FX Update: Spiking long US treasury yields driving risk-off and USD melt-up. FX Update: Spiking long US treasury yields driving risk-off and USD melt-up. FX Update: Spiking long US treasury yields driving risk-off and USD melt-up.

FX Update: Spiking long US treasury yields driving risk-off and USD melt-up.

John Hardy

Head of FX Strategy

Summary:  The US dollar is following up on its initial strengthening move in reaction to the FOMC meeting on Wednesday after a more than a bit of chaotic intervention noise from Bank of Japan intervention yesterday. The important coincident indicator is the fresh surge in US longer treasury yields to new cycle highs. The correlation of moves across markets as risk sentiment deteriorates on this latest wave of higher USD and higher yields could see further volatility expansion.

FX Trading focus: USD pulls higher still. Market ready to challenge the BoJ again soon?

The USD has pulled higher still this morning, setting new cycle lows for EURUSD, GBPUSD and in other USD pairs, though with the notable absence of the USDJPY on the list as the market respects the risk of Bank of Japan intervention, at least at the margin. Still, the directional sympathy in USDJPY to the USD direction elsewhere has been in evidence since the pair bottomed below 142.00 overnight, trading above 143.00 as of this writing. More importantly, the massive surge in US long treasury yields to new cycle- and 11-year highs are piling on the pressure for the Bank of Japan to change its policy. US treasuries are the dominant driver across markets.

The USDJPY situation played out largely as one might have anticipated after the FOMC took US yields higher and the Bank of Japan continued to take a stand on its currency policy and then made good on its intervention threats shortly after USDJPY breached 145.00 to the upside, taking the pair all the way back below 141.00 at one point before the price action stabilized. Now, the upside pressure has ratcheted significantly higher for the pair as the key coincident indicator for USDJPY historically, a longer-dated US treasury yield like the 10-year benchmark, surged yesterday by nearly 20 basis points. Without the BoJ’s presence and threats, we would likely be well on our way to 150.00. How long can the market stand to sit back before challenging the BoJ once again? It doesn’t seem a war the latter can win as long as Kuroda and company insist on staying pat with the current policy of freezing yields out to 10 years as US treasury yields march ever higher… Plenty of danger for market participants wanting to make that challenge, however, as the BoJ/MoF have shown tremendous determination in the past, at least when intervening against JPY strength as in 2003.

Source: Saxo Group

Interesting reactions to two of the other central bank meeting yesterday, as the Bank of England merely hiked 50 basis points as the majority expected, but after a lean had developed in favour of a larger move, given the Riksbank and Fed hikes of larger magnitude this week. Ahead of the decision, the GBPUSD price action got caught up in the Bank of Japan intervention, but sterling trades relatively calmly despite the BoE’s decision if we have a look at EURGBP, as the BoE’s guidance for beyond this meeting was sufficiently hawkish to shift short UK yields sharply higher, likely in part on the plans to forge ahead with QT with plans to sell GBP 80 billion of holdings even as it surmised that the UK economy may already be in recession. GBPUSD reached remarkable new lows below 1.1200 this morning, while EURGBP is still sticky in the range. The flash Sep. UK Services PMI edged into contraction at 49.2 after 50.9 in August.

A bit more drama yesterday around the SNB decision, where many were rushing to price in an exceptionally large hike, given the quarterly meeting schedule of the SNB. Alas, the SNB only hiked 75 basis points and made cryptic comments about intervening in either direction, shocking the CHF lower after EURCHF had traded to new lows as it gave the impression of a bit of pushback against the SNB using the currency as forcefully as a part of its inflation-fighting  arsenal. USDCHF positively soared. Could the SNB have some concerns about competitiveness of Swiss exporters? Regardless, the choppy EURCHF chart suggests that downside progress, if it continues, won’t be easy any more.

The Norges Bank meeting yesterday was a spectacle, as the bank hiked the 50 basis points expected, but forecast that further rate tightening may soon end. Certainly out of touch with other CB signaling, and just look at NOK drop against the US dollar, hitting 10.50 today after trading sub-9.00 as recently as May!

Looking ahead, we don’t have an awful lot on the US data calendar next week until the Friday August PCE inflation data, but we do have 2-yr, 5-yr and 7-yr treasury auctions set for Tue-Thu. As long as US treasury yields at 10-years continue posting new highs, that market will remain a key driver of sentiment, though it often (as in 1987 crash) in an extreme market volatility event suddenly changes character and attracts buying as a relative liquidity safe haven. Be careful out there.

Table: FX Board of G10 and CNH trend evolution and strength.
The former euro strength has decelerated, the CHF strength has decelerated even more post-SNB and the NZD and Scandies are the real weaklings of the lot. Gold playing the resilience card with all of this risk-off – stay tuned there.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
The JPY crosses showing signs of trying to trend negative, but impossible to trust given the intervention backdrop and sovereign yields providing offsetting pressure. While the broader CNH strength picture remains a non-event, note USDCNH trading with a percent of the massive 2019-2020 top near 7.20 today and USDCNH trend reading at 10! USDCHF flipping up to a positive trend post-SNB was also an interesting one – can the pair threaten parity again?

Source: Bloomberg and Saxo Group

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