FX Trading focus: Burst of USD liquidity into USD end to eventually force Fed’s hand
The US dollar rallied further into quarter-end, especially against the Japanese yen yesterday and this morning. Looking at a weak Q2 Tankan survey overnight, one might be tempted to believe that this weighed on the yen, but alas, there was no interesting price reaction around its release, with the bulk of the move unfolding in the European afternoon yesterday and the follow through coming in early European hours this morning. US treasuries have lurched slightly lower to start the quarter, but the move pales in comparison to the move in USDJPY. It’s tough to build a narrative around the move, other than that the fresh, enormous surge in the Fed’s reverse repo facility yesterday (to $992 billion from $841 billion the prior day) could be driving the belief that the Fed will have no choice but to taper asset purchases sooner rather than later, as purchases are one of the drivers in unprecedented growth in that facility over the last few months.
The facility began inflating, it should be noted, around the very time frame that US long yields peaked out at the end of Q1. Certainly, as we discussed in this morning’s Saxo Market Call podcast, it will be interesting whether the transition to quarter-end drives any slowdown in the inflation of this facility and therefore a move to higher US yields or if the Treasury’s ongoing addition of liquidity from its drawdown of its account with the Fed d. Regardless, these factors are not driving any shift in Fed expectations, where rate hike expectations have actually eased a couple of basis points for the beginning of 2023. The June US ADP payrolls change data yesterday offered no surprise, as the better than expected June number was precisely offset by a downward revision of -92k in the May data.
USDJPY is stretching to new cycle highs here well above 111.00, with no apparent need for the usual coincident indicators to provide support, although US yields have jumped slightly since late yesterday, a possible sign that quarter-end effects are in play. The next resistance level for this pair is the big 114.50 area that held all rallies back for the bulk of 2017 after Q1 and briefly in 2018 as well. To get anywhere close to that level. I suspect we would need to see US long yields picking back up toward the range highs. Tomorrow’s June US jobs report is the first test of whether the upside of this channel established since late April continues to define the price action.