FX Update: USD rises as energy and yield spikes crush sentiment
Summary: Market sentiment has finally reached a breaking point on the pressure that had been building for weeks in energy prices and for less than a week in yields, with US Treasury yields taking out key levels all along the curve. In response the US dollar has strengthened more broadly, not just in USDJPY, while risk-sensitive currencies like NZD and SEK have weakened the most.
FX Trading focus: USD rises to top on energy crunch and as yields rushing higher
Markets are finally getting a case of bad nerves as the yield spike has now reached critical proportions, with key points on the US yield curve hitting above important thresholds as we discussed on this morning’s Saxo Market Call podcast, including the 5-year smashing above 1.0%, the 10-year hitting above 1.5% and the 30-year T-bond looking back above 2.0%. The move may be a delayed one showing some sympathy with the remarkable resurgence in energy prices, not only the wild rise in natural gas and power prices which will already crimp growth and earnings in energy-intensive sectors, but also in crude oil in recent days.
Whatever the cause, market sentiment is stumbling badly again today after a finally rolling over yesterday, taking the US dollar broadly higher. The JPY weakness has been somewhat less broad this morning as cratering risk sentiment partially offsets the focus on the ever-JPY negative rise in yields. Keep in mind that energy prices are a headwind for the JPY as well due to the country’s total reliance on fossil fuel imports. Elsewhere, the currencies most sensitive to risk sentiment are under pressure, including SEK and interesting NZD, where position squaring in AUDNZD may be the driver, given that the Australian yields at the shorter end of the curve are rising in sympathy with rising yields elsewhere, while “already risen” NZ yields are flat over the last several trading sessions. The low in AUDNZD may have arrived more quickly than I expected, given I can’t conceive of anything beyond the current backdrop that would make the Aussie look worse versus the Kiwi than is the case right now: collapsed prices for Australia’s main commodity exports, a dovish central bank, a locked down economy, etc.
Elsewhere, the US congress is not helping sentiment as Senate Republicans rejected to proceed with a Democratic initiative to raise the debt ceiling. Some scale of government shutdown after Thursday seems likely and the drama around the US fiscal situation could peak on that day as well, with a vote set for the infrastructure bill in the House (with no room to pay for it without the debt ceiling being raised…).
Chart: GBPUSD set up for a notable failure?
EURGBP settled lower in the wake of the German election, perhaps on the anticipation that a weak mandate from an awkward governing coalition will keep any EU fiscal revival at bay (more below – longer term, this will likely prove the wrong interpretation). The weaker EUR and drop in EURGBP likely helped spark a degree of resilience in GBPUSD even as the US dollar firmed on rising yields. But now the pair is looking heavier and could be set for a test of critical support zone into 1.3600 and just below that has held the pair up since the summer. A break could set up a test of the huge 1.3500 area, but arguably even a run toward 1.3200 or even lower if we are set for an extended correction in equity markets.
German election follow up: While the coalition building in the wake of the German election will prove difficult and many stretch over many weeks to a couple of months, the election has nonetheless delivered a strong message that German attitudes are changing and the general drift will be in the direction of more fiscal to invest in larger scale projects from a. The arguments in favour of this interpretation are well laid out by the FT’s Izabella Kaminska in a brief article this morning in FTAlphaville, as she notes the hollowing out of the core parties and even the CSU’s own leader Markus Söder talking up significant investments in the climate when the SPD and of course Greens are meant to be the leaders on the issue. The foundation may be there for a significant euro rally next year and starting even earlier on a new fiscal era for Europe once we digest the near-term risk of USD strength on a new yield spike and rocky bout of risk sentiment. It’s a thought to keep in mind as EURUSD trades lower and long term volatilities remain relatively cheap.
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 rises to top on energy crunch and as yields rushing higher
Markets are finally getting a case of bad nerves as the yield spike has now reached critical proportions, with key points on the US yield curve hitting above important thresholds as we discussed on this morning’s Saxo Market Call podcast, including the 5-year smashing above 1.0%, the 10-year hitting above 1.5% and the 30-year T-bond looking back above 2.0%. The move may be a delayed one showing some sympathy with the remarkable resurgence in energy prices, not only the wild rise in natural gas and power prices which will already crimp growth and earnings in energy-intensive sectors, but also in crude oil in recent days.
Whatever the cause, market sentiment is stumbling badly again today after a finally rolling over yesterday, taking the US dollar broadly higher. The JPY weakness has been somewhat less broad this morning as cratering risk sentiment partially offsets the focus on the ever-JPY negative rise in yields. Keep in mind that energy prices are a headwind for the JPY as well due to the country’s total reliance on fossil fuel imports. Elsewhere, the currencies most sensitive to risk sentiment are under pressure, including SEK and interesting NZD, where position squaring in AUDNZD may be the driver, given that the Australian yields at the shorter end of the curve are rising in sympathy with rising yields elsewhere, while “already risen” NZ yields are flat over the last several trading sessions. The low in AUDNZD may have arrived more quickly than I expected, given I can’t conceive of anything beyond the current backdrop that would make the Aussie look worse versus the Kiwi than is the case right now: collapsed prices for Australia’s main commodity exports, a dovish central bank, a locked down economy, etc.
Elsewhere, the US congress is not helping sentiment as Senate Republicans rejected to proceed with a Democratic initiative to raise the debt ceiling. Some scale of government shutdown after Thursday seems likely and the drama around the US fiscal situation could peak on that day as well, with a vote set for the infrastructure bill in the House (with no room to pay for it without the debt ceiling being raised…).
Chart: GBPUSD set up for a notable failure?
EURGBP settled lower in the wake of the German election, perhaps on the anticipation that a weak mandate from an awkward governing coalition will keep any EU fiscal revival at bay (more below – longer term, this will likely prove the wrong interpretation). The weaker EUR and drop in EURGBP likely helped spark a degree of resilience in GBPUSD even as the US dollar firmed on rising yields. But now the pair is looking heavier and could be set for a test of critical support zone into 1.3600 and just below that has held the pair up since the summer. A break could set up a test of the huge 1.3500 area, but arguably even a run toward 1.3200 or even lower if we are set for an extended correction in equity markets.
German election follow up: While the coalition building in the wake of the German election will prove difficult and many stretch over many weeks to a couple of months, the election has nonetheless delivered a strong message that German attitudes are changing and the general drift will be in the direction of more fiscal to invest in larger scale projects from a. The arguments in favour of this interpretation are well laid out by the FT’s Izabella Kaminska in a brief article this morning in FTAlphaville, as she notes the hollowing out of the core parties and even the CSU’s own leader Markus Söder talking up significant investments in the climate when the SPD and of course Greens are meant to be the leaders on the issue. The foundation may be there for a significant euro rally next year and starting even earlier on a new fiscal era for Europe once we digest the near-term risk of USD strength on a new yield spike and rocky bout of risk sentiment. It’s a thought to keep in mind as EURUSD trades lower and long term volatilities remain relatively cheap.
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.