FX Update: USD pops anew on shrug of Powell’s shoulders
Summary: The USD rise accelerated steeply yesterday as Fed Chair Powell largely shrugged off the move higher in US treasury yields. And USDJPY went nearly vertical overnight on intervention against rising yields at the long end of the yield curve. The US dollar is now strong across the board and the countdown to the next Fed intervention is underway, but the USD wrecking ball will likely do more damage first.
FX Trading focus: USD rally accelerates on Powell and Kuroda comments
As we thought was likely, Fed Chair Powell failed to signal a sufficient level of concern on rising US treasury yields yesterday to soothe this market, which threw another tantrum, sending treasuries lower and yields soaring, and sending equities into a new tailspin while the US dollar went nearly straight up. As our Steen Jakobsen writes in his piece today, the Fed will eventually act, but only once financial conditions are sufficiently dire to give him the cover to do so, as he can argue that sharply weaker financial conditions would feed through to Main Street USA and present disinflationary and labor market risks. And as we pondered on this morning’s Saxo Market Call podcast, the Fed may be happy for some measure of speculative froth to come out of this market rather than to be seen riding too quickly to the rescue. For now, it is worth noting that the USD has taken out new local highs against every currency in the G10 now save for CAD and NOK, where oil prices spiking on Saudi Arabia’s taking a stand on not increasing production at yesterday’s OPEC+ meeting has kept the petro-currencies divergently resilient.
And overnight, the Bank of Japan’s Kuroda made comments rejecting the notion in a parliamentary hearing that the BoJ is ready to expand the range of trading for Japanese government bonds. The 10-year yield was smashed back lower to around 0.07% after rising as high as 0.15% recently. (let’s recall the irony that the original YCC from the BoJ was intended to prevent the 10-year from going too negative to avoid excess damage to the financial system). More observations on USDJPY below.
Today, we watch and wait for whether the market is sufficiently interested in US employment data to bother reacting to it, and whether we have a paradoxical setup today in which terrible data would be celebrated for the implications for the Fed and treasury yields and great data would be fretted with further risk off.
Stay careful out there – the weekly close will be an important determinant for whether this market can pull itself together of its own volition or will continue to deleverage until central bank action is forthcoming. It is certainly a different ballgame for many portfolio managers this week, who have seen significant losses on their equity holdings, with no offsetting gains on their bond holdings. That positive correlation in equities and stocks at time this week – especially yesterday – is a game changer for trillions of dollars’ worth of money under management that has been based on the assumption that bond and equity prices normally move in negative correlation as they have for much of the last more than twenty years. Historically, they are more often positively correlated.
Chart: USDJPY
USDJPY upside action accelerated again overnight as BoJ Governor Kuroda rejected the notion that the Japanese yield curve should be allowed to lift, which smashed long JGB yields back lower. To me, the pace of recent gains in USDJPY is getting to be too much too fast and will inevitably hit a brick wall at some point down the road – either once the Fed steps in with something to counteract the move in yields (a longer term inevitability), or, perhaps more likely in the near term, when the move higher simply exhausts itself of its own accord. A reversal in all JPY crosses would prove most climactic if asset markets tank badly and finally trigger a bid into bonds. But for now, traders shouldn’t dare step in front of an onrushing train and should consider JPY call option strategies for any contrarian trading notions to the present trend – with a measure of patience and building a position over multiple sessions. Next big round level is 110 here.
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: USD rally accelerates on Powell and Kuroda comments
As we thought was likely, Fed Chair Powell failed to signal a sufficient level of concern on rising US treasury yields yesterday to soothe this market, which threw another tantrum, sending treasuries lower and yields soaring, and sending equities into a new tailspin while the US dollar went nearly straight up. As our Steen Jakobsen writes in his piece today, the Fed will eventually act, but only once financial conditions are sufficiently dire to give him the cover to do so, as he can argue that sharply weaker financial conditions would feed through to Main Street USA and present disinflationary and labor market risks. And as we pondered on this morning’s Saxo Market Call podcast, the Fed may be happy for some measure of speculative froth to come out of this market rather than to be seen riding too quickly to the rescue. For now, it is worth noting that the USD has taken out new local highs against every currency in the G10 now save for CAD and NOK, where oil prices spiking on Saudi Arabia’s taking a stand on not increasing production at yesterday’s OPEC+ meeting has kept the petro-currencies divergently resilient.
And overnight, the Bank of Japan’s Kuroda made comments rejecting the notion in a parliamentary hearing that the BoJ is ready to expand the range of trading for Japanese government bonds. The 10-year yield was smashed back lower to around 0.07% after rising as high as 0.15% recently. (let’s recall the irony that the original YCC from the BoJ was intended to prevent the 10-year from going too negative to avoid excess damage to the financial system). More observations on USDJPY below.
Today, we watch and wait for whether the market is sufficiently interested in US employment data to bother reacting to it, and whether we have a paradoxical setup today in which terrible data would be celebrated for the implications for the Fed and treasury yields and great data would be fretted with further risk off.
Stay careful out there – the weekly close will be an important determinant for whether this market can pull itself together of its own volition or will continue to deleverage until central bank action is forthcoming. It is certainly a different ballgame for many portfolio managers this week, who have seen significant losses on their equity holdings, with no offsetting gains on their bond holdings. That positive correlation in equities and stocks at time this week – especially yesterday – is a game changer for trillions of dollars’ worth of money under management that has been based on the assumption that bond and equity prices normally move in negative correlation as they have for much of the last more than twenty years. Historically, they are more often positively correlated.
Chart: USDJPY
USDJPY upside action accelerated again overnight as BoJ Governor Kuroda rejected the notion that the Japanese yield curve should be allowed to lift, which smashed long JGB yields back lower. To me, the pace of recent gains in USDJPY is getting to be too much too fast and will inevitably hit a brick wall at some point down the road – either once the Fed steps in with something to counteract the move in yields (a longer term inevitability), or, perhaps more likely in the near term, when the move higher simply exhausts itself of its own accord. A reversal in all JPY crosses would prove most climactic if asset markets tank badly and finally trigger a bid into bonds. But for now, traders shouldn’t dare step in front of an onrushing train and should consider JPY call option strategies for any contrarian trading notions to the present trend – with a measure of patience and building a position over multiple sessions. Next big round level is 110 here.
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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