Chief Macro Strategist
Summary: Yields cratered yesterday, first in Europe on weak Eurozone and UK PMI’s and a then later in the US on a downward revision of older US payrolls data. This whipsawed the US dollar first higher and then lower, with USDJPY and JPY crosses seeing heavy selling late yesterday. Alas, bullish risk sentiment on tech earnings and perhaps the drop in yields on weak data took the greenback back lower and engineered a brief JPY resurgence, one that has somewhat faltered today.
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Some whipsaw action across FX yesterday, starting with a dump in the euro and sterling as Eurozone and especially UK preliminary August PMI’s came in far weaker than expected for the services sector. For the UK, it was the first time the Services PMI had dipped below 50 since January, and the UK’s Manufacturing activity dip was particularly ugly, slipping to 42.5 from 45.3 in July, although Germany’s 39.1 continues to suggest a dire pace of contraction, even if that marginally beat expectations. This had fixed income heavily bid and took EU yields sharply lower, doing so before the longer end had managed to post new cycle highs as was the case for the US earlier this week. UK yields rushed lower as well, with the 2-year deflating over fifteen basis points yesterday as BoE hiking intentions dropped. EURUSD touched key support as noted below, while GBPUSD has traced out another test of its head-and-shoulders neckline in the low 1.2600’s before rebounding on USD weakness later in the day.
That US weakness seemed trigger by the bottom suddenly dropping out of USDJPY in the wake of the BLS announcing a -300k revision in the March 2022 to March 2023 payrolls, which saw US treasuries heavily bid. The move has come full circle as of this writing, perhaps in part on strong risk sentiment in the US tech sector (or at least AI-tech sector if we note the speculative frenzy surround Nvidia). But could some of the JPY weakness at the margin be on Japan’s announcement that it would begin releasing radioactive water from its failed Fukushima nuclear plant into the Pacific Ocean, which has prompted China to ban Japanese seafood imports. The bounceback in EURJPY and GBPJPY looks less forceful here and would still look for downside potential there if we have a further drop in yields ahead – made far more likely by the weak data yesterday and mounting evidence of Eurozone and UK recession in the making. Jackson Hole could also drive direction there, as discussed below.
EURUSD wilted to the 200-day moving average yesterday on weak Eurozone PMI before a somewhat weak US PMI and news of negative payrolls revisions hit the market (, which hit US yields and took them lower all along the curve). The reversal is far from convincing, with the 1.0800 level the notable line of support for now as we await Jackson Hole speeches from both Fed Chair Powell and ECB president Lagarde. It’s hard to see a follow through lower without broader risk aversion, but the pace could be slow if yields also slip and USDJPY is under pressure, though I don’t see any reason in principle why we can’t have both EURUSD and USDJPY weakness simultaneously (so EURJPY is the high-beta trade, and possibly GBPJY more so).
I offered extensive thoughts on what Fed Chair Powell might deliver at his Jackson Hole speech tomorrow in my Tuesday update and still think there is little point in expecting any hints on appropriate policy settings for the near term, as this is the job for the regularly scheduled FOMC meetings and there is no urgent question from the market on whether the cycle is done or almost done here. Rather, we should be watching for longer term hints on where the Fed sees the neutral rate (already much higher in the market’s view and well above the longer run projections in the Fed’s quarterly dot plot), whether directly or because of the “fiscal dominance” dynamics that risk higher long yields and longer-term inflation.
But we shouldn’t forget that ECB president Lagarde is also speaking at 1900 GMT and may be set to make a point or two on the ECB’s stance on the future of monetary policy. It’s hard to see the ECB pulling the trigger on rate hikes with a German Manufacturing PMI with a 39 handle. The ECB rate hike cycle is over, which is not yet fully priced.
The sterling rally has lost momentum, possibly fatally so – another directional stab needed for confirmation that its outperformance is finished for now. Elsewhere, the USD remains in an up-trend until proven otherwise, while JPY status is perhaps the most compelling to watch into early next week post-Jackson Hole, if this extends the decline in global yields.
CHFJPY longs have certainly been awarded over the last 105 trading days (!), while other JPY crosses appear in danger of flipping lower or have already done so. Watching EURJPY and GBPJPY closely in coming days on that account.
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