FX Update: USD rolling over again ahead of treasury auctions
Summary: The US dollar peaked out on Friday just ahead of a weak official January jobs report and weakened sharply again yesterday and overnight as US treasury yields rolled over after etching new highs ahead of important treasury auctions tomorrow and Thursday. The JPY responded enthusiastically to lower yields and USDJPY dropped well below 105.00 overnight, while commodity linked currencies likewise firmed with the ongoing ramp in global commodity prices.
FX Trading focus: Market making more sense now as USD in new tailspin
I noted in Friday’s FX Update that something was unsustainable in seeing the US dollar rallying at the same time as risk sentiment was strong and US yields were heading to new highs. It proved indeed that the US dollar was the weakest link and it rolled over badly on the weak US jobs report on Friday. Somewhat oddly, US treasuries were also weak despite the lackluster jobs market data for January, but after new highs in yield – especially for the 30-year T-bond, which kissed 2% for the first time since February of last year – treasuries found support and put in a chunky rally yesterday ahead of a 10-year auction tomorrow and a 30-year T-bond auction tomorrow. From here, I would expect correlations to make more sense: if yields are up sharply and risk down sharply, I would expect a firmer US dollar, while if yields are tamed or even slightly lower while risk sentiment is strong, I would expect the US dollar to fall apace. The turbo-charger for USD weakening would be any intent expressed by the Fed to cap yields Probably too soon for this and the whole situation may be a chicken and egg problem – i.e., that the Fed wouldn’t want to reach for yield curve control/yield caps unless these seemed to be denting market confidence.
Technically speaking, USD pairs are still in a zone of uncertainty as the bears need to take the USD fully back close to the cycle lows (or at least another leg lower as noted in the USDJPY chart below) to get the USD bear trend back on the rails – any faltering here keeps a cloud of uncertainty over the status of the trend.) One seasonal note of concern for any market volatility in the US dollar is the upcoming Chinese New Year holiday, with mainland Chinese markets closed this Thursday through next Wednesday.
Chart: USDJPY survives technical test
The USDJPY pair tested the 200-day moving average above 105.50, in part likely due to an over-positioned market disconcerted by the rise above what had proven a very well defined downward sloping channel, but also as US yields had backed up sharply recently – with higher yields generally associated with headwinds for the JPY. As well, JPY traders have also likely been spooked to a degree by the strong surge in commodities prices, as Japan is almost entirely dependent on imports of energy and other materials. Weighing against any JPY strengthening all the while has been an strong bid for credit risk in EM, where Japan’s investors like to invest for the carry. The pace at which USDJPY selling has come back in since yesterday’s highs suggests that the latest rally may prove merely to have been a squeeze. If the price action drops back down toward 104.00, the latest rally wave will have been fully reversed and traders will revert to focusing on the cycle lows just above 102.50 and possibly eventually to 100.00, although that eventuality may require that US yields stay capped (especially if the Fed hints at some point that it is willing to cap US yields until employment has improved sufficiently. If US yields rise aggressively, on the other hand, together with a continued strong resurgence in commodity prices, the JPY may prove a laggard in strengthening versus the US dollar relative to most other G-10 currencies.
John Hardy
Head of FX Strategy
Disclaimer
The Saxo Bank 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. This content is not intended to and does not change or expand on the execution-only service. 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 Bank 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 Bank 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 Bank 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 Bank 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 Bank 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.
FX Trading focus: Market making more sense now as USD in new tailspin
I noted in Friday’s FX Update that something was unsustainable in seeing the US dollar rallying at the same time as risk sentiment was strong and US yields were heading to new highs. It proved indeed that the US dollar was the weakest link and it rolled over badly on the weak US jobs report on Friday. Somewhat oddly, US treasuries were also weak despite the lackluster jobs market data for January, but after new highs in yield – especially for the 30-year T-bond, which kissed 2% for the first time since February of last year – treasuries found support and put in a chunky rally yesterday ahead of a 10-year auction tomorrow and a 30-year T-bond auction tomorrow. From here, I would expect correlations to make more sense: if yields are up sharply and risk down sharply, I would expect a firmer US dollar, while if yields are tamed or even slightly lower while risk sentiment is strong, I would expect the US dollar to fall apace. The turbo-charger for USD weakening would be any intent expressed by the Fed to cap yields Probably too soon for this and the whole situation may be a chicken and egg problem – i.e., that the Fed wouldn’t want to reach for yield curve control/yield caps unless these seemed to be denting market confidence.
Technically speaking, USD pairs are still in a zone of uncertainty as the bears need to take the USD fully back close to the cycle lows (or at least another leg lower as noted in the USDJPY chart below) to get the USD bear trend back on the rails – any faltering here keeps a cloud of uncertainty over the status of the trend.) One seasonal note of concern for any market volatility in the US dollar is the upcoming Chinese New Year holiday, with mainland Chinese markets closed this Thursday through next Wednesday.
Chart: USDJPY survives technical test
The USDJPY pair tested the 200-day moving average above 105.50, in part likely due to an over-positioned market disconcerted by the rise above what had proven a very well defined downward sloping channel, but also as US yields had backed up sharply recently – with higher yields generally associated with headwinds for the JPY. As well, JPY traders have also likely been spooked to a degree by the strong surge in commodities prices, as Japan is almost entirely dependent on imports of energy and other materials. Weighing against any JPY strengthening all the while has been an strong bid for credit risk in EM, where Japan’s investors like to invest for the carry. The pace at which USDJPY selling has come back in since yesterday’s highs suggests that the latest rally may prove merely to have been a squeeze. If the price action drops back down toward 104.00, the latest rally wave will have been fully reversed and traders will revert to focusing on the cycle lows just above 102.50 and possibly eventually to 100.00, although that eventuality may require that US yields stay capped (especially if the Fed hints at some point that it is willing to cap US yields until employment has improved sufficiently. If US yields rise aggressively, on the other hand, together with a continued strong resurgence in commodity prices, the JPY may prove a laggard in strengthening versus the US dollar relative to most other G-10 currencies.
John Hardy
Head of FX Strategy
Disclaimer
The Saxo Bank 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. This content is not intended to and does not change or expand on the execution-only service. 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 Bank 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 Bank 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 Bank 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 Bank 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 Bank 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.
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