Head of FX Strategy
Summary: An everything-up-but-bonds trade kicked into gear yesterday, accelerating recent upside action for commodity-linked currencies, with another swoosh higher in bond yields punishing the traditional safe haven currencies like JPY, USD and even CHF. Broader risk sentiment is a bit uneasy with this move, and this kind of a move often ends in climactic price action, with now more volatile FX pairs ready to participate from here.
FX Trading focus: what are we accelerating towards?
Commodities and bond yields continue to provide the bulk of the energy in this market, moves that are taking commodity-linked FX up in aggressive fashion, while the traditional safe havens, from the USD and CHF, but especially the JPY, are losing ground. Elsewhere, risk sentiment has stabilized to a degree after the recent risk-off episode was mostly limited to the most speculative corners of the US equity market, where rapidly rising yields have more immediate implications on sky-high valuation multiples. Elsewhere, with the notable exception of mainland Chinese and Hong Kong equity markets, the correction was modest stuff, and barely even registered in European markets. But a move like yesterday’s “everything up and bonds sharply lower” is injecting a lot of energy into recent trends, with trades like AUDJPY and NZDJPY suddenly accelerating on top of an already solid trend higher. This kind of price action is tough to sustain for long, so even if trends could extend much further in price terms, in time terms things often climax quickly – and I would expect that some sort of climax arrives soon, driven by rapidly rising global bond yields, and especially the notable recent rise in real yields.
Chart: EURUSD
Not by any means the centre of attention at the moment, but notable that EURUSD is finally pulling above the local resistance provided by the last several weeks below 1.2200, a break and hold today shifts the focus toward the 1.2350 area top and adds focus to the weakening of the US dollar, although we note that a key centre of gravity – the Chinese renminbi – trades in the middle of the range established since the beginning of the year – and USDJPY is trading back toward recent highs. I have a tough time ginning up enthusiasm for upside EUR prospects, so let’s see if the move holds – it is certainly an obvious break of a head-and-shoulders-like neckline if we see a strong close today.
The G-10 and USDCNH rundown
USD – you would think that the USD would fall as a function of even more aggressive pricing of negative real yields as anticipated US stimulus is seen driving inflation farther and farther above the policy rate and even the yield curve, but real yields have actually picked up notably in the US recently. For now, will take the weak USD as the flip-side of the enthusiasm for commodities and if global holders of treasuries are shedding their allocations, this could also be weighing on the greenback. Whether the very scary scenario I outlined last week of falling risk appetite, a falling USD and rising US treasury yields engages is now an open question.
CNH – the CNY staying quiet within the range established in USDCNY since the beginning of the year, and Chines equity markets corrected badly recently. Certainly suggests China would like to lean against strength here.
EUR – as noted above, breaking higher in EURUSD even if the Euro is rather weak against the commodity super-stars of the moment. Little to get excited about in Europe.
JPY – the JPY is in a remarkable downward spiral and will likely only find support (probably in climactic fashion) if we finally see a reversal in the commodities up/bonds down trade that has been raging for about a month now.
GBP – sterling finally consolidating after its strong run of late. Next Wednesday sees Chancellor Sunak announcing the Spring Budget at which he may choose to announce the eventual intent to hike corporate taxes as well as a huge new £100 billion stimulus.
CHF – if the backdrop of rising yields and commodity prices extends here, the EURCHF move could extend as high as 1.1200-1.1250, but move looks aggressive if EU yields stay capped or ECB weighs in again on that issue (after ECB comments earlier this week).
AUD – AUDUSD touched 0.8000 this morning for first time since 2018 – next chart point is the 0.8135 area high from back then – but watching iron ore prices more than copper prices as a coincident indicator for the Aussie.
CAD – USDCAD breaks the 1.2500 level for first time since early 2018 on the latest surge in oil prices. Canadian yields have moved aggressively at the longer end of the curve and BoC Governor Macklem saw “early signs“ of an overheating housing market earlier this week.
NZD – the kiwi is the strongest performer this week by a long shot and will prove very high beta to any shift in the backdrop. Trade data, consumer confidence survey and RBNZ’s Orr up tonight from New Zealand – another week of action like this will have Orr under pressure to verbally intervene.
SEK – the krona not standing out as there is no commodity angle – watching the magic 10.000 level in EURSEK – higher inflation and stable or better risk appetite allow SEK to run higher.
NOK – new highs for crude oil see NOKSEK snapping to attention again – big resistance line coming up there – USDNOK hit new lows this morning as oil prices dominate the focus.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
