Reflation trade deflated but not defeated

The bond market finally won the tug-of-war in markets on Thursday as risk trades finally followed yields lower. Markets are back in risk-on mode with 10-year yields rebounding off their 200-DMA. (more on this below). AUD is the highest performer, followed by NZD and CAD with JPY losing against al currencies. The Canadian jobs report is due on Friday (more on CAD jobs and BoC in the final paragraph).

We say it often but it's worth repeating today: Listen to what the bond market is saying. Falling yields spilled over into a broader risk-off trade Thursday with global stocks sinking and USD/JPY dropping a full cent.

This move has been brewing for a while but market participants are utterly puzzled by the lack of fundamentals underpinnings for the drop. We've highlighted the Fed but it's a stretch and the delta variant is a known unknown so that's a hard sell as well. Bond traders continue to point to positioning and liquidity, which is why we will be watching how upcoming Treasury auctions are digested.

Adding to the puzzle was glimmer of a turnaround in New York trade as 10-year yields bounced off the 200-dma we highlighted earlier in the week. 1.39-40% now becomes the new resistance, but vulnerability towards more downside remains for near the 100-WEEK MA at 1.21%. The dollar stabilized soon after and bounced, stocks followed. Oil also finished higher on the day in a sign that trade is washed out. Copper has been flat for three weeks and isn't reflecting any newfound growth fears.

The best advice might be to roll with the technicals and manage risk until the price action and fundamentals converge.

One spot to watch especially closely is CAD. The Canadian jobs report is due on Friday followed by the BOC next Wednesday. That's a live meeting with a genuine taper likely. The loonie is also at the nexus of the oil and risk trades. The consensus is for a healthy 195K jobs and 7.7% unemployment from 8.2%. Lockdowns were eased in the month so it could be a good one, though July/Aug is set to be even stronger.