FX Update: Yield rise brings fresh pressure on JPY, CHF.
Head of FX Strategy, Saxo Bank Group
Summary: Yields popped higher yesterday, particularly in Europe, and this took both the JPY and the CHF down a couple of notches ahead of the key event risk this week, the Fed Chair Powell speech at Jackson Hole tomorrow, which is not expected to bring anything of note, ironically setting the bar for a surprise very low. The FX trends of the past couple of months have fizzled to the point that the coming few sessions will either keep them alive or see them more fully neutralized.
FX Trading focus: Yields pop, the two sides of low anticipation ahead of Jackson Hole
Yesterday saw a surge in sovereign bond yields – most notably in Europe relative to the very quiet market there in recent weeks. ECB Vice President de Guindos helped spark the sell-off in EU sovereigns with positive comments on the economy and in touting an upgrade of the ECB’s economic forecasts at the ECB meeting of the week after next. The market concentrated more on this “hawkish” development as opposed to Chief Economist Philip Lane, who said that any discussion of a wind down of PEPP purchases at that September 9 meeting would be premature given that purchases are expected to run through the end of March at minimum, even as he waxed positive on the limited impact of the latest wave of the virus on the EU economy. This helped drive a further reversal in EURJPY back higher, as that pair has now fully reversed its most recent sell-off wave and popped back above its 200-day moving average. US yields were likewise higher and helped drive an underperformance of the yen versus the US dollar as discussed in the USDJPY chart thoughts below. The less popular 7-year treasury auction comes at an awkward time tonight ahead of Powell’s speech. The CHF is also on the defensive here as EURCHF popped back toward 1.0800 this morning without quite getting there.
What more to say on Fed Chair Powell’s Jackson Hole speech tomorrow other than that market expectations are virtually nil for this speech to bring any hints on the timing of the Fed taper, given it isn’t really the right forum in the first place. Still, there is some chance that this forum offers a hint or two of Fed observations on overarching lessons learned from the pandemic and how its policy has affected an “uneven economy” that is the topic of the virtual Jackson Hole symposium. Could the Fed finally recognize more explicitly that its tools of ZIRP and QE are poor at best– and even counterproductive at worst - for addressing both inequality and the specific nature of this recovery. Could the Fed actually make the case that it would be better to recede to the background and allow government to act as the primary policy maker from here? That is most likely a bridge of hope too far. In terms of the QE taper, my general sense is that I have no clue on the timing (Oct 1-Dec 1 is my assumed range and the market’s as well) but I suspect that the market’s expectations for the pace of reductions are too cautious.
USDJPY is champing at the bit of local resistance above 110.00 as EU and US yields have suddenly come alive here ahead of the Jackson Hole speech from Fed Chair Powell tomorrow. Entirely unsure whether that speech will have major implications for the US treasury market in the near term, but if yields do pop back higher, we will likely suddenly have a different setup for USDJPY, which could go on to challenge its cycle top in the event the US 10-year treasury benchmark, for example, goes on to pop above the big 1.50% area (1.35% currently). The higher yield threat will need to fade to see the pair challenging back toward that 109.00 area that didn’t sustain the break earlier this month. The setup here echoes the triangulation in the price action back in Nov-Jan before US yields staged a major revival. Note the Ichimoku cloud levels in play here as well.
Canada – PM Trudeau playing left populist – in recent days, Prime Minister Justin Trudeau has been playing quite the left populist in announcing new policy initiatives for the other side of the September 20 snap election that he called, unwisely it may turn out, given that polls have tightened markedly. On Tuesday it was a call to ban all foreign purchases of Canadian real estate for a period of two years and yesterday it was the idea to administer a special surtax on Canadian bank profits beyond CAD 1 billion annually.
South Korea surprises with rate hike overnight – of 25 basis points, taking the rate to 0.75%. interestingly, the bank did this in the teeth of the worst Covid surge the country has experienced, and cited financial stability risks as the chief reason for the move, though it also raised its inflation forecast for this year to 2.1%, just above its target.
Table: FX Board of G10 and CNH trend evolution and strength
We are poised at the flipping point in many of the recent trends, in which the coming couple of sessions determine whether these trends are neutralized or reconfirmed – for example, the weak AUD and other commodity currency and GBP trends, and the stronger USD, JPY and CHF trends. All of this ahead of a well defined event risk in the form of Fed Chair Powell’s speech at Jackson Hole tomorrow (discussed above).
Table: FX Board Trend Scoreboard for individual pairs
Here, we note interesting developments around the edges, like CHFNOK flipping to negative on the combination of the recent surge in oil prices taking NOK back higher, while the now bond yields rising yesterday have taken CHF down a couple of notches. Note USDJPY trying to flip positive today as we discuss the USDJPY outlook in the chart above. Elsewhere, note that EURUSD is on the cusp of neutralizing the downtrend fully as we await the outcome of the Jackson Hole speech tomorrow (ditto for EURJPY). In fact, readings below an absolute value of 1.0 abound as FX directions are in flux almost across the board.
Upcoming Economic Calendar Highlights (all times GMT)
- 1130 – ECB Meeting Minutes
- 1200 – Poland Central Bank Meeting Minutes
- 1230 – US Weekly Initial Jobless Claims
- 1230 – US Q2 GDP Revision
- 1410 – ECB's Villeroy to speak
- 1500 – US Aug. Kansas City Fed manufacturing survey
- 1500 – ECB's Schnabel to speak
- 1700 – US 7-year Treasury Auction
- 2200 – New Zealand Aug. ANZ Consumer Confidence
- 2300 – US Fed Annual Jackson Hole retreat begins
Quarterly Outlook Q2 2022
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