USD weak and US yields at long end rise to new multi-month highs
The US dollar weakened yesterday on the same day that US yields rose to new highs, with much of the latter coming somewhat oddly overnight in the Asian session. The narrative driving this is apparently that stimulus will either come now or massively so later (under presumed Democratic clean sweep as odd solidify in that direction) and that this will drive US inflation rates higher and real rates lower. Democrat House Speaker Pelosi and the Trump administration are still negotiating despite yesterday’s declared deadline (from Pelosi’s side) coming and going. I am not fully convinced that this is the case and wonder if some of the bond weakness is down to the rise in bond volatility driving technical adjustments in bond portfolio allocations, whether in risk parity models or in basic ratioed portfolios as recent risky asset volatility has seen no offsetting upside in US treasuries. On that note, I am still skeptical of a major USD directional move unfolding until we get to the other side of the US election.
The JPY wakes up this morning.
Normally, with higher US yields we would not be looking for pronounced JPY strength, but the fact that US yields are moving independently of yields elsewhere is a bit novel and weak risk sentiment is providing a JPY boost as well – although that particularly cylinder has fired erratically at best for many months now. Regardless, USDJPY is having a poke below 105.00 suddenly this morning, a move that keeps the focus on JPY crosses and one that clashes with the recent USD weakening move as the JPY and USD have been tightly correlated in most crosses for years.
Today’s G-10 rundowsn
USD – I am not sold on the narrative and afraid of taking away too much from this USD weakening move – wouldn’t take much for the greenback to spoilthe latest attempt at making a directional statement. Longer term is a different matter, but we need to get to other side of election and would prefer a partial options position for now rather than high conviction spot trades.
EUR – the euro running up to new highs, perhaps in part on the massive interest in the EU’s first social bonds issued directly by the EU in connection with the pandemic relief effort. Key technically for EURUSD to maintain above 1.1850 here to keep interest in a test toward 1.2000. But is market ready to get aggressive on a view on the USD before the US election result?
JPY – a look at yields ex-US suggests that the JPY need not sweat the rise in US yields unless we see global long yields dragged higher still. Risk sentiment is likewise strong in EM carry trades, etc., but we’ll watch this USDJPY situation closely if we stay below 105.00 as traders may be complacent on hedging flow risks if the JPY rally move here broadens.
GBP – sterling taking back about half of the recently lost terrain on the latest rhetoric and some sources suggesting that some of the UK position is theatre . The EU’s Barnier made flattering overtures on the UK’s sovereignty and said a deal is within reach in a speech this morning.
CHF – no spin here – below 1.0700 in EURCHF needed to merit attention, and really below 1.0600.
AUD – a popular short in the crosses as the RBA the only central bank able to gin up expectations of a significant shift in policy recently. That shift is likely large done. Further AUD downside would need a challenge to the reflation narrative, weaker global outlook, CNY to stop rallying, etc.. not to mention a technical break of 0.7000 in AUDUSD and 74.00 in AUDJPY.
CAD – a relative winner in the crosses, but not much more range to work with to 1.3000, which my hold until we get to other side of election to see if the USD bears kicks off then.
NZD – winning out relative to AUD on the RBA dovish shift, but hard time seeing significant room for further weakness in AUDNZD beyond another percent or two – watching 200-day moving average there at 1.0625 next.
SEK – the krona has held in well during the recent Covid-19 resurgence and weaker outlook now for the EU, but looking for significant further EURSEK downside now a tough call.
NOK – call us contrarian to further upside in EURNOK beyond 11.00 for now unless we get a new oil sell-off and more profound weakening in risk sentiment.
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