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.