FX Update: Market nerves fraying on US Treasury yield rise, USD surge. FX Update: Market nerves fraying on US Treasury yield rise, USD surge. FX Update: Market nerves fraying on US Treasury yield rise, USD surge.

FX Update: Market nerves fraying on US Treasury yield rise, USD surge.

John Hardy

Head of FX Strategy

Summary:  The US dollar found some further fuel yesterday on the ongoing surge in treasury yields as the 10-year yield pokes at the highs since last November, while risk sentiment also rolled over badly in the equity market yesterday. Some further follow through into this morning as the greenback is in proper breakout mode as we watch the weekly close for further clues. GBPUSD the first major USD pair to breach 200-day moving average.

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FX Trading focus: USD in breakout mode – watching weekly close.

The equity market and the US dollar saw an odd one-two chop yesterday, with risk sentiment chopping lower on a stronger than expected January US PPI figure and another strong weekly jobless claims figure below 200k. The market then rallied and USD weakened before negative Tesla news saw the entire spectrum of risk-sensitive assets hit an air pocket, sending the USD soaring again, with additional follow through overnight. Putting together a narrative around the above feels pointless, but certainly suggests fragile sentiment. The most important driver in the background is the rise in US treasury yields, where the 2-year benchmark has now pushed up close to the multi-year highs near 4.80% (trading 4.69% this morning, highest daily close last November was 4.72%), while the 10-year benchmark yield nudged above the late December peak of 3.90%, leaving only the highs above 4.25% from last October/November. Further signs of reaccelerating inflation pressure could continue to drive US yields higher, but the critical US data, next Friday’s January PCE inflation data print aside, is not up until the week after next.

In the meantime, the focus here is on the weekly close and highly correlated action across markets, which can aggravate volatility risks. The technical situation is also critical for USD pairs as most have broken important ranges here, including EURUSD breaking down through 1.0656, GBPUSD below 1.1961 (and below the 200-day moving average near 1.1940), and AUDUSD below 0.6856 (now closing in on 200-day moving average just above 0.6800). USDJPY has been under major upside pressure on the headwinds for JPY from rising yields, with about 200 pips to go before it pushes up against the 200-day moving average ahead of 137.00. A solid further USD consolidation can continue here without reversing the semi-secular trend shift – let’s start with the 200-day moving averages in EURUSD and USDJPY as targets for such a scenario.

The week ahead features few key event risks on the US calendar, the chief two being the FOMC minutes on Wednesday and the PCE Inflation data print Friday as noted above. Elsewhere, we will have a RBNZ meeting up on Wednesday, where a minority is looking for a downshift in the pace of hikes to 25 bps while the majority expect a 50bps move. The 2-year AU-NZ spread has risen and is at its tightest since mid-November as a bit more has been priced in for the RBA recently. The market is pricing another 110+ basis points of tightening through the August RBNZ meeting – that looks a bit rich.

The Eurozone calendar is the heaviest next week, with preliminary February PMI’s up on Tuesday, and the two key German surveys, the ZEW and IFO, up on Tuesday and Wednesday. Will the resilience in the EU economy show signs of firming further? The German 10-year Bund yield is challenging the cycle highs above 2.50%, and ECB hawk Schnabel is out this morning arguing that the market is underestimating inflation risks, saying that “we are still far away from claiming victory” and is particularly concerned about rising wages as a sustained driver of inflation risks: “Given a longer duration of wage contracts compared to the US and a more centralized bargaining process, one could expect wage growth in the euro area to be more persistent.”

EURUSD could use at least a significant consolidation after not having notably consolidated since its launch from the early November lows below 0.9800. A basic 38.2% consolidation of the entire rally wave off the early sub-0.9600 lows would target 1.0460, while a larger test lower, the 200-day moving average or even the 61.8% retracement would mean the low 1.0300’s or 1.0108, respectively. When EURUSD finds support will likely coincide with where risk sentiment bottoms out, especially if the risk off move is mostly driven by further back-up in US treasury yields. The 1.0300-1.0500 area is the base case. The 1.0100 to parity area is a risk if the US economy shows sufficient strength to send US 10-year yields to new cycle highs above 4.30% eventually.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
The US dollar is now properly trending if the break levels of the last 24 hours hold into next week. Elsewhere, mostly varying shades of weakness, but the JPY weakness is a standout, a bit of an irony given all of the prior focus on BoJ normalization when de facto we are seeing massive QE to defend the existing YCC policy and higher yields everywhere else are piling on the pressure. Looks like the CHF is getting a bit of yield sickness as well – would expect CAD and AUD to play some catchup on the negative side if commodity prices remain under pressure – watch gold and 1,800 and copper and $4 per pound. GBP is in a funk as well. SEK’s comeback attempt has been mostly spoiled by poor sentiment for risky assets, but worth watching for a quick spring-back if the pressure eases.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
All of the USD pairs are now trending in the greenback’s favour – looking for extension if the negative mood across global markets extends. Let’s see if the EURSEK negative trend holds – price action there still in the shadow of the big recent sell-off.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1330 – Canada Jan. Teranet/National Bank Home Price Index
  • 1330 – US Fed’s Barkin (Non-voter) to speak
  • 1330 – US Jan. Import/Export Price Indices
  • 1345 – US Fed’s Bowman (Voter) to speak
  • 1500 – US Jan. Leading Index

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