JPY lower on rising bond yields, overnight CPI miss

John Hardy

Head of FX Strategy, Saxo Bank Group

USDJPY edged to new highs overnight after the last CPI data from Japan failed to budge Bank of Japan expectations and yields elsewhere remain at the high end after the big break higher in US long yields. Today’s calendar focus is on CAD, and Italian politics will grab the spotlight over the weekend.

Concerns surrounding Italy’s political situation are a bit below recent highs as measured in the European peripheral spreads, but after an initial and relatively modest adjustment, the euro crosses suggest that the market sees the situation as contained at the moment. There will be more horse trading within the awkward, populist Lega-Five Star Movement coalition over the weekend, and a (likely FSM) prime minister has yet to be named, but this weekend could see further crystallisation of the political picture and the market will have to take a stand next week on whether to unwind the euro and EU peripheral debt discount or decide that the existential threat remains a real and present danger.

We suggest the latter, though the fuse may be very long on this particular time bomb for the EU.

The JPY has grabbed the battle standard in the charge to the bottom of the heap among G10 currencies, weakening further overnight to as far as 111.00 in USDJPY after a slight miss in the latest CPI data. Even if CPI does crawl a bit higher over the next month or two, the market will be quick to write it off as linked to higher oil prices (which are a significant contributor to JPY weakness here, in our view) and a weaker currency. Wage pressures in Japan are another matter if these continue to rise in line with the latest release at near 2.0%.

Today’s focus swings to Canada with its latest April CPI and March retail sales releases. The country’s rate expectations have more or less kept track with US counterparts over the last few weeks and the vastly stronger oil prices are CAD-positive. On the structural side, however, we suspect Canada is more sensitive to higher rates feeding into a sharper slowdown in private household debt.

USDCAD has been triangulating and will need to choose a direction next week. We suspect higher if the USD is firm elsewhere. The next Bank of Canada meeting is up on May 30.

Chart: USDCAD

USDCAD has not participated in the strong USD move of late, though it has found support around the 1.2750-25 area well above the prior range low and the 200-day moving average above there around 1.2650. To the upside, the descending trendline is a potential catalyst for longs, but clearing the 1.3000 level again is vital for a bullish attempt at higher levels. To the downside, a drop to 1.2700 with USD sideways to weaker elsewhere could usher in a test of the range lows below 1.2550.

Enlarge

The G-10 rundown

USD – the USD rally a bit sidelined for now, but in no mortal danger just yet as we watch the recent cycle lows in GBPUSD (very pivotal Fibonacci level at recent low) in EURUSD and the 111.00 area in USDJPY for further progress.

EUR – the single currency surviving the slings and arrows of outrageous Italian politics with surprising aplomb, but is the resilience justified? We are surprised how little the latest IMM report showed US speculative long euro positioning in future unwinding – interesting to see today’s report as there is plenty of fuel for further euro downside from general position unwinding.

JPY – the yen in a very bad place with strong/stable risk appetite, higher oil prices, and higher bond yields. As long as all three of these remain in place, yen could win the race to the bottom, though eventually we suspect risk appetite could be the first to crack if all three continue rising.

GBP – pulling our our Fibo yardstick, we note that while the 1.3500 area in general looks pivotal, the actual recent low near 1.3465 was an exact test of the 38.2% Fibo of the entire rally sequence off the 1.2000 area to the 1.43+ high. A failure of this level could lead to a test of the next major Fibo around 1.2900.

CHF – yawn... USDCHF parity magnet in place as EURUSD has stopped falling at the moment. The EURCHF 1.1800 area looks pivotal and will likely move up or down in synch with any notable shift in EU existential fears, whether to the positive or negative side.

AUD – AUDUSD consolidating in a narrow range and the chart structure remains bearish as long as it remains below 0.7600-50.

CAD – As indicated above, USDCAD is set for a directional move soon before month-end as today’s data sets up expectations for the May 30 Bank of Canada meeting and the reaction to it.

NZD – kiwi clawing back some of the losses versus the AUD, with the first support for AUDNZD at the 200-day moving average around 1.0885, but the support for the break sequence higher down in the key 1.0800-50 pivot zone.

SEK – the 10.25-30 area has developed as the local pivot zone as the market has to decide whether the SEK repricing whould be taken back toward the bigger 10.00 area. The SEK rally may not have much more fuel in the tank, most of which has been driven by an unwind in crowded short SEK positioning in our view.

NOK – we give up on NOK as the last couple of days of action have whipsawed the chart. The overarching conclusion is that it is highly disappointing that very strong oil prices have failed to support the NOK more against a struggling euro, and that short Norwegian rates near multi-month lows offer no support either.

Upcoming Economic Calendar Highlights – all times GMT

   • 1230 – Canada Apr. CPI
   • 1230 – Canada Mar. Retail Sales
   • 1315 – US Fed’s Kaplan (non Voter) to Speak
   • 1315 – US Fed’s Brainard (Voter) to Speak

 

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