and evasion of the nationalist forces in 1930’s China).

US President Trump, meanwhile, touted a willingness to include Huawei in a possible trade deal. Knowing further headline risks could emerge over the weekend. On the other hand, Trump is dusting off his Tariff Man cap as a new proposal circulates to assess tariffs on countries that undervalue their currencies. In the past, this  would  have moved the market, but it seems we always default to complacency these days.

UK Prime Minister Theresa May is finally set to exit the scene, with her plans for her departure to be announced today. Her ill-fated deal will not make it to another vote and now we’ll have to witness a few weeks of a Conservative leadership shuffle, which many see leading to a pro-hard Brexit figure like Boris Johnson assuming leadership. For the near term, aren’t we already at maximum uncertainty on sterling? In other words, some consolidation may be in order here.

EU parliamentary elections set for this weekend. I anticipate the Eurosceptic protest vote may underwhelm unless turnout is exceptionally poor (a reasonable risk), but we will assess Monday – the parliament doesn’t have much say in matters unless an obstreperous “blocking vote” of a third of parliament can make life difficult in passing new measures. But certainly, we will have a larger and louder voices calling for reform and EU’s political leadership will need to respond. Most interesting perhaps is the French vote as a referendum on Macron’s popularity.

Trading interest

No tactical long USD interest for now after yesterday’s reversal – dropping AUDUSD shorts and USDCAD longs (renewed interest in the latter if we manage a close back above 1.3500)
AUDNZD longs for strategic trade (stop below 1.04, targeting 1.10-1.12)

Chart: EURUSD

A classic bullish reversal yesterday in EURUSD as new lows were sharply rejected on weak US data. Whether this will lead to considerable further upside is an open question, as we have EU parliamentary elections this weekend and a three-day week ahead for the US and UK, so fresh bad data may have simply scared away the speculative shorts for now. Rate spreads haven’t really been the driver here, so why should they be now? In any case, we can only say that the bearish case has been tactically rejected for the  moment  and  the first hurdle to the upside is the recent 1.1264 high.
Source: Saxo Bank
The G10 rundown

USD – next week is a quiet one on the calendar until Friday’s PCE Inflation data, which could set off further fireworks as the market could dramatically shift Fed rate cut expectations on a lower than expected print. 

EUR – a smart technical reversal yesterday in EURUSD, but let’s see the  mood on Monday in the wake of the parliamentary election results. Germany-Italy yield spreads have backed off in recent sessions, although EURCHF and EURJPY look priced for existential concern. 

JPY – yesterday saw the yen firing on both lower-yield and weak risk appetite cylinders, but today’s robust bounce in sentiment attenuates the signal somewhat. The yen only really performs well when markets are running for the hills.

GBP – wondering if we have maxed out on sterling uncertainty, even if the Brexit party posts an absurdly strong result Sunday evening. Could even rally today on May’s resignation. This does not remove long-term weakening risks, merely the short-term momentum.

CHF – EURCHF scraping bottom near the important 1.1200 area – Monday could tell us to what degree this is about the EU parliamentary election concerns versus the mirror-image of Brexit-concern driven GBP weakness (although these are in turn related).

AUD – AUD bears have to be losing some confidence, given the inability to achieve greater momentum. Speculative positioning looks heavily short as well, so near term danger of consolidation of the weak AUD trend.

CAD – USDCAD had a go at the resistance yesterday, but the USD weakening is spoiling the interest for the moment for a move higher. Next week important for CAD, with the BoC up Wednesday and GDP on Friday.

NZD – some backfilling in NZDUSD since yesterday’s lows after the  weak US data and  then subsequent bounce  in risk sentiment. We are still looking for  that bigger  AUDNZD rally to materialise – first step would be a move and close above the  200-day moving average, currently around 1.0635. Next Wednesday we have the Reserve Bank of New Zealand publishing a financial stability report and then a Governor Orr press conference and appearance before a parliamentary committee.

SEK – bounce-back in risk sentiment seeing EURSEK have another run at support – only interesting if we approach the 10.65-60 area.

NOK – the crash in oil prices yesterday not supportive, but the risk bounceback is – whiplash alert.
 
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.