US Dollar, Treasury bonds in focus
Head of FX Strategy
The most interesting development this week would be strong US Treasury auctions that see a sharp drop in US yields as a test of the recent weak USD trend. On the risk appetite front, note that the highs on Friday near 2,750 are near a critical Fibo retracement level for the S&P 500, so that level looks pivotal for the next leg of market action.
The two key factors for the action from here are the state of risk appetite and the US treasury market, which faces an important test this week with three large auctions of two-, five-, and seven-year Treasuries on Tuesday through Thursday and the latest Federal Open Market Committee minutes on Wednesday. The big surprise many noted last week was the fresh highs in US yields failing to derail the ongoing equity market recovery.
On the currency side, the narrative is that the US dollar can continue to fall as US interest rates rise because the rise in US yields reflects concerns on the US fiscal/current account balance sheet more than it reflects a strengthening US economy. The US 10-year benchmark came within hailing distance of the huge 3.00% level last week, widely considered a critical structural chart point – it is hard to believe, last week’s action notwithstanding, that a persistent rise above this level would be met with a shrug by asset markets, from equities to emerging markets.
The most interesting development this week would be strong US treasury auctions that see a sharp drop in US yields as a test of the recent weak USD trend. On the risk appetite front, note that the highs on Friday near 2,750 are near a critical Fibo retracement level for the S&P 500, so that level looks pivotal for the next leg of market action.
Chart: EURUSD versus the S&P 500
The recent market action suggests there is a rough directional correlation of EURUSD and the S&P 500, something that is likely to continue as long as markets remain volatile as speculative positioning is relatively stretched (long EUR, short USD).
For EURUSD to continue to progress higher, we may need the recovery in risk sentiment to continue, which would allow for further build-up in positioning.
The G-10 rundown
USD – the bounce on Friday came from the edge of the abyss in EURUSD and USD Index terms. It seems that the most supportive combination for the greenback this week would be a strong bond auction and return of risk aversion as it would challenge the narrative on two fronts.
EUR – the 1.2500 level is proving a tough nut to crack for EURUSD as big round levels are often cause for pause in this super-major. Recent market action suggests that this pair is more tightly correlated with the rise and fall in risk appetite, perhaps as long EUR and short USD are strong consensus trades.
JPY – we discussed the risk of a significant breakdown in USDJPY recently, but have been surprised at the vigorousness of the move even as risk appetite staged a significant recovery last week. Hard to believe that broad JPY strength continues here if we continue to see strong risk sentiment.
GBP – sterling remains locked in the range versus the euro, as we await further signs from the Brexit front, apparently. Some earnings and employment data on Wednesday the data highlight of the week for the UK.
CHF – a bit surprising that EURCHF didn’t rebound more enthusiastically to the bounce in risk sentiment, suggesting perhaps lingering concerns about the March 4 Italian election and the German SPD party vote on the grand coalition the same day.
AUD – the AUD saw a weak close on Friday, but the key commodity prices for Australia have rebounded recently. The bears in AUDUSD can keep their hopes alive if we remain below 0.8000, though better confirmation would be a strong drop back through 0.7750.
CAD – USDCAD has put in a bounce near the 21-day moving average, as the pair remains in limbo and the 200-day moving average is declining towards the top of recent price action soon. Bulls need a close above the 1.2600-50 area to argue for an upside break, as well as perhaps a fresh sell-off in crude oil. Canada Retail Sales and CPI up on Thursday and Friday this week, respectively.
NZD – the strong kiwi has been interacting with its 2018 highs above 0.7400, the last resistance zone ahead of 0.7500+. We have long-term valuation concerns on the kiwi, but no visibility on what would spark a sell-off as the currency largely escaped the recent bout of volatility.
SEK – key test for EURSEK tomorrow if the market backdrop is quiet as Sweden reports CPI.
NOK – EURNOK tilting back lower on recovery in risk appetite and crude oil. The 200-day moving average has risen to the bottom of the range this year just above 9.50 – making this are pivotal for downside prospects.
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.