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11 July 2017 at 7:30 GMT
FX Update: USDJPY eyes 115.00 on higher yields — #SaxoStrats
- Yield-driven JPY action in focus on summer lull in FX markets
- Fed's Brainard to speak on balance sheet normalisation
- EURCHF attracting interest on ECB forward guidance shift
FX markets are overall quiet but we are seeing some interest in the Swiss franc, particularly EURCHF, pick up on the changes made by the ECB on forward guidance. Photo: Shutterstock
By John J Hardy
Currencies are generally suffering a case of the summer doldrums as the only thing going at the moment is the pressure on bond yields continuing to drive the JPY stronger, while the implications for risk assets seems to have subsided for now, keeping complacency high and trading ranges generally muted.
The outlook for volatility only picks up, perhaps, if we get another acceleration in the bond market sell-off similar to the prior one. We have some important Federal Reserve speakers over the next couple of days; today we have governor Brainard, normally a dovish voice, giving a keynote address on “normalising central banks’ balance sheets”.
Market observers will look for hints on the timing, but not entirely sure where we can generate a notable surprise given that the Fed has already explicitly outlined the unwinding schedule should the economy continue to allow quantitative tightening to proceed.
More interesting is Yellen’s testimony over the next two days and how explicit she is in admitting that the Fed’s more hawkish stance is due to the risks from its third mandate of financial stability rather than concerns on inflation or a tight labour market.
Chart: EURCHF
EURCHF is finally generating some interest after the long bout of euro strength as the European Central Bank has slowly shifted its forward guidance on monetary policy, but also due to the sharp rise in global bond yields.
The break above 1.1000 here could open up for a move into the 1.1200 area, which is the post-CHF revaluation high.
The G-10 rundown
USD – relative yield moves are USD supportive, but not sufficiently so to drive much USD strength outside of USDJPY at the moment. Will require a notable shift in forward expectations from the Fed (market says December hike is a 50/50 proposition and about 50/50 for another single hike in 2018).
EUR – the euro has gone quiet as we’ve run dry of fresh fuel to generate further momentum and positioning is getting into stretched territory. Risk of a bigger consolidation if EURUSD can’t maintain 1.1300, while the well-etched upside trigger level remains 1.1450.
JPY – the yen is a slave to bond yields (negatively correlated) and will remain so until or unless cracks begin to show in the Bank of Japan's commitment to yield-curve-control.
GBP – sterling remains vulnerable on the overhanging Brexit uncertainty, with Bank of England speakers possibly showing the degree of concern on inflationary implications from a weak currency.
CHF – interest building in the franc after the 1.1000 level breached in EURCHF as weekly Swiss National Bank sight deposits were almost flat this week.
AUD – Looking peppy against the suddenly struggling kiwi, but with the Reserve bank of Australia sitting on its hands relative to the central bank policy shifts elsewhere, it's tough to build a case for the next big move in Aussie.
CAD – the Bank of Canada may have a hard time meeting the market’s expectations even when they hike rates tomorrow as CAD longs may have gotten too aggressive in the short term.
NZD – retail card data from New Zealand not normally a major market mover, but positioning has kiwi longs vulnerable to the bad news of a very weak number overnight. NZDUSD has room to consolidate into the important 0.7100 area and AUDNZD interest picks up on a move through the upside-down head and shoulders-like area around 1.0550.
SEK – waiting for the Thursday CPI data from Sweden and seeing risks for stronger SEK toward 9.50 or lower in EURSEK.
NOK – some momentum divergence on the EURNOK chart points lower there toward 9.30-35 and the stronger inflation data for June yesterday supports fresh NOK longs.
Upcoming Economic Calendar Highlights (all times GMT)
- 0900 – UK Bank of England’s Haldane to Speak
- 1100 – UK Bank of England’s Broadbent to Speak
- 1215 – Canada Jun. Housing Starts
- 1630 – US Fed’s Brainard to Speak on Monetary Policy
— Edited by Michael McKenna
John J Hardy is head of FX strategy at Saxo Bank