Key US ten-year bond yield surges within reach of key 4% level

AUD, NZD, EMFX Slump; PBOC Hikes RRR Rate to Defend Yuan

Summary

The benchmark US 10-year Treasury yield surged 7 basis points higher to 3.95% (3.88% yesterday), within striking distance of reaching the key 4% level. Which, according to FactSet, a financial and software data company that serves capital market participants, was last traded in 2008.

Widening yield differentials between US and other global counterparts continued to lift the US Dollar up against most of its Rivals.

Against the Japanese Yen, the US Dollar surged to 144.90, just short of the 145.00 resistance. In contrast to the rising US 10-year yield, Japan’s 10-year JGB yield was unchanged at 0.24%.

The British Pound (GBP/USD) steadied to 1.0730 on short covering after tumbling to a record low at 1.0645 on Monday. A surge in the UK 10-year bond yield to 4.5% from 4.24% boosted Sterling.

A popular gauge of the Greenback’s value against a basket of 6 major currencies, the Dollar Index (DXY) edged higher to 114.17 from 113.75 yesterday.

The Australian Dollar (AUD/USD) fell 0.7% to 0.6430 (0.6480) while the Kiwi (NZD/USD) lost 0.56% to 0.5635 (0.5680). Risk-off sentiment weighed on resource FX. USD/CAD rose to 1.3725 (1.3705).

Asian and Emerging Market Currencies plummeted against the US Dollar. The USD/CNH (Dollar-Offshore Chinese Yuan) soared to 7.1800 (7.1600). USD/THB rallied to 38.00 from 37.85 yesterday.

In a move to defend the Yuan, the People’s Bank of China (Chinese central bank) announced it would raise the risk reserve requirement ratio for forward-exchange sales to 20 per cent.

Wall Street stocks tumbled. The DOW ended at 29,180 (29,427) while the S&P 500 was last at 3,651 from 3,675 yesterday. Japan’s Nikkei slumped to 26,400 (26,590).

Other global bond rates rose. Germany’s 10-year Bund yield was last at 2.22% (2.11%). The UK 10-year Gilt yield jumped 26 basis points to 4.50%. Japan’s 10-year JGB yield was unchanged at 0.24%.

Data released yesterday saw Japan’s SPPI (Services Producer Price Index) y/y fall to 1.9% in August from July’s 2.0%, and lower than median estimates at 2.4%.

US August Durable Goods Orders dipped to -0.2%, bettering median forecasts at -0.4% but lower than a previous -0.1%. Core Durable Goods (excluding Transportation) were flat at 0.2%.

The US Conference Board Consumer Confidence Index rose to 108.0 from 103.6, beating estimates at 104.0. US August New Home Sales climbed to 0.685M from 0.532M, beating forecasts at 0.5M.

• AUD/USD – Weaker asset markets and softer Asian/EM currencies in a risk-off environment weighed on the Aussie Dollar. The AUD/USD pair plunged to an overnight and 4-month low at 0.6414 before steadying to 0.6430. Overnight high traded was at 0.6513.

• GBP/USD – Sterling managed to stabilise above the 1.0700 level to 1.0730 in late New York. Overnight, the British Pound hit a low at 1.0659. Overnight high traded was at 1.0838. Short covering provided support for the GBP/USD pair.

• USD/JPY – Widening yield differentials between US and Japanese bonds continued to drive the Greenback higher. The USD/JPY pair soared to an overnight and fresh 24-year high at 144.90 before settling to 144.80 in New York.

• EUR/USD – Weighed down by broad-based US Dollar strength, the Euro eased to 0.9590 from yesterday’s 0.9625. Overnight low traded for the EUR/USD pair was at 0.9569 in choppy trade. The overnight high recorded was at 0.9671.

On the lookout

Today’s economic calendar kicks off with the release of the Bank of Japan’s Monetary Policy Minutes from its latest meeting. Traders will be looking to see if there are further warnings on Yen weakness given the recent moves in the USD/JPY pair. New Zealand follows with its ANZ Business Confidence (no f/c, previous was at -47.8). Australia follows with its Preliminary August Retail Sales (f/c 0.4% from 1.3% - ACY FInlogix). Japan releases its Final July Leading Economic Index (f/c 99.6 from a previous 100.3 – ACY FInlogix), Japanese Coincident Index for July (f/c 100.6 from 100.6 – FX Street). Germany starts off European data with its October GFK Consumer Confidence Survey (f/c -39 from -36.5 – ACY FInlogix). France follows with its September Consumer Confidence (f/c 80 from a previous 82 – ACY FInlogix). Next up is the Italian September Consumer Confidence (f/c 95.1 from 98.3 – ACY FInlogix). Switzerland releases its September Economic Sentiment Index (f/c -50 from -56.3 – ACY FInlogix). The US rounds up today’s data releases with its August Goods Trade Balance (f/c at -USD 85 billion from -USD 89.06 billion – ACY FInlogix), US August Pending Home Sales (m/m f/c -1.4% from -1%; y/y f/c -23% from -19.9% - ACY FInlogix).

There are global several monetary officials due to speak at different events later today and tomorrow.

ECB President Christine Lagarde is due to participate in discussion on US-European Geo-Economics in Frankfurt. Fed Chair Jerome Powell is expected to participate in a panel discussion about digital currencies at an event hosted by the Bank of France in Paris). Early tomorrow morning (12.15 am Sydney, 29 September) US Federal Reserve FOMC member James Bullard is scheduled to speak to a banking conference in St. Louis, Missouri USA.

Trading perspective

While the Dollar continued to advance against most of its Rivals to varying degrees, a bit of caution is warranted today. Speculative long US Dollar bets are overstretched. The Greenback’s sustained rally against the Asian and EM Currencies has been strong. The USD/CNH pair is a prime example, and PBOC officials raised the reserve ratio on forward selling of the Offshore Chinese Yuan to 20%. The move could see more Asian and EM Central banks move to defend their currencies against the surging Greenback. Having traded Asian and EMFX currencies in the latter part of my career, this scenario bears monitoring.

While US Federal Reserve officials continue to warn of more rate rises, a FX Street report quoting Minneapolis Fed President Neel Kashkari caught my eye. Kashkari said that the US central bank is moving “very aggressively” tame inflation, and there is a high risk of “overdoing it.” Traders will continue to monitor central bank officials and their comments.

•  AUD/USD – The Australian Dollar’s plunge resulted from broad-based USD strength and risk-off stance which pushed Asian and EM Currencies lower. AUD/USD closed at 0.6430 from yesterday’s 0.6480. Immediate support for today can be found at 0.6410 (overnight low 0.6414). The next support level is found at 0.6390. Immediate resistance can be found at 0.6470, 0.6500 and 0.6530. The Aussie remains heavy, and the next target is 0.62 cents. Any rebounds will find more selling at the 0.66/0.67 area. Likely range today 0.6380-0.6520.

• GBP/USD – The British Pound steadied to settle at 1.0730 from yesterday’s 1.0755 yesterday. Heavy selling of Sterling found short covering support at 1.0660 (overnight low traded was 1.0659). Look for immediate support at 1.0700, 1.0660 and 1.0630 today. On the topside, immediate resistance can be found at 1.0760, 1.0790 and 1.0820. Look for another volatile session, likely range today 1.0680-1.0820. Trade the range.

• USD/JPY – Against the Japanese currency, the US Dollar rallied to 144.80, up 0.20% from yesterday’s 144.35. Immediate resistance for today lies at the 145.00 level. A break above that could see last Friday’s high of 145.90 re-tested. Markets will be watching for more rhetoric from Japanese officials if USD/JPY stays bid. Immediate support lies at 144.30 and 143.80. Look for more choppy moves, likely range today 144.20-145.20.

(Source: Finlogix.com)

• EUR/USD – The Euro’s grind lower accelerated overnight with the shared currency closing at 0.9590 (0.9625 yesterday). Overnight low traded was at 0.9569. Immediate support on the day lies at 0.9565 followed by 0.9535 and 0.9500. Immediate resistance can be found at 0.9620, 0.9650 and 0.9680. While the pressure remains lower for the shared currency, am wary of pushing the Euro much lower towards twenty-year lows (2002).