Yesterday saw a fairly large intraday reversal in this recent spike in bond prices and at some point, a parabolic move like this has to reverse. If it does, I would suggest that some of the largest moves in response to such a reversal might be found within the G10 currencies, where the moves have been extreme and on a scale rarely seen before. A brief rundown of the current status of the G10 currencies if bonds suffer a climax reversal here or soon:
- Overdone strength: CHF and JPY
- Overdone weakness: NOK, SEK, AUD, CAD
- Somewhere in between: EUR and USD
We hesitate to add NZD to the “overdone weakness” category due to the recent dovish blast from the RBNZ’s Orr and company, as the RBNZ is a bit fresh in getting more determinedly on the devaluation warpath. GBP is in its own category as well as the weakness there is down to a unique driver, Brexit.
In EM, the curious TRY rally through all of this begs the question of whether TRY strength was a product of manipulation or a symptom of the consensus that TRY is the most troubled of the more liquid EM’s and it has been a no-brainer to short the currency versus the rest of the EM space, which has mostly struggled badly recently (RUB, MXN, ZAR, etc.)
Chart: SEKJPY monthly
Note that SEKJPY is approaching all-time lows as it slips towards the 11.00 level. This is one of the many trades within the G10 that has pushed to remarkable extremes – especially the CHF- and JPY- crosses. This is not to say that a reversal will happen now, but the long-term present starkly asymmetric risk-reward and any immediate reversal in the bond rally could see a strong reversal in these trades as well.