Article / 28 October 2016 at 7:56 GMT

FX Update: Spike in bond yields pummels JPY

Head of FX Strategy / Saxo Bank
  • Currencies affected by surge in global bond yields
  • Fallout from higher yields seem immediately in USDJPY
  • If higher yields hit risk appetite more broadly, riskier currencies would be pressured
  • Busy calendar next week; looking for knock-on effects from surge in yields
Dollar and yen banknotes
 The yen was hammered by surge in bond yields. Image: iStock

By John J Hardy

Far and away the most important development yesterday was the surge in global bond yields, a follow-through move higher after the US 10-year initially got bogged down recently after challenging the pivotal 1.75% area. 

The fallout has most immediately been seen in USDJPY, not a surprise given the Bank of Japan’s new commitment to fix its 10-year yield at around zero percent, meaning a spread widening with other yields globally when yields rise. But increasingly, if the move higher in yields affects risk appetite more broadly, traditional risk-correlated currencies such as the commodity dollars and emerging-market currencies could come under more significant pressure. 

The Japanese inflation data was slightly lower than expected overnight, though the Tokyo October CPI data showed a rather large turnaround that could be currency-related as there is a quick and direct correlation with CPI and the JPY exchange rate. So we may be surprised at future CPI releases if the JPY stabilises and even weakens a bit from here.

Minor stuff on the economic calendar today, with a very busy calendar next week and a general focus on what this move higher in yields will mean for the relative strength of currencies and knock-on effects into broader risk sentiment.

USDJPY up on higher bond yields

USDJPY is on the move on the surge in bond yields and has risen above local resistance and could progress higher to the 200-day moving average and next flat-line resistance at 107.50. A particularly brutal follow-through higher in US yields on stronger US data next week and a clear-cut Clinton victory on November 8 could mean a rapid test all the way to 110.00 in coming weeks.
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Source: Saxo Bank

The G-10 rundown

USD – the US dollar generally firm, especially against then yen and the commodity dollars. Traders may be reluctant to plunge full force into broad USD strength due to the risks of next week’s data and the outlook for a December rate hike, and especially the November 8 presidential election, but the USD is increasingly in bull-market mode.

EUR – the euro has been resilient over the last couple of sessions as wobbly risk appetite and focus on weakness in risk-correlated currencies and the yen provide a bit of relative support. Still see further downside potential in EURUSD if 1.0950/1.1000 continues to provide resistance. 

JPY – the yen could remain the weakest link if yields continue to surge and risk appetite remains reasonably stable, though the currency could find some support against the higher yielders if we switch to a generalised risk-off response.

GBP – no support for sterling despite the UK GDP beat, though we’re more likely, given reasonable economic performance and a very weak currency, to see the Bank of England skipping a rate cut next week. In the background, the rise in yields is somewhat of GBP-negative.

CHF – surprised that USDCHF hasn’t picked up more upside interest on the rise in global yields – lacking interest here as long as EURCHF bogged down in 1.08-1.10 range, and USDCHF is below parity.

AUD – The Reserve Bank of Australia is unlikely to move next Tuesday, but we have strong structural concerns about the Australian economy from here, which is firing on the credit/consumption cylinder only, and banks are tightening lending standards while housing activity has slowed amid of an epic housing bubble.

CAD – Upside potential in USDCAD is significant if risk appetite takes flight on the surge in bond yields. CAD also potentially a high beta currency to headlines on the US presidential election.

NZD – NZD should be vulnerable if global bond yields continue to rise as this works against carry trades, but next week’s NZ Q3 employment data is the next key data input.

SEK – yesterday’s dovish tilt from the Riksbank was obviously entirely unanticipated, judging from the price action, and the SEK selling was aggravated by the backdrop of sharply rising global bond yields. SEK seems to be overshooting in places (NOKSEK!), but could run a bit weaker. Watching 10.00 in EURSEK for whether this provides psychological resistance.

NOK – nothing interesting from Norges Bank yesterday and nothing was expected, so traders are left to look at oil prices and mulling. Tactically, upside risks in EURNOK if risk appetite takes flight due to the surge in bond yields.

Upcoming Economic Calendar Highlights (all times GMT)
  • 0800 – Norway Oct. Unemployment Rate 
  • 0900 – Eurozone Oct. Economic/Industrial/Services/Consumer Confidence 
  • 1200 – Ermany Oct. Preliminary CPI 
  • 1230 – US Q3 GDP Revision 
  • 1400 – US Oct. Final University of Michigan Sentiment 

— Edited by John Acher

John J Hardy is head of forex strategy at Saxo Bank


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