Chief Macro Strategist
Summary: Global yields posted new cycle highs nearly everywhere yesterday save for in the US, a factor that has held the US dollar back recently. That didn’t stop USDJPY from posting aggressive new highs, however, as the JPY remains under intense pressure from rising yields. Elsewhere, the RBA surprised with a larger hike than most expected, while the calendar focus this week is on the Thursday ECB meeting and Friday May US CPI reading.
FX Trading focus: JPY dragged to new cycle low on fresh yield rise
Rising global yields are punishing the Japanese yen once again, with all major JPY crosses surging higher again overnight on the fresh pop in yields. USDJPY posted a new 20-year high of 133.00 this morning as the next chart focus is on the 135.00+ highs of 2002 next, and this despite US yields lagging global peers of late (more below). If this rise in yields continues, the Bank of Japan will rapidly find itself in a political pinch due to its insistence on the yield-curve control (YCC) policy under which it caps 10-year JGB’s at 0.25%. Only a strong backdown in yields and commodity prices in coming weeks may be able to save Governor Kuroda from an embarrassing climb-down from its YCC commitment that would unleash tremendous volatility. Stay tuned and beware the volatility potential in JPY crosses.
As discussed in Friday’s update, the latest leg of the rise in global bond yields has seen the rise in US yields lagging considerably, as these have not yet posted highs for the cycle even after yesterday’s strong surge, while yields elsewhere hit new cycle highs already late last week. The US dollar did get a bump on weaker risk sentiment yesterday and overnight, but the move has been modest and financial conditions have not tightened. The US dollar only seems to threaten on the strong side when rising US yields also drive a tightening of general financial conditions. We’re well off the highs in the US dollar, but I am reluctant to call a cycle top for the greenback until we get a sense of whether markets can absorb the Fed’s intended QT at its full intended pace of $95B/month by September 1 and we are beyond the trough of the bear market that we suspect is on the way. Among G-10 currencies only the USDCAD pair strongly suggests a cycle top for the US dollar. The AUDUSD pair is the possibly next shoe to drop if the US dollar continues to weaken. Currently, that AUDUSD chart is in limbo, for the USDCAD pair, the USD has capitulation lower. AUDUSD is the next possible focus for cementing a USD reversal if last week’s highs above 0.7250 fall.
Chart: AUDUSD
The RBA hiked the policy rate more than most expected, choosing a full 50-basis point move to take the cash target rate to 0.85% rather than an odd-sized hike many were expecting of 40 bps to get the rate back on a “normal” 0.25% increment of 0.75%. This suggests more urgency to normalize policy than the market was expecting. The reaction in AUDUSD was modest even as AUDNZD, for example, jumped to new multi-year highs. Major AUDUSD resistance at the converging moving averages around 0.7230-60 held last week. The bearish case remains in limbo, however, after the pair reversed so aggressively back above the major 0.7000 chart level. A shift in the narrative on commodities (to the downside) and a weaker global growth outlook and/or a new tightening of financial conditions is likely needed for the old bear trend to reassert, with a move below 0.7000 to prove the point on the chart.
The ECB meeting this Thursday arrives after the market has raised the anticipated ECB policy trajectory aggressively over the last couple weeks. The bank has thoroughly guided for an end to bond purchases this month, with the first hike to come in at the July meeting. Looking further out the curve, the ECB policy rate through the December ECB meeting is now marked at +0.66% versus below 0% as recently as early April. Since mid-May, the rise in the ECB yield trajectory at the front end of the curve has outpaced that of the Fed by around 25 basis points. Can the ECB exceed these aggressive market expectations? Assuming that the ECB isn’t set to shock relative to its own guidance for July lift-off, a hawkish surprise would seem more likely to take the form of a surprisingly strong upgrade to staff inflation projections, which are due for a refresh after the March set of projections. In March the 2022-24 CPI was projected at 5.1%, 2.1%, and 1.9%. Particularly the 2024 projection being revised above 2.0% might be seen as a strong signal. This might have the market solidifying expectations for 50 basis points moves starting in September (market currently 50/50 on whether the September meeting will see a 25-bp or 50-bp move).
The final versions of the various PMI surveys rarely see significant adjustments, but the final May UK Services PMI print out this morning showing 53.4, up from the flash estimate of 51.8. Oddly, this wasn’t what suddenly lit a modest fire under sterling this morning about a half hour before that data release. Sterling has been gyrating all over the place since Boris Johnson survived last night’s party leadership confidence vote 211-148. Political observers still suggest his days may be numbered, but the market implications of political uncertainty aren’t clear – still impressive that EURGBP has steered clear of the key 0.8600 area – may need to wait for the ECB reaction to get a firm sense of that pair’s next move.
Table: FX Board of G10 and CNH trend evolution and strength.
The JPY under massive new pressure on the rise in global yields, while CAD leads the charge higher, with AUD not far behind. In momentum terms, one of the more interesting developments is the CHF dropping sharply to start this week. Next week features an SNB meeting.
Table: FX Board Trend Scoreboard for individual pairs.
Interesting to note the weak Scandies as EURNOK and EURSEK have both recently been at tipping points to trend lower, but aren’t doing so. Elsewhere, the USDCHF attempt to flip the trend back higher and NZDUSD to flip lower despite the current status of AUDUSD and USDCAD are interesting subplots as well.
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