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The FX Trader: JPY and yields the focus.
John J. Hardy
Global Head of Macro Strategy
Résumé: The volatility in risky assets saw limited transmission into FX on Friday, but the Japanese yen remains the chief focus among major currencies for volatility potential, especially if US treasuries come under further pressure.
What to know: quick bullets
- Further volatility in equities seeing weak transmission into FX. Another rather wild session on Wall Street on Friday saw a very brief echo of the “risk-off” trades of yore, as US treasuries and the Japanese yen and Swiss franc put in a rally during the worst of the pressure before reversing as animal spirits improved in risky assets. As noted in Friday’s update, however, the US dollar was no safe haven, quite the contrary. The equity market closed unchanged and key support in cryptocurrencies (94k-ish in Bitcoin) held after a challenge over the weekend, when the news broke that Peter Thiel has sold his stake in Nvidia and reduced stakes in Tesla, Apple and others. With equities in a bright mood to start the weak, the US dollar is bid and JPY is offered.
- UK – sterling stabilized, but Gilts did not on Friday: Sterling stabilized Friday after an initial sell-off on the FT story that Chancellor Reeves and PM Starmer are set to ditch plans to increase income taxes to address the fiscal hole. Their cover is apparently a new Office of Budget responsibility report that improved forecasts for the deficit by some GBP 1.7 billion. It is worth noting that while EURGBP and GBPCHF stabilized, UK yields charged sharply higher at the long end of the curve, suggesting increased concern on the fiscal dynamics.
- JPY remains weak on yield focus. US treasury yields rose on Friday after the risk-off wobble and can become a focus once again after low volatility of late if they rise further at the long end of the curve (currently just below 4.15% and they become a bigger focus above 4.20%), while Japan’s JGB yields rose to new post-2008 highs for the 10-year (above 1.73%) and new highs since 1999 for the 20-year (near 2.75%) after stronger than expected Q3 GDP data overnight. This has EURJPY back near 180.00 again (a level I suggest is akin to waging economic war with Europe) and back near the pivotal 155.00 in USDJPY.
Chart focus: GBPUSD
The US dollar picture is far from clear, while sterling has been trending lower and the market is nervous ahead of the Autumn Budget Statement on November 26, when Chancellor Rachel Reeves will outline the government’s plans to address dire fiscal dynamics. All of this with the Labor suffering its worst readings ever in recent polls – near 17%. For GBPUSD, resistance to keep the bearish trend alive in GBPUSD comes in between 1.3200 and 1.3300.
Technical and other observations for key pairs.
- Dollar Index – at pivotal levels into the 99.00 area if we look at a trend line that has been challenged and the recent lows, though different USD pairs pulling in different directions. 100.00 needed to re-establish the choppy up-trend from the Sep. lows.
- EURUSD – has neutralized the attempt to establish a bear trend, but technical indeterminate here. The next upside hurdle is 1.1670 resistance.
- JPY pairs – it looks like the “coming 155-160 USDJPY showdown” scenario remains intact, especially as long as global yields remain on the rise, though the center of gravity is US treasury yields, so we are particularly likely to see “Game on!” if,say, the US 10-year yield rises above the 4.20-25% zone (currently 4.14%).
- GBPUSD and EURGBP – it is rather resilient of sterling that we haven’t headed lower with the big reaction in UK yields on Friday.
- AUDUSD and AUD – AUDUSD is mid-range. In AUDNZD, we got a big correction in the strong bull trend trade as the yield spread between AU and NZD has now tightened 7-8 basis points at the front end of the curve after blowing out further on the recent strong AU jobs report. But the trend to remain intact if 1.1400-1.1450 zone holds– but risk of a bigger sell-off if any strong NZ catalysts emerge. RBNZ up next Wednesday the 26th.
- EURCHF- a big reversal on Friday that is partially sterling-linked, but EURCHF also critical after the huge 0.9200+ area support was taken out and then the move was rejected.
- Scandies – NOK and SEK sold off on the recent risk off event, with crude oil offering additional pressure on NOK – with this pressure easing at the start of the week, will EURNOK and EURSEK challenge the huge range support again?
Next steps
The market is hungry for US data. This week, we’re told we’ll get the September US employment report, but that the data wasn’t collected for October and we may have to wait for November data for a read on what is going on. Meantime, we’ll have a look at more timely weekly private ADP payrolls tomorrow. Other data highlights this week include the UK CPI up on Wednesday and the Eurozone and other flash November PMIs up on Friday.
Risk sentiment pivotal but what is transmission into FX? We got a stabilization move Friday, which could allow a comeback in more traditionally cyclically exposed currencies from AUD to SEK, but JPY pairs will likely show the most volatility if both equities and yields rise together from here, creating ever more tension if USDJPY rises well above 155.00.
FX Board of G10 and CNH trend evolution and strength.
Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board.
Few changes of note after a choppy session on Friday, with NZD vying for a comeback, while precious metals decompressed Friday.
Table: NEW FX Board Trend Scoreboard for individual pairs.
EURJPY hits 180 days in a positive trend – more than remarkable. USDCHF triggered a downtrend reading – but look at the chart and the big range that remains intact there before deciding that it is particularly relevant here. EURSEK is only interesting if the sub-10.90 levels break in coming sessions.
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