The End Game has arrived
Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
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Dollar blasts higher on Powell, US data
John Hardy
Head of FX Strategy
Summary: Strong US data and new hawkish comments from Fed chair Powell drove US yields sharply higher Wednesday, placing EURUSD in focus on European yields' inability to keep pace.
The bond market has seized the market’s undivided attention after a watershed day yesterday in which the long end of the US curve suddenly came unglued, with US 30-year yields breaking a massive chart point at 3.25% - the highest level in over four years.
For perspective, this is the first time the longest US yields have posted a four-year or longer high since the early 1980s, so it is worth taking notice when something unfolds for the first time in over a generation.
The move has violently changed the plot and represents a strong risk for risk appetite if the move as risky assets, whether equities or emerging market currencies, look poorly positioned for this development and a further rise in yields could slam the brakes on the recent attempts to don rose-tinted glasses in emerging markets and elsewhere.
Driving the move higher in US yields was the triple whammy of the key breakout levels growing nearer in both the 10- and 30-year maturities, a 20-year high in the US ISM non-manufacturing survey in September, and comments from Federal Reserve chair Powell, who made many off-the-cuff comments that spooked the markets, especially his loose talk of the next crisis and what it may or may not look like (“… maybe it will surprise is and looks just like the last one”).
As well, Powell discussed again the dropping of the language in the Federal Open Market Committee statement describing Fed policy as “accommodative”, and indicated in a somewhat surprising turn of phrase that he felt the FOMC rate was “a long way from neutral”. Yikes! This is refreshing candor from the Fed, though the market may not feel that way. The US data and Powell’s comments were good for pricing in an additional 10 basis points of Fed hikes through the end of next year relative to where they were at the Tuesday close.
The drastic move higher in US yields is pressuring bond yields higher the world over and Japan is no exception, the Bank of Japan’s yield-curve-control policy notwithstanding. Note that the 10-year JGB traded above the assumed cap (15 basis points) and above 16 bps overnight while longer-dated JGBs have moved in synch with the rise in yields elsewhere, and the 30-year is approaching 100 basis points for the first time since early 2016.
If the BoJ blinks on its commitment to the 10-year and we get a downdraft in risk assets, risks would point to a strong JPY rally while calmer risk assets and a further rise in yields, together with a signal from the BoJ that it is doubling down on commitment to YCC, is needed for USDJPY to pull above the big 114.50 resistance and to 115.00 and beyond.
Volatility risks are asymmetric for downside in JPY crosses, especially outside USDJPY.
Chart: EURUSD
The break of 1.1500 is critical here in EURUSD and significant if the pair can’t engineer a reversal well back above that level ahead of the weekend. Earlier,we suspected that the euro might have a chance to put up a fight if both US and European yields are on the rise at approximately the same rate, but such a forceful move in US yields in relative terms is too high of a hurdle at the moment. Watching the status of the 1.1500 level through this week’s close, as the pair is vulnerable to the downside as long as it remains clear below that level into the 1.1300 lows and even down into the 1.10-1.12 area.
For perspective, this is the first time the longest US yields have posted a four-year or longer high since the early 1980s, so it is worth taking notice when something unfolds for the first time in over a generation.
The move has violently changed the plot and represents a strong risk for risk appetite if the move as risky assets, whether equities or emerging market currencies, look poorly positioned for this development and a further rise in yields could slam the brakes on the recent attempts to don rose-tinted glasses in emerging markets and elsewhere.
Driving the move higher in US yields was the triple whammy of the key breakout levels growing nearer in both the 10- and 30-year maturities, a 20-year high in the US ISM non-manufacturing survey in September, and comments from Federal Reserve chair Powell, who made many off-the-cuff comments that spooked the markets, especially his loose talk of the next crisis and what it may or may not look like (“… maybe it will surprise is and looks just like the last one”).
As well, Powell discussed again the dropping of the language in the Federal Open Market Committee statement describing Fed policy as “accommodative”, and indicated in a somewhat surprising turn of phrase that he felt the FOMC rate was “a long way from neutral”. Yikes! This is refreshing candor from the Fed, though the market may not feel that way. The US data and Powell’s comments were good for pricing in an additional 10 basis points of Fed hikes through the end of next year relative to where they were at the Tuesday close.
The drastic move higher in US yields is pressuring bond yields higher the world over and Japan is no exception, the Bank of Japan’s yield-curve-control policy notwithstanding. Note that the 10-year JGB traded above the assumed cap (15 basis points) and above 16 bps overnight while longer-dated JGBs have moved in synch with the rise in yields elsewhere, and the 30-year is approaching 100 basis points for the first time since early 2016.
If the BoJ blinks on its commitment to the 10-year and we get a downdraft in risk assets, risks would point to a strong JPY rally while calmer risk assets and a further rise in yields, together with a signal from the BoJ that it is doubling down on commitment to YCC, is needed for USDJPY to pull above the big 114.50 resistance and to 115.00 and beyond.
Volatility risks are asymmetric for downside in JPY crosses, especially outside USDJPY.
Chart: EURUSD
The break of 1.1500 is critical here in EURUSD and significant if the pair can’t engineer a reversal well back above that level ahead of the weekend. Earlier,we suspected that the euro might have a chance to put up a fight if both US and European yields are on the rise at approximately the same rate, but such a forceful move in US yields in relative terms is too high of a hurdle at the moment. Watching the status of the 1.1500 level through this week’s close, as the pair is vulnerable to the downside as long as it remains clear below that level into the 1.1300 lows and even down into the 1.10-1.12 area.
The G-10 rundown
USD – the force of the move in US yields is driving USD gains across the board, and this development could deepen if the market is goaded into further selling by a strong Average Hourly Earnings print for September tomorrow.
EUR – an amicable comment from the EU commission’s side on the Italian populists’ supposed intention to reduce the deficit beyond next year. This is the right gambit for the Italian government to take now – get the toe in the door on their new initiatives and set a precedent rather blowing everything up right away and then picking up the fight again next year. Let’s see if it works...
JPY – discussion of JPY above – for now eyeing the 10-year JGB for how the Bank of Japan reacts to a further rise in global yields. USDJPY running into a massive resistance level here around 114.50.
GBP – sterling in a positive mood relative to the euro, but perhaps more due to the latter’s woes rather than any new Brexit developments.
CHF – the EURCHF break higher is reluctant to take hold as long as we risk a meltdown in risk assets if global bond market selling drives risk off (as opposed to reflecting optimism about growth potential, etc.). The 1.1400-1.1440 area the obvious hurdle here for EURCHF bulls. USDCHF, meanwhile, suddenly not far from parity.
AUD – the Aussie plunging to new lows, both due to USD strength but possibly also due to the idea that we are transitioning away from Trump against everyone on trade to a more targeted US anti-China policy.
CAD – USDCAD backing up toward the 1.2900 resistance as the loonie has a hard time outpacing a very strong USD – the weekly close tomorrow after both the US and Canada report their latest jobs data will determine whether the bearish case remains intact.
NZD – a new low for the cycle suddenly in NZDUSD after yesterday’s watershed move in US yields. AUDNZD still yielding no clues in relative strength terms between AUD and NZD. Last levels to the downside are the sub-0.6250 lows from back in late 2015.
SEK – risk of backfilling in EURSEK higher if we lurch into a risk-off mode here, but still prefer SEK over euro if the pair avoids a rise back above 9.50.
NOK – at some point, one would think that a stronger USD tames the oil price rise, but this not happening yet, but no evidence of this yet. The price action in NOK strength looks a bit overextended here if we see further risk-off.
Upcoming Economic Highlights (All times GMT)
• 1230 – US Weekly Initial Jobless Claims
• 1315 – US Fed’s Quarles (Voter) to Speak
• 1400 – Canada Sep. Ivey PMI
• 1800 – Mexico Central Bank Decision
• 0130 – Australia Aug. Retail Sales
USD – the force of the move in US yields is driving USD gains across the board, and this development could deepen if the market is goaded into further selling by a strong Average Hourly Earnings print for September tomorrow.
EUR – an amicable comment from the EU commission’s side on the Italian populists’ supposed intention to reduce the deficit beyond next year. This is the right gambit for the Italian government to take now – get the toe in the door on their new initiatives and set a precedent rather blowing everything up right away and then picking up the fight again next year. Let’s see if it works...
JPY – discussion of JPY above – for now eyeing the 10-year JGB for how the Bank of Japan reacts to a further rise in global yields. USDJPY running into a massive resistance level here around 114.50.
GBP – sterling in a positive mood relative to the euro, but perhaps more due to the latter’s woes rather than any new Brexit developments.
CHF – the EURCHF break higher is reluctant to take hold as long as we risk a meltdown in risk assets if global bond market selling drives risk off (as opposed to reflecting optimism about growth potential, etc.). The 1.1400-1.1440 area the obvious hurdle here for EURCHF bulls. USDCHF, meanwhile, suddenly not far from parity.
AUD – the Aussie plunging to new lows, both due to USD strength but possibly also due to the idea that we are transitioning away from Trump against everyone on trade to a more targeted US anti-China policy.
CAD – USDCAD backing up toward the 1.2900 resistance as the loonie has a hard time outpacing a very strong USD – the weekly close tomorrow after both the US and Canada report their latest jobs data will determine whether the bearish case remains intact.
NZD – a new low for the cycle suddenly in NZDUSD after yesterday’s watershed move in US yields. AUDNZD still yielding no clues in relative strength terms between AUD and NZD. Last levels to the downside are the sub-0.6250 lows from back in late 2015.
SEK – risk of backfilling in EURSEK higher if we lurch into a risk-off mode here, but still prefer SEK over euro if the pair avoids a rise back above 9.50.
NOK – at some point, one would think that a stronger USD tames the oil price rise, but this not happening yet, but no evidence of this yet. The price action in NOK strength looks a bit overextended here if we see further risk-off.
Upcoming Economic Highlights (All times GMT)
• 1230 – US Weekly Initial Jobless Claims
• 1315 – US Fed’s Quarles (Voter) to Speak
• 1400 – Canada Sep. Ivey PMI
• 1800 – Mexico Central Bank Decision
• 0130 – Australia Aug. Retail Sales
Quarterly Outlook Q2 2022
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