FX Update: New CNH weakness, BoE launches emergency QE.

FX Trading focus: BoE Emergency QE! CNH In focus as USDCNH crosses above 7.20.

Breaking: BoE moves with emergency QE to avoid systemic meltdown. Just before I was about to send the report below out, the Bank of England announced that it would purchase long date UK gilts to stabilize the market in a “temporary operation”. It was stunning to see sterling rally on this, even if a brief kneejerk! This is an admission that the currency will have to take the impact if yields rising elsewhere, since UK yields can’t rise as rapidly as they have recently without triggering a systemic-type event that requires BoE easing. Still, riveting to watch the action from here – the move forced UK yields sharply lower, with the 10-year UK Gilt yield moving 40+ bps lower quickly in response, but US yields were also some 10 bps lower. Given my comments on the Fed “breaking things” below – the UK financial markets just got broken, who is next, when is it the US’/Fed’s turn, and will signs that risk sentiment is celebrate this BoE move as the canary in the tightening coal mine pan out, or is it a red herring for now? Stay tuned.

Back to the original program: The market is spooked by the ongoing rush higher in US treasury yields, with the 10-year treasury benchmark reaching the symbolic and real support level of 4%, which held the line for an extended period. Whether the juggernaut of treasury selling can stop so quickly simply because this level has been reached is an open question, but round levels have often proved major sticking points in the past. Already at these levels and after the tremendous acceleration in yields higher, the treasury market is strongly at risk of “breaking something” with the USD the accompanying wrecking ball here. More thoughts on that below.

But sentiment has also been driven lower by an aggravation in an already fraught geopolitical backdrop after the Nord Stream 1 and 2 pipelines were severed by coordinated explosions yesterday. The medium to longer term outlook for energy inputs into especially Germany’s industry  was always hazy beyond the heroic efforts to ensure gas supplies through this coming winter, but this development throws up a dark cloud over the longer term outlook as well, since even regime change in Russia and a shift in attitudes on both sides would still require extensive repairs of the infrastructure to get the gas flowing again. A bit surprised that the euro has held out as well as it has in the face of this latest news.

Chart: CNHJPY
The US dollar rally finally took USDCNH above the 7.20 area that defined major tops on two prior occasions in 2019 and 2020 and set a new high water mark for USCNH in the history of the offshore CNH currency above 7.26 at one point this morning. The official USDCNY exchange rate has not traded this high since early 2008. The move comes ahead of a major holiday next week in China, with markets closed for the entire week, which will leave markets in limbo next week as USDCNY won’t trade.With USDJPY holding the line despite the US dollar strength, it is riveting to watch the CNHJPY yield for whether we are finally set to see a major mean reversion in this most important of Asian currency pairs. Note the trendline and the 200-day moving average that will come into view quickly if the sell-off extends.