FX Update: Yields the focus again after Friday rebalancing jolt

Forex 4 minutes to read
John Hardy

Head of FX Strategy

Summary:  Friday saw a strong surge for the US dollar, which until proven otherwise, may have merely been and end-of-month rebalancing move after a weak April for the big dollar. As May gets under way and key Asian markets off-line until Thursday, European yields are surging again as the German Bund yield pokes at the cycle highs, sending EURJPY back toward cycle highs. A big week ahead for the Antipodean currencies and US macro data.


FX Trading focus: Yields in focus again – JPY remains hypersensitive

As yields are pressing higher again, it is important to touch on the themes I brought up in recent updates – namely, that if global yields rise again, this doesn’t necessarily have to be a USD positive, even if nominal yield spreads rise, provided that US real yields fail to keep track with real yield developments elsewhere. The focus today on yields is more intense in Europe, where the Bund yield breached its multi-month highs near -20 bps last Thursday and we are seeing some follow through to new highs this morning. Note EURJPY chart below as the JPY continues to show extreme sensitivity to yields. US yields are still within range, with the 10-year benchmark trading near 163 bps as of this writing, some 15 bps below the cycle highs from the late March highs. Again, the interesting development to watch for is whether we will find confirmation of the narrative that the more radical attitude to stimulus in the US drives worsening twin deficits and relatively higher inflation that takes US real yields more negative. The yield rises in February and March outstripped inflation expectations and drove the USD higher, for example. Elsewhere, the price action is a mixed bag to start the week, with some key commodity prices retreating from recent highs and the two largest Asian markets Japan and China out of office for a holiday, only returning on Thursday.

The economic and central bank calendar are fairly busy this week, starting with tonight’s RBA Meeting likely a non-event (since the prior statement indicated that the RBA would wait until “later in the year” before determining whether to roll forward the target bond for the 3-year 0.1% yield curve control policy. Surely May is not later in the year?).  Still, the market could be sensitive to any indication that the bank’s resolve to continue signaling that no rate hike will take place until 2024 is crumbling Australia house prices are one place to look for financial stability risks that policymakers there should be doing more to address. On that note, New Zealand’s Financial Stability Review release set for Wednesday and could include new macroprudential policy indications from the RBNZ – AUDNZD is playing cat and mouse with its 200-day moving average ahead of these important events.

Elsewhere, plenty of focus on EM this week, with a Brazil central bank meeting Wednesday expected to bring a 75 bps rate hike and the Turkish central bank scheduled to meet on Thursday. And major US data this week besides today’s ISM Manufacturing includes the ISM Services on Wednesday and the April jobs report on Friday (expected to show nearly a million jobs added for the month.)

Chart: EURJPY
Friday saw some consolidation in EURJPY after its recent sharp run higher, likely driven in part by end-of-month rebalancing that took the USD (and less so the JPY) higher and risk sentiment lower. last Friday. As EU sovereign yields burst higher to start the week (and the 10-year Bund reached a new highs for the year above -18 bps) the EURJPY has already pulled back close to the cycle high today, demonstrating once again the JPY hyper-sensitivity to bond yields. Note that Japan is closed this week for a holiday until the Thursday session. If the new high in yields holds, EURJPY could be set for a test higher still, but if they falter, the recent extension looks overdone relative to the EU-Japan yield spread.

Source: Saxo Group

Table: FX Board of G-10+CNH trend evolution and strength
The JPY still struggling as safe-haven sovereign bonds were under pressure today. Elsewhere, a bit odd to see commodity FX under modest pressure when all of the recent focus on inflation risks and commodity price jumps, although energy prices did suffer a setback last Friday just after reaching a local high, possibly in part on concerns that the ongoing Covid nightmare in India could dampen demand for some time there. Iron ore prices came under pressure Friday as well (with the key Chinese futures markets off-line until Thursday) and the RBA is up tonight, with AUD disappointing once again last week in not finding enough momentum to break higher versus a weak USD through the key 0.7800+ resistance. While NOK and CAD are still posting strong positive trend readings, meanwhile, EURNOK is struggling to maintain its recent break below 10.00, backing back above that level today.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs
In the individual pair breakouts, it is worth noting that EURCHF is trying to break lower today, and CHFSEK higher, a development worth tracking as it doesn’t square well with EU sovereign yields breaking higher and supposed hope of an EU growth resurgence on the way. Elsewhere, note that despite the AUDUSD pulling sharply away from resistance, considerably more selling needed to take the trend back to negative.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1345 – US Final Apr. Markit Manufacturing PMI 
  • 1400 – US Apr. ISM Manufacturing 
  • 1820 – US Fed Chair Powell to speak 
  • 0130 – Australia Apr. Trade Balance 
  • 0430 – Australia RBA Cash Target 
Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
Most of our staff in Singapore are working from home to help limit the spread of the coronavirus. We remain at your service on the details below. Thank you for your understanding.

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.