Macro: Sandcastle economics
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JPY pulling for more gains
John J. Hardy
Chief Macro Strategist
Summary: The wobbly carry trade backdrop in high-yield EM currencies and strong sovereign bond markets are powering a firming Japanese yen. The last piece for a notable extension of the move would be a sell-off in major equity markets.
We’re none the wiser on Brexit today after none of the menu of indicative votes yesterday in the UK parliament passed even after May offered to resign if her deal is approved. May’s deal is getting increasing support from key Tory figures now on the fear that its failure would eventually lead to no Brexit at all. But a tiny group of hard Brexit ERG Tories and the Northern Ireland's DUP are holdouts and the indicative votes show that there is still no agreement on how to proceed on a failure of May’s deal.
More votes to are be held today – some clarity on where we go next surely emerges ahead of the weekend, but the long delay options may do sterling few favours.
The most prominent mover since yesterday has been the yen as it once again changes directions, this time back to the strong side, driven in general by the strong bid in the major sovereign bond markets and perhaps as well by fresh wobbles in high-yield EM, a threat to JPY-funded carry trading. EURJPY is down through support again and we put it back on our trading interest watchlist below. A further across the board extension of JPY strength likely will require a general deleveraging in risk assets that spreads to the major equity markets.
European Central Bank President Mario Draghi and other officials were out trying to reassure markets that the ECB would like to ease the impact of negative rates on banks, but specifics were few until this morning, when chief economist Peter Praet aired the idea of tiered rates for banks, in which only excess reserves over a certain amount would suffer the full weight of the negative deposit rates. This is a practice that the Bank of Japan already employs. But Praet said there would need to be a “monetary policy case” for tiering rates. Market impact of this policy negligible.
EM currencies have weakened considerably in spots, with the move a bit sharper than the sell-off in equities would point to, though there are signs of global safe haven seeking in major sovereign bond markets and emerging market spreads are a bit wider in recent sessions. The most volatility in recent sessions has been seen in the Turkish lira, where overnight implied yields have risen to over 1000% as the authorities discourage speculation ahead of the Turkish regional elections this weekend. The roll of spot positions from Friday to Monday today looks will be very expensive for TRY shorts – currently priced over 3%!
Trading interest
We are back to favouring JPY longs via USDJPY and EURJPY even after the recent crazy gyrations have shaken our confidence. Stops above 110.75 in USDJPY and above 124.50 in EURJPY
Still like AUDNZD longs here on dips as long as we stay above 1.0350.
Maintaining USDCAD longs with stops below 1.3330.
Chart: EURJPY
Euro sentiment is weak again as EURUSD slides toward 1.1200 again and Brexit worries remain, while the ECB is short on policy options to address the bloc’s growth slowdown. EURJPY is breaking lower below the key 124.00 level again after a recent false move below that level. Ready now for a notable extension lower?
More votes to are be held today – some clarity on where we go next surely emerges ahead of the weekend, but the long delay options may do sterling few favours.
The most prominent mover since yesterday has been the yen as it once again changes directions, this time back to the strong side, driven in general by the strong bid in the major sovereign bond markets and perhaps as well by fresh wobbles in high-yield EM, a threat to JPY-funded carry trading. EURJPY is down through support again and we put it back on our trading interest watchlist below. A further across the board extension of JPY strength likely will require a general deleveraging in risk assets that spreads to the major equity markets.
European Central Bank President Mario Draghi and other officials were out trying to reassure markets that the ECB would like to ease the impact of negative rates on banks, but specifics were few until this morning, when chief economist Peter Praet aired the idea of tiered rates for banks, in which only excess reserves over a certain amount would suffer the full weight of the negative deposit rates. This is a practice that the Bank of Japan already employs. But Praet said there would need to be a “monetary policy case” for tiering rates. Market impact of this policy negligible.
EM currencies have weakened considerably in spots, with the move a bit sharper than the sell-off in equities would point to, though there are signs of global safe haven seeking in major sovereign bond markets and emerging market spreads are a bit wider in recent sessions. The most volatility in recent sessions has been seen in the Turkish lira, where overnight implied yields have risen to over 1000% as the authorities discourage speculation ahead of the Turkish regional elections this weekend. The roll of spot positions from Friday to Monday today looks will be very expensive for TRY shorts – currently priced over 3%!
Trading interest
We are back to favouring JPY longs via USDJPY and EURJPY even after the recent crazy gyrations have shaken our confidence. Stops above 110.75 in USDJPY and above 124.50 in EURJPY
Still like AUDNZD longs here on dips as long as we stay above 1.0350.
Maintaining USDCAD longs with stops below 1.3330.
Chart: EURJPY
Euro sentiment is weak again as EURUSD slides toward 1.1200 again and Brexit worries remain, while the ECB is short on policy options to address the bloc’s growth slowdown. EURJPY is breaking lower below the key 124.00 level again after a recent false move below that level. Ready now for a notable extension lower?
The G10 rundown
USD – the fact that US interest rates have the farthest to fall is a dual-edged sword – offering the most reward for long treasury buyers if rates continue to collapse, but also meaning, particularly at the short end, that yield spreads versus other currencies can collapse more in the USD’s disfavour.
EUR – support failing in EURJPY – could this finally lead to a proper trending move after the prior feint? And EURUSD is wending its way towards that hugely important 1.1200 area. Might need a bad Brexit situation to finally blast that pair out of the range.
JPY – the yen finds its legs again as sovereign bond markets remain bid and carry trades come under pressure. We are once again constructive on further strength after a few sessions of whiplash.
GBP – sterling trading unchanged after trying to hope for a breakthrough yesterday as it still appears May doesn’t have the last votes needed ahead of the weekend. A long delay won’t necessarily do sterling any favours even if we avoid the No Deal scenario
CHF – the 1.1200 level in EURCHF under pressure and may have a hard time holding up if sterling takes an ugly dive on a long delay in Brexit uncertainty or worse and risk sentiment is generally poor.
AUD – desperately looking for range expansion in AUDUSD for a sense that the pair is ever going to make a break. While we have an acceleration in the anticipation of RBA easing, Australia mining stocks are pushing on multi-year highs.
CAD – yesterday saw another weak merchandise trade balance reading and oil prices rolling over are an additional risk and keep us focused higher for USDCAD.
NZD – the follow on weakness from the RBNZ dovish turn so far not in evidence, but the kiwi’s star has likely peaked in the sky and we look for ways to sell the currency – perhaps via AUDNZD longs and even NZDUSD shorts eventually if the USD firms broadly.
SEK – weak euro and risk sentiment doing SEK no favours – the SEK bulls may be forced to surrender for now if these developments deepen. Yesterday’s Sweden Household lending survey showed another decline.
NOK – price action very discouraging for downside hopes in EURNOK and positioning will be vulnerable to a squeeze on this backup above 9.70 this morning.
Upcoming Economic Calendar Highlights (all times GMT)
09:10 – ECB’s Guindos to speak
10:00 – Euro Zone Mar. Confidence Surveys
11:15 – US Fed’s Quarles (voter) to speak
12:00 – Czech Central Bank Announcement
12:30 – US Q4 GDP Revision
12:30 – US Weekly Initial Jobless Claims
13:00 – Germany Mar. Flash CPI
13:30 – US Fed’s Clarida (Voter) to speak
19:00 – Mexico Central Bank Rate Announcement
USD – the fact that US interest rates have the farthest to fall is a dual-edged sword – offering the most reward for long treasury buyers if rates continue to collapse, but also meaning, particularly at the short end, that yield spreads versus other currencies can collapse more in the USD’s disfavour.
EUR – support failing in EURJPY – could this finally lead to a proper trending move after the prior feint? And EURUSD is wending its way towards that hugely important 1.1200 area. Might need a bad Brexit situation to finally blast that pair out of the range.
JPY – the yen finds its legs again as sovereign bond markets remain bid and carry trades come under pressure. We are once again constructive on further strength after a few sessions of whiplash.
GBP – sterling trading unchanged after trying to hope for a breakthrough yesterday as it still appears May doesn’t have the last votes needed ahead of the weekend. A long delay won’t necessarily do sterling any favours even if we avoid the No Deal scenario
CHF – the 1.1200 level in EURCHF under pressure and may have a hard time holding up if sterling takes an ugly dive on a long delay in Brexit uncertainty or worse and risk sentiment is generally poor.
AUD – desperately looking for range expansion in AUDUSD for a sense that the pair is ever going to make a break. While we have an acceleration in the anticipation of RBA easing, Australia mining stocks are pushing on multi-year highs.
CAD – yesterday saw another weak merchandise trade balance reading and oil prices rolling over are an additional risk and keep us focused higher for USDCAD.
NZD – the follow on weakness from the RBNZ dovish turn so far not in evidence, but the kiwi’s star has likely peaked in the sky and we look for ways to sell the currency – perhaps via AUDNZD longs and even NZDUSD shorts eventually if the USD firms broadly.
SEK – weak euro and risk sentiment doing SEK no favours – the SEK bulls may be forced to surrender for now if these developments deepen. Yesterday’s Sweden Household lending survey showed another decline.
NOK – price action very discouraging for downside hopes in EURNOK and positioning will be vulnerable to a squeeze on this backup above 9.70 this morning.
Upcoming Economic Calendar Highlights (all times GMT)
09:10 – ECB’s Guindos to speak
10:00 – Euro Zone Mar. Confidence Surveys
11:15 – US Fed’s Quarles (voter) to speak
12:00 – Czech Central Bank Announcement
12:30 – US Q4 GDP Revision
12:30 – US Weekly Initial Jobless Claims
13:00 – Germany Mar. Flash CPI
13:30 – US Fed’s Clarida (Voter) to speak
19:00 – Mexico Central Bank Rate Announcement
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