FX Update: USD rolling over again ahead of treasury auctions
Head of FX Strategy, Saxo Bank Group
Summary: The US dollar peaked out on Friday just ahead of a weak official January jobs report and weakened sharply again yesterday and overnight as US treasury yields rolled over after etching new highs ahead of important treasury auctions tomorrow and Thursday. The JPY responded enthusiastically to lower yields and USDJPY dropped well below 105.00 overnight, while commodity linked currencies likewise firmed with the ongoing ramp in global commodity prices.
FX Trading focus: Market making more sense now as USD in new tailspin
I noted in Friday’s FX Update that something was unsustainable in seeing the US dollar rallying at the same time as risk sentiment was strong and US yields were heading to new highs. It proved indeed that the US dollar was the weakest link and it rolled over badly on the weak US jobs report on Friday. Somewhat oddly, US treasuries were also weak despite the lackluster jobs market data for January, but after new highs in yield – especially for the 30-year T-bond, which kissed 2% for the first time since February of last year – treasuries found support and put in a chunky rally yesterday ahead of a 10-year auction tomorrow and a 30-year T-bond auction tomorrow. From here, I would expect correlations to make more sense: if yields are up sharply and risk down sharply, I would expect a firmer US dollar, while if yields are tamed or even slightly lower while risk sentiment is strong, I would expect the US dollar to fall apace. The turbo-charger for USD weakening would be any intent expressed by the Fed to cap yields Probably too soon for this and the whole situation may be a chicken and egg problem – i.e., that the Fed wouldn’t want to reach for yield curve control/yield caps unless these seemed to be denting market confidence.
Technically speaking, USD pairs are still in a zone of uncertainty as the bears need to take the USD fully back close to the cycle lows (or at least another leg lower as noted in the USDJPY chart below) to get the USD bear trend back on the rails – any faltering here keeps a cloud of uncertainty over the status of the trend.) One seasonal note of concern for any market volatility in the US dollar is the upcoming Chinese New Year holiday, with mainland Chinese markets closed this Thursday through next Wednesday.
Chart: USDJPY survives technical test
The USDJPY pair tested the 200-day moving average above 105.50, in part likely due to an over-positioned market disconcerted by the rise above what had proven a very well defined downward sloping channel, but also as US yields had backed up sharply recently – with higher yields generally associated with headwinds for the JPY. As well, JPY traders have also likely been spooked to a degree by the strong surge in commodities prices, as Japan is almost entirely dependent on imports of energy and other materials. Weighing against any JPY strengthening all the while has been an strong bid for credit risk in EM, where Japan’s investors like to invest for the carry. The pace at which USDJPY selling has come back in since yesterday’s highs suggests that the latest rally may prove merely to have been a squeeze. If the price action drops back down toward 104.00, the latest rally wave will have been fully reversed and traders will revert to focusing on the cycle lows just above 102.50 and possibly eventually to 100.00, although that eventuality may require that US yields stay capped (especially if the Fed hints at some point that it is willing to cap US yields until employment has improved sufficiently. If US yields rise aggressively, on the other hand, together with a continued strong resurgence in commodity prices, the JPY may prove a laggard in strengthening versus the US dollar relative to most other G-10 currencies.
Upcoming Economic Calendar Highlights (all times GMT)
- 1100 - US Jan. NFIB Small Business Confidence
- 1500 – ECB Chief Economic Lane out speaking
- 1700 – US Fed’s Bullard (non-voter) to speak
- 1800 – US 3-year Treasury Auction
- 2050 – Australia RBA’s Jones to Speak
- 2100 – New Zealand RBNZ Governor Orr speaking before parliamentary committee
- 2330 – Australia Feb. Westpac Consumer Confidence
- 0001 – UK Jan. RICS House Price Balance
- 0130 – China Jan. CPI / PPI
Latest Market Insights
Quarterly Outlook Q3 2022: The Runaway Train
- Central banks' attempts to kill inflation is a paradigm shift, which could end in a deep recession.
Tangible assets and profitable growth are the winnersWith US equities officially in a bear market, the big question is where and when is the bottom in the current drawdown?
Understanding the lack of investment appetite among oil majorsThe everything rally seen in recent quarters has become more uneven, as its strength is driven by commodities in short supply.
The pressure is on as the wind leaves the sailsWith cryptocurrencies in sharp decline, are we entering a crypto winter or is the bear market a healthy clean-up of the crypto space?
Why the Fed can never catch up and what turns the US dollar lower?Many other central banks are set to eventually outpace the Fed in hiking rates, taking their real interest rates to levels higher than the Fed will achieve.
Bank of Japan: Swimming against the tideThe Japanese economy has gone from the age of deflation to rapidly rising prices in no time, leaving the Bank of Japan in a pickle.
Green transformation detour and bear market hibernationWith the impending risk of global econonomic derailment, we share the five things investors need to consider in this new half year.
Crisis redux for the eurozone?Whether there's going to be a recession in Europe or not, the path towards a stable economy will be agonizing.
Technical Outlook: Gold, Oil and a remarkable multi-decade perspective on EquitiesThe Nasdaq bubble pattern, USDJPY resistance, crude oil uptrend losing steam and the technical outlook for USD.
China: the train of new development paradigm left the station two years agoChina is transiting to a new development paradigm, as they are hit by deteriorating terms of trade, a slower global economy and an uncertain future while continuing attempts to contain the pandemic.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)