USDJPY blasts higher - more to come?
US yield curve reaches record steepness. Is the Fed losing control over the long end of the curve?
MAJOR HEADLINES – PREVIOUS SESSION
- Switzerland Apr. Trade Balance out at 2.56B vs. 0.12B in Mar.
- Sweden Apr. PPI out at -0.9% MoM vs. +0.2% expectedSweden Apr. Retail Sales rose 3.5% MoM vs. 0.3% expected
- Germany May Unemployment Change out at +1k vs. +64k expected
- Germany May Unemployment Rate out at 8.2% vs. 8.4% expected and 8.3% in Apr.
- Norway May Unemployment rate fell to 2.6% vs. 2.9% expected and 2.8% in Apr.
- EuroZone May Consumer Confidence was steady at -31 vs. -30 expected
- UK May CBI Retail Sales survey dropped to -17 vs. -15 expected and +3 in Apr.
- US Apr. Durable Goods Orders rose 1.9% and 0.8% ex Transportation vs. +0.5%/-0.3% expected, respectively
- US Weekly Initial Jobless Claims rose 623k vs. 628k expected and 636k the previous week
THEMES TO WATCH – UPCOMING SESSION
- US Apr. New Home Sales (1400)
- US Weekly Crude Oil and Product Inventories (1500)
- US Fed's Fisher to Speak (2220)
- New Zealand Apr. Building Permits (2245)
- UK May GfK Consumer Confidence (2301)
- Japan Apr. Jobless Rate (2330)
- Japan Apr. Household Spending (2330)
- Japan May Tokyo CPI and Apr. National CPI (2330)
- Japan Apr. Industrial Production (2350)
- Japan Apr. Housing Starts (0500)
Market Comment:
Despite reasonably positive US treasury auction results this week in the face of very heavy issuance, long bonds in the US rushed to new highs in yields. Yesterday saw the auction of a $35 billion of 5-year notes that saw better bid-to-cover ratios than previous auctions despite the record tying auction size. The indirect bidding percentage seems to show increasing demand is coming from central banks rather than the private sector. This undermines the theory that appetite for US debt is fading, but yields nonetheless rushed to new highs - a sign that the knowledge of the need for further massive issuance in the pipeline may be overshadowing the current auction results. The new highs in yields are giving the equity market pause as in the long run, rising yields and rising equity prices are incompatible. If the Fed loses control over the long end of the yield curve, as it seems to be doing with yield curve steepness rising to record levels yesterday, then we have the theoretical beginnings of a USD devaluation. Higher long yields will also halt any relief to the private sector from mortgage refinancing, which is dropping quickly with the rise in yields. Even more, higher yields further cripple the public balance sheet as public debt financing costs rise.
The German unemployment level actually dropped in May rather than rising - though apparently credit for this goes to seasonal factors that come with the arrival of spring. We certainly can't read anything positive into this number as the German economy contracted an alarming -3.8% QoQ in Q1 and employment is a lagging indicator. We can look for a resumption toward 10% unemployment and possibly worse in coming months.
The JPY was a bit slow in reacting to the rise in bond yields late yesterday, but the action in today's session shows the currency struggling close to new lows for the cycle on a basket basis. USDJPY rose back through key levels - see more in the chart below. This is more of a JPY bearish development than a USD-positive one as we can see from the action in the other JPY crosses. The correlation between USDJPY and US long bond yields seems to be holding better than some of the other correlations of late (especially the USD- equity market correlation that was such a focus in the market for a long time.)
Yesterday saw the USD recovering some of the lost ground, perhaps on the higher yields and on some residual correlation with risk appetite as equities swooned into the close. GBPUSD couldn't maintain altitude above 1.6000 and EURUSD touched briefly below 1.3800, but the bounce back this morning seems to show the weak USD trend is very much alive, and we'd have to see a very steep correction to wipe away the trend for now. The first line in the sand is at 1.3725 in EURUSD and perhaps 1.5500 in GBPUSD. US data out today was marginally positive, with the jobless claims data easing a tad lower and the Durable Goods data ex Transportation showing a positive reading for only the second time since June of last year, and showing a rising trend.
The US Existing Home Sales data yesterday showed a strong uptick, but this can be attributed to high activity due to short sales and foreclosures. This is the only way to explain rising activity with still steeply falling prices. Home sales data will likely continue to stabilize as the sales rates have reached unsustainably low levels. This does not mean that prices will rise, however, as rising long rates and the need to work off the still large inventory overhang could further eat into prices for another year or more.
EURGBP was all the way down to graze the 200-day moving average yesterday below 0.8700. It is more than curious to see a super-strength pound if the theme here is that we are to worry about the profligate money printing at central banks and currency devaluation. Of course, in a global recovery scenario (if we are to believe it...which we don't for the medium term) then the relief for the financial sector would be a boon to the pound...We watch the 0.8700/50 area with interest in EURGBP. If the pair is not able to hold below this level, then a return to the higher part of the range could be in the cards. To the downside, the 0.8650 is of huge importance, and is a level that stretches back to last November.
Chart: USDJPY
USDJPY rose sharply through the cloud resistance on the Daily Ichimoku chart as US bond yields spiked to new highs for the cycle. That level around 95.50 becomes the new important support level. Key resistance comes in at the high for the day as of this writing at the 200-day moving average around 97.15, and then the top of the Ichimoku cloud around 98.30. If long yields continue to rise, this could see USDJPY challenging the 100.00 level eventually as the JPY outlook remains very dependent on carry implications.
