FX Update: Commodities to lead bonds to lead JPY?

FX Update: Commodities to lead bonds to lead JPY?

Forex 4 minutes to read
John J. Hardy

Chief Macro Strategist

Summary:  Commodity markets are commanding the most attention across markets and may be dragging bond yields down on the implications for easing inflation. In turn, then, shouldn’t JPY find a bit more support, as it did today when EU core bond yields cratered on weak flash June PMIs? Also, today the Norges Bank surprised many with a 50 basis point hike, although the NOK price action in the wake of the decision is underwhelming.


FX Trading focus: Fresh pressure on JPY as BoJ losing control. USD triangulating.

The JPY jumped overnight in the wake of comments by a prominent ex-Ministry of Finance official suggesting that intervention from the MoF can’t be ruled out, though he indicated the bar is high for intervention as it generally requires a sense of crisis. This price action came after the USDJPY rate managed to peak out at 136.70 on Tuesday despite softer US treasury yields this week, yields that are breaking down further today, as the 10-year benchmark US Treasury yield looks like it is in reversal mode, though a more profound sense of reversal would require a drop through 3.00% (trading near 3.10% as of this writing). Today, the weaker than expected flash June PMIs in Europe (France: 51.0 Manufacturing and 54.4 Services vs. 54.0/57.5 expected and 54.6/58.3 previous and Germany 52.0 Manufacturing and 52.4 Services vs. 54.0/54.5 expected and 54.8/55.0 previous, and Eurozone at 52.0 Manufacturing, 52.8 Services and 51.9 Composite) have brought EU core yields tumbling aggressively and taken EURJPY down several notches, a deserved re-alignment with the fundamentals.

With or without intervention jawboning from Japan (and this is from an ex-official with no contact to the MoF personnel actually in charge), shouldn’t BoJ YCC policy per se should only pressure the JPY as a function of rising global yields, and when these head lower, the pressure should come off the JPY, after all? A massive sell-off in crude oil, even if a big chunk of the fall was retraced since late yesterday, is also a nominal JPY positive. Longer bond yields are likely in part reinforced by weak commodity prices as the latter are seen at the forward edge of the inflation drivers. And then the question becomes – if inflation pressures are seen as receding, will risk sentiment eventually celebrate that development or fret the reasons that price pressures are abating: on fears of recession? The easiest read is that commodity-related FX should struggle as long as the narrative is that commodity prices are retreating due to recession-induced demand destruction. On that note – watching the 1.3000 area in USDCAD and the cycle lows in AUDUSD near 0.6830.

Chart: EURUSD
EURUSD is weighing back on the 1.0500 area that has been the approximate mid-point of the range since 1.0600 fell about two weeks ago after weaker than expected flash June PMI survey figures out of the EU this morning. Interesting as well that EURUSD is breaking down as the key US 10-year treasury benchmark it breaking down through local support, but that is likely on core European yields beating an even more severe retreat on the soft data this morning. The EURUSD sell-off here likely to correlate with general risk sentiment and is showing signs getting any real downside momentum until we are closer to threatening the 1.0400 area, with the latest price action emphasizing the tactical importance of the 1.0600+ resistance.

Source: Saxo Group

Norges Bank hiked the deposit rate 50 basis points, a nominal surprise as observers were split on whether they would hike 25 bps again or 50 bps. I imagine USDNOK trading near 10.00 and EURNOK trading near the 10.50 area weighed in the decision to go with the bigger hike, as a weak currency is doing the Norges Bank’s inflation fighting intentions no favors. Governor Wolden did note that the krone has been weaker than expected. Interesting in the Norges Bank forward economic projections that the bank is far more concerned about persistent inflation than the ECB and Fed are, as the 2023 “underlying” CPI forecast was raised to 3.3% from 2.4% and the 2024 forecast was raised to 3.0% from 2.5%. GDP forecasts were lowered and the path of the policy rate was steepened and raised: in March, the Norges Bank forecast the policy rate to 2.5% at the end of 2023, and today’s statement sees the rate at “around 3.0% in the period to summer 2023. The NOK pulled off support, but the price action was not overwhelming, likely on the massive turmoil in the oil market.

Table: FX Board of G10 and CNH trend evolution and strength.
While the CHF posts the strongest trend reading, nothing has happened in the key EURCHF And USDCHF pairs since the shock SNB move to hike 50 bps last week. Watching the commodity currencies, AUD in particular, for more downside risk if the recent commodity corrections deepen – and as a flip-side of that, whether the JPY could start flipping positive in places as well.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Lots of odd crosses criss-crossing trends – chief focus on JPY pairs like AUDJPY and CADJPY if commodity correction continues, and on whether the USD rally is set to extend.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1100 – Turkey Rate Announcement
  • 1230 – US Weekly Initial Jobless Claims
  • 1345 – US Jun. Flash Services and Manufacturing PMI
  • 1400 – US Fed Chair Powell to testify before House Panel
  • 1800 – Mexico Rate Announcement
  • 1800 – ECB's Villeroy to speak
  • 2301 – UK Jun. GfK Consumer Confidence
  • 2330 – Japan May National CPI

Quarterly Outlook

01 /

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)


Business Hills Park – Building 4,
4th Floor, office 401, Dubai Hills Estate, P.O. Box 33641, Dubai, UAE

Contact Saxo

Select region

UAE
UAE

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.