FX Update: USDJPY jumps to near five-year high on US yield surge

Forex 4 minutes to read
John J. Hardy

Chief Macro Strategist

Summary:  USDJPY has surged to new multi-year highs as US long-dated treasury yields jumped higher on the first trading day of the year. Is that move narrative-based or more of a mechanical one based on shifting funds linked to the calendar roll? Time will tell, but as long as long-yield volatility persists, it will quickly dominate the focus. Elsewhere, the National Bank of Poland is already up with their first rate setting meeting of the year as they are expected to hike another 50 basis points.


FX Trading focus: US long yields surges and USDJPY responds: a red herring?

The first trading day of 2022 saw US long-term yields jumping higher, with the US 10-year Treasury benchmark risking some 11 basis points, one of the strongest moves in months. The most important exercise here is getting a sense of whether this move can extend, for which we must know what is driving it, something that will take a bit more time to determine. On the one hand, one might argue that higher long US yields make sense and are simply a delayed reaction to the drumbeat of promising news flow suggesting that the health impact of the omicron wave will prove limited and that the variant’s extreme contagiousness will mean it will burn itself out amidst rising herd immunity. Sure, the school/work/entertainment restrictions are a near term concern until we can get a sense of the pace of the declining trajectory on the other side of the impending case peak. So, the eventual lifting of all virus restrictions means growth unleashed and higher longer term yields.

Alternatively, as I argue in this morning’s Saxo Market Call podcast, the surge may simply be a mechanical development that is linked with the shift into the New Year as the big banks piled into treasuries to reduce penalties linked to their balance sheet size at year-end and then abandon those positions as the new calendar year gets under way. The Fed’s Reverse Repo facility, for example, spike higher into year-end to a record $1.9 trillion, and dropped about $325 billion in a single day yesterday, possibly helping boost yields.

Or there could be a bit of both, but the salient point is that if US long-dated yields continue to surge aggressively, they will quickly dominate the narrative, as discussed below in the UDSJPY chart description. It is worth noting that, while there are long periods of strong correlation between US longer treasury yields and USDJPY, it is not always present, as the latter part of 2017 and especially 2018 showed, and is always worth investigating when correlations break for signs that the narrative focus has shifted.

Chart: USDJPY weekly
Note the tendency for sharp mean reversion in USDJPY rallies and sell-offs over the last few years. As noted above, there is little to hold the pair back from higher levels if US long-term yields continue to surge, but if this is accompanied by a broadly stronger US dollar, the damage will quickly become self-correcting as the global reserve currency’s strength and higher interest rates quickly become toxic for risky assets and financial markets in general in a world swimming in excessive USD-denominated debt. Back in early 2017, note how the very sharp rally in USDJPY to the cycle high just above 118.50 from the late-2016 lows simply ended within a couple of weeks.

Source: Saxo Group

Elsewhere: EURPLN near two-month lows ahead of NBP rate hike today. The Polish National Bank meets today and will announce its policy rate, with consensus expecting a 50 basis point hike to take the rate to 2.25%. The central bank was slow off the mark to hike rates late last year, but eventually moved quickly and signaled a stronger tightening regime with a 75-bp hike in early November and a follow up 50-bp hike in December. EURPLN topped above 4.70 (new 12-year high) in late November and has since turned lower, trading below 4.60 and near two-month lows ahead of today’s decision, where hawkish guidance will be important for further PLN gains after inflation reached 7.8% in November and is expected at 8.2% in December. At the same time, the EU and Poland are embroiled in a conflict over rule-of-law issues that has seen EU recovery package funds withheld from the country until the issue is resolved, which could take at least another few months as the EU initiated legal action in late December, which Poland has two months to respond to, followed by as much as two months that the EU has to respond to Poland’s response.

Table: FX Board of G10 and CNH trend evolution and strength
JPY weakness is the most pronounced trending move on the FX Board, with sterling strength a bit of a head-scratcher in terms of drivers.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Watching how the first days and couple of weeks shape up for this year before drawing conclusions on some of the recent developments here.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • Poland Base Rate Announcement (no time given)
  • 1500 – US Dec. ISM Manufacturing
  • 1500 – US Nov. JOLTS Job Openings
  • 1630 – US Fed’s Kashkari (non-Voter) to speak

Quarterly Outlook 2024 Q4

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Head of FX Strategy

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Head of FX Strategy

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

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

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.

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

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) Ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law. 

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.