FX Update: USD rolling over again ahead of treasury auctions
Head of FX Strategy
Summary: The US dollar peaked out on Friday just ahead of a weak official January jobs report and weakened sharply again yesterday and overnight as US treasury yields rolled over after etching new highs ahead of important treasury auctions tomorrow and Thursday. The JPY responded enthusiastically to lower yields and USDJPY dropped well below 105.00 overnight, while commodity linked currencies likewise firmed with the ongoing ramp in global commodity prices.
FX Trading focus: Market making more sense now as USD in new tailspin
I noted in Friday’s FX Update that something was unsustainable in seeing the US dollar rallying at the same time as risk sentiment was strong and US yields were heading to new highs. It proved indeed that the US dollar was the weakest link and it rolled over badly on the weak US jobs report on Friday. Somewhat oddly, US treasuries were also weak despite the lackluster jobs market data for January, but after new highs in yield – especially for the 30-year T-bond, which kissed 2% for the first time since February of last year – treasuries found support and put in a chunky rally yesterday ahead of a 10-year auction tomorrow and a 30-year T-bond auction tomorrow. From here, I would expect correlations to make more sense: if yields are up sharply and risk down sharply, I would expect a firmer US dollar, while if yields are tamed or even slightly lower while risk sentiment is strong, I would expect the US dollar to fall apace. The turbo-charger for USD weakening would be any intent expressed by the Fed to cap yields Probably too soon for this and the whole situation may be a chicken and egg problem – i.e., that the Fed wouldn’t want to reach for yield curve control/yield caps unless these seemed to be denting market confidence.
Technically speaking, USD pairs are still in a zone of uncertainty as the bears need to take the USD fully back close to the cycle lows (or at least another leg lower as noted in the USDJPY chart below) to get the USD bear trend back on the rails – any faltering here keeps a cloud of uncertainty over the status of the trend.) One seasonal note of concern for any market volatility in the US dollar is the upcoming Chinese New Year holiday, with mainland Chinese markets closed this Thursday through next Wednesday.
Chart: USDJPY survives technical test
The USDJPY pair tested the 200-day moving average above 105.50, in part likely due to an over-positioned market disconcerted by the rise above what had proven a very well defined downward sloping channel, but also as US yields had backed up sharply recently – with higher yields generally associated with headwinds for the JPY. As well, JPY traders have also likely been spooked to a degree by the strong surge in commodities prices, as Japan is almost entirely dependent on imports of energy and other materials. Weighing against any JPY strengthening all the while has been an strong bid for credit risk in EM, where Japan’s investors like to invest for the carry. The pace at which USDJPY selling has come back in since yesterday’s highs suggests that the latest rally may prove merely to have been a squeeze. If the price action drops back down toward 104.00, the latest rally wave will have been fully reversed and traders will revert to focusing on the cycle lows just above 102.50 and possibly eventually to 100.00, although that eventuality may require that US yields stay capped (especially if the Fed hints at some point that it is willing to cap US yields until employment has improved sufficiently. If US yields rise aggressively, on the other hand, together with a continued strong resurgence in commodity prices, the JPY may prove a laggard in strengthening versus the US dollar relative to most other G-10 currencies.
Upcoming Economic Calendar Highlights (all times GMT)
- 1100 - US Jan. NFIB Small Business Confidence
- 1500 – ECB Chief Economic Lane out speaking
- 1700 – US Fed’s Bullard (non-voter) to speak
- 1800 – US 3-year Treasury Auction
- 2050 – Australia RBA’s Jones to Speak
- 2100 – New Zealand RBNZ Governor Orr speaking before parliamentary committee
- 2330 – Australia Feb. Westpac Consumer Confidence
- 0001 – UK Jan. RICS House Price Balance
- 0130 – China Jan. CPI / PPI
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.