FX Trading focus: JPY dragged to new cycle low on fresh yield rise
Rising global yields are punishing the Japanese yen once again, with all major JPY crosses surging higher again overnight on the fresh pop in yields. USDJPY posted a new 20-year high of 133.00 this morning as the next chart focus is on the 135.00+ highs of 2002 next, and this despite US yields lagging global peers of late (more below). If this rise in yields continues, the Bank of Japan will rapidly find itself in a political pinch due to its insistence on the yield-curve control (YCC) policy under which it caps 10-year JGB’s at 0.25%. Only a strong backdown in yields and commodity prices in coming weeks may be able to save Governor Kuroda from an embarrassing climb-down from its YCC commitment that would unleash tremendous volatility. Stay tuned and beware the volatility potential in JPY crosses.
As discussed in Friday’s update, the latest leg of the rise in global bond yields has seen the rise in US yields lagging considerably, as these have not yet posted highs for the cycle even after yesterday’s strong surge, while yields elsewhere hit new cycle highs already late last week. The US dollar did get a bump on weaker risk sentiment yesterday and overnight, but the move has been modest and financial conditions have not tightened. The US dollar only seems to threaten on the strong side when rising US yields also drive a tightening of general financial conditions. We’re well off the highs in the US dollar, but I am reluctant to call a cycle top for the greenback until we get a sense of whether markets can absorb the Fed’s intended QT at its full intended pace of $95B/month by September 1 and we are beyond the trough of the bear market that we suspect is on the way. Among G-10 currencies only the USDCAD pair strongly suggests a cycle top for the US dollar. The AUDUSD pair is the possibly next shoe to drop if the US dollar continues to weaken. Currently, that AUDUSD chart is in limbo, for the USDCAD pair, the USD has capitulation lower. AUDUSD is the next possible focus for cementing a USD reversal if last week’s highs above 0.7250 fall.
The RBA hiked the policy rate more than most expected, choosing a full 50-basis point move to take the cash target rate to 0.85% rather than an odd-sized hike many were expecting of 40 bps to get the rate back on a “normal” 0.25% increment of 0.75%. This suggests more urgency to normalize policy than the market was expecting. The reaction in AUDUSD was modest even as AUDNZD, for example, jumped to new multi-year highs. Major AUDUSD resistance at the converging moving averages around 0.7230-60 held last week. The bearish case remains in limbo, however, after the pair reversed so aggressively back above the major 0.7000 chart level. A shift in the narrative on commodities (to the downside) and a weaker global growth outlook and/or a new tightening of financial conditions is likely needed for the old bear trend to reassert, with a move below 0.7000 to prove the point on the chart.