Head of FX Strategy
The US 10-year yield rushed higher yesterday as US retail sales data failed to provide any support for US Treasuries, which were already struggling ahead of the data release. The US 30-year yield is the last hold-out, as it has yet to close at new high for the cycle (around 3.25%), a resistance area with significance for that benchmark all the way back to 2014.
But the damage was done yesterday as the 10-year is the most immediate focus and risk appetite did not take kindly to the development, with major equity indices in a fresh, ugly correction that came at a pivotal moment not long after resistance had just been cleared, for example, in the US S&P 500 index. In exchange rates, the USD generally rushed higher, especially versus the struggling euro, as EURUSD probed the lows and USDJPY pulled above 110.00 for the first.
But the real damage continues versus emerging market currencies, which never appreciate the price of “global money” (the USD reserve currency) rising and long-term interest rates on that money also rising quickly.
This latest move in US longer interest rates has global markets entering a critical danger zone that could set off a negative spiral of deleveraging. The factors we will watch from here include not only the longer US rates and the now 3.00% support level in the US 10-year benchmark, but also the 200-day moving average in the S&P 500.
Among emerging market currencies, we focus especially on the Turkish lira, the most liquid of the EM currencies with notable risk of a “run on the country” if foreign capital takes flight. We are in a “quiet period” ahead of the June 24 election and President Erdogan has promised more political involvement in traditional central bank policy, including the threat to cut rates – the opposite move is normally made to shore up a currency in trouble. It is a long wait until the election and the post-election policy uncertainty, which will see Erdogan with vastly expanded executive powers. The market could justifiably fear that he will choose drastic intervention measures once he is sworn in as president – with the worst version of these fears something along the lines of the harsh capital controls implemented by Malaysia’s Mahathir in the late 1990s?
Japan’s Q1 GDP estimate overnight showed a miserable performance for the Japanese economy, as nominal growth limped in at -0.4% quarter-on-quarter and the annualised growth was a terrible -0.6%, the worst performance since 2015. While recent inflation data has picked up, this kind of growth performance is going to keep the Bank of Japan far away from a policy adjustment for now. The one saving grace for the yen is that a possible decline in risk appetite could support the yen in some of the crosses (versus the struggling euro, for example).
Chart: EURJPY
The EURUSD decline is well advertised and much of the talk is about the strong USD driving this, but we also have a weak euro on our hands if we have a look at most of the euro crosses, including EURJPY. This pair has found resistance at an interesting resistance area (the Ichimoku daily cloud) and the euro may underperform from here on underappreciated political concerns.
The G-10 rundown
EUR – the FT ran a story (paywall) discussing an early draft of Italy’s populist parties’ platform for the upcoming government, which included a mechanism for leaving the EU and a request that the ECB write off EUR 250 billion of Italian sovereign debt. The euro may continue to broadly underperform here – even against sterling. As some have pointed out – the irony here is that without Italy, the euro should be much stronger….
JPY – the yen is not in a good place as the US yield advantage yawns wider and USDJPY busts up above 110.00. Weak risk appetite could provide a slightly offsetting support in the crosses.
GBP – sterling is escaping additional negative attention at the moment despite an ugly spike in Apr. Jobless Claims printed yesterday. The 1.3500 area in GBPUSD is trying to hang in there and the euro has come under more isolated pressure recently. EURGBP looks heavy if the 0.8750-25 area gives way here.
CHF – the EURCHF rally thoroughly derailed by this latest downdraft until proven otherwise and the technical case for bears picks up momentum if the 1.1800 area falls, which could point to a test of the 200-day moving average around 1.1650.
AUD – the Aussie is back near the lows for the cycle against the US dollar, as we watch for Australia’s employment data overnight for whether its relative performance improves or worsens. The shorter Australian rates have picked up sharply over the last couple of sessions and the stocks of the mining giants in Ausralia have pulled to multi-year highs.
CAD – a sharp spike higher in USDCAD yesterday in sympathy with the USD pairs elsewhere, but the strong oil price seems to providing considerable support for CAD in relative terms – and have a look at the EURCAD chart for a sense of the relative performance as Canadian rates have tracked US rates higher recently.
NZD – AUDNZD is contending with the 200-day moving average near the highs of the last couple of sessions and could risk a setback if Australia’s jobs data tonight comes in weaker than expected.
SEK – the weight of the weaker euro weighing perhaps on EURSEK, but this morning we even have a Riksbank member suggesting that the path to a rate hike in October is open.
NOK – the NOK performance against a struggling euro and despite strong oil prices of late can only be described as pathetic. The move above 9.60 disappoints the EURNOK bears.
Upcoming Economic Calendar Highlights (all times GMT)
0900 – Eurozone Final Apr. CPI
1200 – ECB’s Draghi to speak
1230 – Canada Mar. Manufacturing Sales
1230 – US Fed’s Bostic (Voter) to speak
1230 – ECB’s Coeure to speak
1230 – US Apr. Housing Starts / Building Permits
1315 – US Apr. Industrial Production
1430 – ECB’s Praet to speak
1430 – US Weekly US DoE Crude Oil / Product Inventories
1600 – Switzerland SNB’s Jordan to speak
2130 – US Fed’s Bullard (non Voter) to speak
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
