FX Update: Bond yields a major driver ahead of Trump speech

Forex 5 minutes to read

John Hardy

Head of FX Strategy

Summary:  Currencies seem very passive to developments across other markets here, and the market providing the most interesting forcing is the safe haven bonds, with JGBs registering another big sell-off overnight and the US 10-year benchmark approaching big levels. How long will EM in particular but risk appetite in general be able to remain complacent in the face of rising yields?


Markets remain in a complacent mood and currencies seem rather passive and merely reactive to what is going on elsewhere, with the minor exception of sterling (more below). The market that is providing the most driving force here is the safe haven bond market, where yields have been on a tear higher, particularly out in Japan, where the 10-year JGB yield nearly managed to reach 0% overnight. There is something big afoot in global long bond yields and at some level this has to begin working its way through the equity market and risky assets, where a good deal of the recent runup has been built on the stimulus of lower rates and the implications for multiples more than on prospects for a global growth rebound. We had a great discussion on this morning’s Market Call podcast on the rise in yields and high levels of market complacency.

Besides keeping an eye on yields – especially with US markets fully back online today – and outside of the specific stories mentioned in the G-10 rundown below, it is a busy week for US President Trump, who will be out speaking today before the New York Economic Club. The market will be highly reactive during this speech to any hints of his stance on the ongoing US-China trade negotiations, with any comments on tariffs particularly important.  Then tomorrow, the first hearings of the impeachment process will be held in the House, with more to follow on Friday. Millions across the US will be tuning in to these hearings and could affect Trump’s odds in the Senate if some of his base wobbles (doubtful) but certainly also affect the slice of independent voters in next year’s elections, which will weigh heavily on markets all next year because of the starkly different policy direction of a Trump second term versus especially a more progressive Democrat.

Chart: JGB yields keeping up with US counterparts
Here, just want to point out that the sell-off in JGB’s has been so vicious of late that it has largely managed to keep up with the moves in US yields even in nominal terms – something that hasn’t normally been the case (the yield spread for the 10-year benchmarks shown in red in the chart). Of course, with the US banking holiday yesterday, there could be some catchup in store for US yields today, but this is a remarkable development that likely constrains the upside potential for USDJPY if it continues.

Source: Bloomberg

The G-10 rundown

USD – the US dollar continues to come out on top as the US yield curve – and curves globally – bear steepen. There is the added uncertainty of the US-China trade deal status that could further boost the USD if Trump comes out hawkish on China today.

EUR – euro may outperform against riskier currencies if complacency yields to more concern, but specific EU-positive catalysts needed to spark an isolated rally.

JPY – USDJPY pushing on resistance once again, but the massive rise in longer Japanese yields keeping the JPY from feeling the pressure one would normally expect as yields rise.

GBP – sterling catching a strong intraday bid yesterday on the news that the Brexit party’s Farage will not run candidates in Tory districts, but that bid has faded a bit as odds are still touch and go on whether Boris Johnson can realize a majority.

CHF – the franc marching to the beat of its own drummer – possibly as the euro has taken over as a preferred funding currency for carry trades, which could mean upside down behavior from historic patterns over risk off events – but too early to tell. In defense of the resilient CHF here – 10-year Swiss government bonds now yield -38 bps vs. -112 bps at the lows!

AUD – the Aussie looking vulnerable and could get very much more so on the perfect storm of a belligerent Trump on trade (not our call, but a risk), and any mishap in the upcoming data – particularly Thursday’s employment data .

CAD – USDCAD progressing higher again as the yield spread at the short end of the curve between US and Canada has moved over 15 basis points in the former’s favour. Technically, looks like one of the better pairs for expressing a strong  USD view, particularly if Trump breaks

NZD – a big decision tonight from the RBNZ as the bank’s official cash rate approaches the effective lower bound. A 25-bp move is widely expected, but how the RBNZ spins its decision and guidance will carry more weight. Generally inclined to believe that Orr defaults to the dovish side - but not much more policy room to work with. Yet another signal that CB's handing over the reins to the government?

SEK – EURSEK in limbo here after the obvious 10.60 support area was tested but not broken. In general, stronger risk appetite and positive economic news both at home and abroad are needed to rekindle SEK upside. Riksbank has done its part by signaling the move away from the negative yield era.

NOK – the EURNOK sell-off taken right to the top of the pivotal 10.05-00 zone as we await further developments.

Today’s Economic Calendar Highlights (all times GMT)

  • 0930 – UK Oct. Jobless Claims Change
  • 0930 – UK Sep. Average Weekly Earnings
  • 0930 – UK Sep. Unemployment Rate
  • 1000 – Germany Nov. ZEW Survey
  • 1030 – US Fed’s Clarida (Voter) to Speak
  • 1700(?) US President Trump to Speak
  • 2330 – Australia Nov. Westpac Consumer Confidence
  • 0030 – Australia Q3 Wage Price Index
  • 0100 – New Zealand RBNZ Official Cash Rate
  • 0200 – New Zealand RBNZ Governor Orr Presser
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/legal/disclaimer/saxo-disclaimer)
- 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
3 Church Street, #30-00
Samsung Hub
Singapore 049483

All departments are available 08:30 to 17:30 Monday to Friday.

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 is not intended for residents of the United States and Japan. Please click here to view our full disclaimer.

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