Forex today: USD/JPY bears dancing for joy on inverted yield/recession hysteria


  • USD/JPY dropped with the yen a the best performer on the day.
  • Risk-off markets took hold again on fears of a global recession struck.

Forex today was back to risk-off with just as much aggressiveness in the price action as the prior day. The markets got in a twist over both the UK and US yield curves inverting signalling lower rates to come and/or a recession. US stocks crashed and burned and the FX price action followed suit, with the usual suspects responding in kind. 

The US 2-year treasury yields fell from 1.66% early Sydney to 1.56%, the 10-year yield fell from 1.69% to 1.58% which was the lowest since 2016:

"The difference between the 2yr and 10yr rates is the smallest since 2006 (it briefly reached -2bp overnight – unnerving some investors who interpret such inversion as a signal of recession ahead). The 30 year bond yield tumbled from 2.16% to 2.02%. Markets are pricing 33bp of easing at the 19 September Fed meeting, and a terminal rate of 1.04% (Fed funds rate currently 2.13%)," 

analysts at Westpac explained. 

Meanwhile, US stocks fell heavily, with the Dow Jones Industrial Average was closing at session lows as recession fears penetrating their way through to US stocks despite Trump's tweets trying to save the day. Investor anxieties are now deep-rooted at this point, well, they at least should be. The DJIA lost 800 points, or ended 3.1%, lower at 25,479. As for the S&P 500 index, it closed heavily in the red as well, down 2.9% at 2,841. The Nasdaq Composite Index dropped 3% lower to close at 7,773.

As for data, investors were reminded of, again, how poor the eurozone bloc economy is looking. The Eurozone July industrial production showed a nasty sized miss in the annual level at -2.6%y/y (est. -1.5%), with Eurostat citing weak capital goods production and highlighting weak production in Germany. Then, Q2 Eurozone GDP  arrived at +0.2% QoQ, +1.1% YoY. The Q2 GDP in German data came in as -0.1% QoQ as est., +0.4%YoY vs est. +0.1% YoY but they had a minimal direct market impact. Then, across the channel, UK July inflation report was hot, with the Consumer Price Index 2.1% YoY, est. 1.9%y/y; core CPI 1.9% YoY, est. 1.8% YoY) which was coming in but by close to BoE’s targeted 2%.

Currency action

The analysts at Westpac explained the markets price action:

  • "EUR/USD fell from 1.1190 to 1.1135 while GBP/USD was volatile but closed NY flat.
  • USD/JPY extended its Sydney session decline from 106.80 to a low of 105.66, the yen the best performer on the day.
  • AUD reversed the previous day’s gain, falling from 0.6800 to 0.6740.
  • NZD/USD similarly fell from 0.6460 to a low of 0.6421.
  • AUD/NZD fell from 1.0520 to 1.0480."

President Trump appeared to blame the Fed for the slide in equities, calling Chair Powell “clueless.” St. Louis Fed president Bullard (FOMC voter this year) saw good macro outcomes for the US, including a near 50-year low on unemployment and low inflation, but wondered whether inflation could get stuck below target, noting Japan's case where the policy interest rate hasn't been above 0.5% over the last 20 years and inflation has been low or negative. He cited a range of policy tools, including negative interest rates. There will be little further Fed commentary ahead of next week's Jackson Hole Symposium, where the topic is "Challenges to Monetary Policy."

Key notes from Wall Street

Wall Street flips over into a sea of red on Global recession fears

Key events ahead in Asia

July Labour Force survey:

Early Thursday markets will see Australian Bureau of Statistics releasing Aussie employment data for July at 11:30 Sydney/9:30 Singapore/HK and 01:30 GMT. Following downbeat readings in June, markets will keep a close eye on the employment data to better foresee future policy moves by the Reserve Bank of Australia (RBA) considering its emphasis on the unemployment rate. Market consensus favors Employment Change to increase from 0.5K to 14.0K on a seasonally adjusted basis whereas no change is anticipated in the Unemployment Rate of 5.2% and Participation Rate of 66.0%.

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