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US 10-Year Yield Drops to 10-month Lows, USD/JPY Plummets

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Good morning and Welcome to the first market commentary for the year!

Summary: The Dollar Index extended losses in thin holiday-affected trading yesterday to finish 0.3% lower at 96.15. Most of the move came in the USD/JPY which plummeted to close at 109.70 (110.30 Monday). Major markets were closed for New Year’s Day. The benchmark US 10-year bond yield slumped 4 basis points to 2.68%, it’s lowest level since January 26, 2018. Stock futures rallied following President Trump’s tweet that “big progress” is being made with China on trade following his phone call with his Chinese counterpart Xi-Jinping. Brent Crude Oil prices rose in limited trade, up 1.8% to $54.15 ($53.55 Monday).

  • US Ten-year Bond yield – slumped to 2.68% from 2.72%, a low not seen since late January 2018. While a lot of the buying of Treasuries (which push yields lower) may have been the result of position-adjusting in thin markets, 2018 was supposed to be a year of bond bears. Perhaps their positioning got overcrowded. Ten-year yields hit a high of 3.23% in November.
  • USD/JPY – This currency pair was the most active in thin, choppy trade. The slump in the US 10-year yield saw traders dump their US Dollar longs against the Japanese currency. In our last report for 2018 we highlighted Saxo Bank/Bloomberg’s latest Commitment of Traders/CFTC report which saw net speculative JPY short bets increase to -JPY 102,771 contracts which were near 12-month highs.
  • AUD/USD – The Aussie was little-changed as risk appetite remained poor. AUD/USD finished with modest gains at 0.7057 from 0.7040 on Monday. With an overall weaker Greenback, we see the Aussie holding above 70 cents with chances of grinding back to 0.72 cents.

On the Lookout: With most financial centres back today expect a tentative start with markets consolidating. Any follow-through from Trump’s tweet on trade will be closely monitored. The only major data release on Monday was China’s Manufacturing and non-Manufacturing PMI data (Monday). One cancelled out the other with Manufacturing PMI missing forecasts at 49.4 against 50.0 Non-Manufacturing PMI beat expectations. Today sees China’s Caixin Manufacturing PMI for December.
On the European front, the news that Italy’s parliament approved the budget deficit boosted the Euro. Today sees Euro area Manufacturing PMI’s from Italy, France and Germany, and the Euro-Zone. The UK releases its Manufacturing PMI data as well. The holiday-shortened week finishes with a bang – Friday’s US Payrolls. With more volatility in store. Happy days!

Trading Perspective: Any improvement in risk appetite will see stocks move higher initially with the US Dollar lower. However, this would see US yields stabilise which would provide the Greenback with some support. The USD/JPY has led currency markets as we ended 2018 and this currency pair will take the lead for the initial part of this month. We want to look at speculative market positioning as well in both currencies and treasuries as we start the new year. Volatility is here to stay.

  1. USD/JPY – The Dollar plummeted to a low of 109.635 on the US 10-year yield drop. Immediate support can be found at 109.50. The next support level lies at 109.10 followed by 108.50. Initial resistance lies at 110.00 followed by 110.40. Look for some consolidation at current levels as risk appetite improves. We see a likely range today of 109.60-110.20.
  2. AUD/USD – The Aussie has led risk currencies lower since Christmas time. The Australian Dollar has also dropped against the other Majors and currencies of its trading partners. The antipodean currency has managed to hold on to the 0.70 cent handle and given the current market environment, we should see further stability for the Aussie. Speculative market positioning remains short of Aussie bets and the next likely move is higher. Immediate support lies at 0.7030 followed by 0.7000. Immediate resistance can be found at 0.7070 (overnight high) and then 0.7110. Likely range today 0.7040-0.7120. Emerging Market currencies extended their climb against the Greenback, which is a positive sign for the Aussie. USD/SGD closed at 1.3635 from 1.3660 Monday.
  3. EUR/USD – The Single currency has had a quiet few days with liquidity particularly thin in Europe. The Euro closed little-changed at 1.1460 from 1.1443 on Monday. With a weaker overall US Dollar, expect the Euro to consolidate its gains with 1.1500 the next target. Euro area PMIs are due later today but the big mover with be the US Payrolls data on Friday. Market positioning remains short of Euro bets. Immediate resistance can be found at 1.1470 and then 1.1510. Immediate support lies at 1.1420 and then 1.1380.
  4. USD/CAD – Like the Aussie, the Canadian Dollar, or Loonie as many Canadian traders refer to it, has suffered with the market’s poor risk appetite as well as the drop in Oil prices and related resources. USD/CAD has continued to move north despite an overall lower Greenback against the other Majors. USD/CAD finished 2018 at 1.3645 from 1.3490 before Christmas. Canada also reports on its Employment data on Friday. Canada’s economy has suffered with its trade friction with the US slowing in many areas. The settling of Oil prices though should benefit the Loonie. USD/CAD has immediate resistance at 1.3665 (overnight high), followed by 1.3700. Immediate support can be found at 1.3610 followed by 1.3580. Look for a drift lower in this currency pair with a generally softer US Dollar.

 

Happy trading all.

Dollar Little-Changed into Fed’s Last Meeting and Yields Fall

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Summary: The Dollar finished mixed against its Rivals, little-changed ahead of the Fed’s final meeting for the year. Most traders expect the US central bank to hike the Fed Funds rate by 0.25%. However, bets for an increase have lessened to 70% from 80% on Monday. Fears of slowing global growth due to trade uncertainty and recent mixed economic data pushed equities lower into the bear market territory. The S&P 500 turned negative in choppy trade to end near September 2017 lows following an initial rally over 1.0%. The Yen extended gains against the Greenback, finishing up 0.3% (112.51). EUR/USD ended with mild gains (1.1356). The Kiwi outperformed climbing 0.6% to 0.6850.

Investing.Com US Ten Year Bond Daily Chart – 19 December 2018


New Zealand’s 10-year bond yielded 2.43%, the nearest to the benchmark US 10-year yield, among the Majors. The 10-year US yield dropped another 4 basis points to 2.82%. Upbeat US Housing data enabled the Dollar Index (USD/DXY) to recover to 97.05, little-changed from 97.09 yesterday.
Oil prices plunged 6.0% overnight as investors fretted about global growth. Energy shares sank. Upbeat US Housing data enabled the Dollar to climb off it’s lows.

  • USD/JPY – The Yen extended its gains versus the Dollar lifted by lower US yields as well as poor risk appetite. USD/JPY dropped to an overnight low of 112.249 before rallying at the close to end at 112.51. The Bank of Japan’s monetary policy decision is due on Thursday, followed by a press conference by Governor Haruhiko Kuroda. Expect subdued trade in Asia today into both these central bank meetings.
  • NZD/USD – The Kiwi outperformed its peers, rising to finish 0.60% higher to 0.6858 from 0.6808 yesterday. Westpac’s Consumer Confidence Index climbed 5.6 points 109.1 in December. The rise was a marked change from a sharp drop in Q3. The narrowing between NZ and US 10-year yields boosted the Kiwi.
  • US Ten-Year Bond Yield – The benchmark Ten-year yield fell 4 basis points to 2.82%, near August’s lows. The support at 2.80% should hold into the Fed meeting but beware a break lower. The Two-year yield fell to 2.65% (2.70% yesterday) which is the lowest since early September. The US Dollar needs yield support to hold current levels, let along rally further.

On the Lookout: US President Trump piled on more pressure on the Fed with another tweet saying he wouldn’t agree with another rate hike. Trump also cited the Wall Street Journal’s suggestion that the Fed should pause. While any criticism or comments on Fed policy is unnecessary (particularly ahead of the meeting) Asian traders will be on the look-out for further.
The current disagreement over President Trump and Congress over his budget requirements for a border wall threaten a partial government shutdown.
Data today will also be looked at. New Zealand reports its Current Account. Out of Europe, Germany releases its PPI for November. The UK reports on its Annual Headline and Core CPI and House Price Index. Canadian Headline and Trimmed Mean CPI followed by the US Current Account are the last set of data before the FOMC rate decision and Statement (early tomorrow morning).

Trading Perspective: A dovish Fed rate increase of 0.25% will weigh on the Dollar. This will mean that the Fed will slow down the pace of its rate rises for 2019. Given the current market volatility and slump in equity prices, the Fed may opt for a 0.15% increase in the Fed Funds rate. The current disagreement over President Trump and Congress over his budget requirements for a border wall threaten a partial government shutdown. This is not Dollar positive. Market positioning remains long of Dollar bets and the risk is for further corrective moves.

Barchart.Com USD JPY Daily Chart – 19 December 2018

  1. USD/JPY – The Yen should continue to strengthen in the current environment. The outcome of the BOJ meeting following the Fed is keeping the USD/JPY from trading lower. Immediate support lies at last night’s low of 112.25. The next support can be found at 111.70-80. Immediate resistance lies at 112.85 (overnight highs) followed by 113.20. The yield on Japan’s 10-year JGB yielded 0.01%, down one basis point in contrast to the 4-basis point drop of its US counterpart. Market positioning remains long US Dollar bets against the Yen. The preference is lower for this currency pair.
  2. EUR/USD – The Single Currency closed little-changed at 1.1355 from 1.1351 yesterday. The Euro hit a high of 1.14024 before edging lower at the New York close. Euro area growth has slowed while political uncertainty over the governments of Italy and France remain. On the other side is the weakening US Dollar as the Fed slows its pace of rate hikes. German 10-year Bund yields closed one basis point lower. The range between 1.1250 and 1.1450 has not broken although risks are growing for a topside break. Market positioning is short Euro bets which add to downside pressure. Immediate resistance lies at 1.1400 and then 1.1450. Immediate support comes in at 1.1310 and then 1.1270.
  3. AUD/USD – Another currency that finished little-changed against the US Dollar, at 0.7172 (0.7177 yesterday). The Aussie had a narrow trading range of 0.7165 and 0.7203. We can expect similar today in Asia. The lower commodities and risk-off sentiment are constraining the Aussie. Immediate resistance lies at 0.7200 and 0.7230 for today. Support can be found at 0.7160 (overnight low 0.7165) and then 0.7130. A weaker overall US Dollar should see the Aussie trade higher.
  4. US S&P 500 – It closed at 2540 after rallying to 2574. In early Asia, the S&P 500 continues to trade heavy with its current level at 2528. There is a short term support at 2520 and then 2500. Strong support should emerge at 2470. Immediate resistance can be found at 2570 and then 2630. While we should see some consolidation in Asia today, the risk remains south.

Happy trading all.

Pound Roars Back, PM May Survives Leadership Challenge

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Summary: The British Pound roared back in typical fashion as UK Prime Minister May survived a crucial leadership challenge. After plummeting to a fresh low not seen since April 2017 (1.2477), Sterling jumped to finish in New York at 1.2630. The Euro climbed back to the higher end of its recent range ahead of tonight’s ECB policy rate meeting, the last for 2018. The Dollar Index (USD/DXY), where the Euro and Sterling carry a combined weight of 69.5% slid 0.40% to 97.065 (97.455 yesterday). US Headline and Core CPI for November matched expectations.
Wall Street led global stocks higher lifted by a more positive trade outlook. Donald Trump said he would use his influence to calm the Huawei executive’s arrest as part of a deal with China. The DOW ended 1.27% higher while the S&P 500 gained 1.25%.

  • GBP/USD – true-to-form as one of the world’s most volatile major currencies, Sterling roared back 1.2%. PM May won the confidence vote with the numbers required for a simple majority (200 for, 177 against). The Pound which hit a high of 1.2670 just ahead of the confirmation, slipped back to 1.2615 immediately following the news of her survival. However, May still faces an uphill battle to get her Brexit deal through Expect more volatility ahead.
  • EUR/USD – the Euro bounced back to finish at 1.1365 after testing the lower end of its recent range at 1.1315. EUR/USD traded to an overnight high of 1.13873. The ECB meets on monetary policy for the last time this year. The European Central Bank is expected to confirm its plan to end Quantitative Easing at the end of the year. Traders are still at a query as to when Mario Draghi and his colleagues will lift ultra-low interest rates. The Main Refinancing Rate is expected to stay at 0.00%. The yield on Germanys 10-year Bund rose 5 basis points to 0.28%.
  • US Ten-Year Bond Yield – rose 3 basis points to 2.91%. Other global yields were also higher. The Federal Reserve has its final policy meeting next week. Despite a recent dovish tilt, policymakers are expected to raise the Fed Funds rate another 25 basis points. The 10-year yield saw a low close of 2.85% earlier this week where it has since pulled back. Any bounces will be limited to 2.95-3.0 %.

On the Lookout: Markets will watch for further developments on the trade and Brexit fronts. Meantime the risk of a US government shutdown grows as President Trump is at odds with leading Democrats over the funding of his plans to build a border wall with Mexico. Every December, this threat of a US government shutdown (for whatever reasons) occurs.
Events and economic data releases today are: UK RICS House Prices, German Final CPI (November), Swiss National Bank’s Monetary Policy Assessment Meeting and Libor Rate (expected to stay at -0.75%), ECB Main Refinancing Rate and Press Conference and finally US Weekly Jobless Claims.

Trading Perspective: Expect more range trading in the Dollar Majors with Sterling still likely to remain the most volatile. Market positioning will figure more prominently as traders jockey to adjust positions into the year-end ahead of the Christmas holidays.

  1. GBP/USD – Sterling managed a high of 1.2670 before dropping as PM May survived the confidence vote to 1.2615. She faces an uphill battle to convince her party as well as those in the opposition to accept the Brexit deal she struck with the European Union. After yesterday’s big move, we can expect some consolidation, albeit within a wide range. Immediate support can be found at 1.2600 and 1.2550. On the topside, initial resistance lies at 1.2670 and then 1.2720. Lets not forget that the speculators are short of Sterling. If the 1.2500 level holds, and we see a weaker overall US Dollar, we could see a squeeze higher in the Pound. Expect more volatility ahead.
  2. EUR/USD – The downside test of 1.3515 held with the Euro falling short of 1.1400. With the differential between European and US rates narrowing, and the prospect for more, EUR/USD has found a base at 1.1300. The Euro was boosted by news that Italian PM Conte proposed a 2.04% deficit target for 2019. The focus will be on the ECB’s plans to nudge up it’s ultra-low interest rates at its meeting later today. Most traders are expecting no new guidance on the ECB’s first rate hike. Expect the Euro to hold the 1.1300 support zone on the back of generally weaker Dollar and a short speculative Euro market.
  3. US S&P 500 – with a more positive trade outlook, stocks had a strong rally before easing at the close. The S&P 500 traded to a high of 2685 before slipping to close at 2663 (2645 yesterday). Technically any bounces should be limited to 2680. A break on the topside of 2700 could yield 2740. The 2640 level should hold and a rally to the 2700/40 level is likely. Preference is to sell the rally to 2740.

 

Sterling Sinks Further on No-Confidence Vote Talk, Dollar Up

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Summary: Sterling drove lower hit by reports that lawmakers had the numbers to trigger a no-confidence vote on PM May’s leadership. The Pound opened at 1.2480, fresh 20-month lows. Tensions between China and the US eased as officials between Beijing and Washington discussed plans to avert a trade war. The Dollar Index (USD/DXY) ended up 0.26% to 97.45.


US Bond yields rose as November Producer Prices beat forecasts. The yield on the US 10-year note rose to 2.88% from 2.85% while the 2-year yield was up 5 basis points.
Wall Street stocks closed in the red after rallying for most of the session. The DOW slipped 0.47%.

  • GBP/USD – slip-sliding away, traders continued to hammer the Pound lower to 1.2480 in early Asia before settling at 1.2487 currently. While there was no official announcement, reports from different sources indicated that the numbers for a threshold to trigger a no-confidence vote on PM May’s leadership were reached. Sterling’s sentiment remains fragile with more volatility ahead
  • EUR/USD – finished at the lower end of its recent range at 1.1318 (1.1327 yesterday) ahead of tomorrow’s ECB policy rate meeting, the last for 2018. The ECB is expected to end its asset purchasing program and present its economic assessment of the Eurozone. Expect the range between 1.1300-1.1430 top remain intact in the current environment.
  • AUD/USD – outperformed, rallying 0.20% to 07207 from 0.7189 on higher resource prices. The Aussie was also buoyed by reports that trade negotiations between China and the US were progressing to ease tensions. Although no details were given on the discussions.
  • US Ten-Year Bond Yield – bounced off 2.85% to finish at 2.88%. Other global bond yields were mostly flat.

On the Lookout – Expect Asia to continue monitoring news headlines with further volatility in all markets. Today’s economic data releases will focus on Japan’s Core Machinery Orders and Producer Price Index (November), Euro Zone Industrial Production and US Headline and Core CPI.
US Headline Inflation is expected to have slipped in November to 0.0% from October’s 0.3% while Core inflation is forecast flat. A lower number will see a lower Dollar.
The speculative market’s position is long of US Dollar bets. The CFTC Commitment of Traders report (week ended Dec 4) saw net long Dollar bets to their highest level since December 2016. Net speculative Dollar long bets increased in 6 out of 9 IMM currencies (EUR, JPY, GBP, CAD, NZD, and MXN). Net speculative USD longs were trimmed against the AUD to -AUD 50,800 contracts from -AUD 53,900.

Trading Perspective

  1. USD/DXY – Unless we see a surprise in the US inflation numbers tonight, the Dollar Index should stay within it’s recent 96.30-97.60 range. This has been the range since November 20. The unknown is Sterling, which is vulnerable to further sell-offs. The Pound carries an 11.9% weight in the Dollar Index. Likely range today 96.75-97.55.
  2. GBP/USD – this currency pair opens on a soft note in Asia, unable to rebound off its lows. All the news out of the UK are focussed on Brexit which is overwhelmingly negative, for now. The next significant support level for Sterling is at 1.2370/1.2400. Short term support lies at 1.2460 and then 1.2420. Immediate resistance can now be found at 1.2535 and 1.2585. The latest CFTC report saw speculative GBP shorts increased to -GBP 39,800 contracts from -GBP 39,100. This is the largest number of GBP shorts since September 2017. The topside is just as risky and we can expect more volatile times ahead for the Pound.
  3. AUD/USD – The Aussie outperformed the Majors and finished up 0.2%. This currency pair continues to hold supports between 0.7160 and 0.7180. Immediate resistance lies at 0.7220 and 0.7250. A weaker US Dollar could see another strong Aussie attempt at the topside.
  4. USD/JPY – The Dollar rose against the Yen in tandem with the higher US ten-year yield. Risk sentiment also stabilised. USD/JPY traded to a high of 113.47 before settling at 113.378 in Asia. Total net speculative JPY shorts increased to -JPY 109,300 contracts from -JPY 104,300 according to the latest CFTC COT report. These are the largest net JPY shorts since February this year. Likely range today 112.75-113.55. Look to sell rallies.

US Ten-Year Bond Yield Drops Anew, Yen, Euro, Pound Climb

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Summary: The benchmark US 10-year bond yield extended its epic drop by another 4 basis points to 2.87% from 2.91% yesterday. Barely a week ago, the 10-year yield was sitting at 3.05%. Futures traders now put the odds Fed rate hike this month to 60% from almost-certain. The US Dollar finished lower against the Yen, Euro and Sterling.
Risk appetite took another hit on news of the arrest of CFO of Chinese tech giant Huawei. Fears rose of a flare-up in US-China trade relations. The DOW fell 1.93%, leading Wall Street stocks lower.

  • USD/JPY – reversed initial gains to finish 0.34% lower to 112.50 (113.18 yesterday). The Dollar sank to a low of 112.23 overnight before rallying at the close. This currency pair is traditionally the most sensitive to moves in the US 10-year yield and looks headed further south. Japan’s 10-year JGB yield was down one basis point to 0.05%.
  • AUD/USD – against the trend, the Aussie fell against the US Dollar and other majors after the weak Q3 GDP report on Wednesday. The news of the arrest of Huawei’s CFO has put markets on risk-off mode which does not bode well for the antipodean currency. AUD/USD finished at 0.7322, down 0.57% from 0.7268 yesterday. AUD/USD slumped to an overnight low of 0.7191. With an overall weaker US Dollar, the Aussie should find support near 0.7200.
  • EUR/USD – held the low of 1.1321 well, bouncing to an overnight high of 1.1413 before slipping to 1.1380 at the New York close. German November Factory Orders beat expectations, rising 0.3% against a forecast -0.4%.
  • US 10-Year Bond Yield – after holding at 2.91%, the benchmark 10-year yield slid to a low of 2.83% before settling at 2.87% at the New York close. In early Sydney the yield has stabilised at 2.89%. Barely a week ago, the yield was at 3.05%, which is an epic drop of almost 20 basis points. The loss of yield support from the US Dollar will keep it under pressure.

On the Lookout: Traders go into Friday’s Payrolls day with a risk-off stance. The US-China trade dispute is escalating and weighing on investors. Bank of Japan Governor Haruhiko Kuroda said economic risks from abroad could be severe. Lastly, it’s all about the yields. The move in bond yields highlight concern that the global growth picture is not as robust as it seems. Global growth has slowed. It comes at a time that central banks are scaling back stimulus. What a difference a few days make!
Today economic data sees Japanese Household Spending and Leading Economic Indicators. Euro-area data at German and French Industrial Production for November, UK reports on Halifax House Price Index. Canada’s Employment data precede the US Non-Farms Payrolls for November. The median forecast is for a gain of 195,000 Jobs from October’s 250,000. Wages will be closely watched with traders looking for an increase of 0.3% from 0.2%.

Trading Perspective:

  1. USD/JPY – the combination of a lower US 10-year bond yield and risk-off mode will continue to weigh on this currency pair. There is immediate resistance at 112.80 and 113.20. Support comes in at 112.45 followed by 112.20. A break of 112.20 could see us back down to 111.50. Don’t forget that the speculative market is short JPY which will limit the USD/JPY topside.
  2. AUD/USD – The Aussie looks soft at the outset and a risk-off stance by the markets could see initial selling pressure to the overnight lows of 0.7195/0.7200. Immediate resistance can be found at 0.7250, followed by 0.7270. A bad US Payrolls number will continue to pressurise the US Dollar. This will provide the Aussie support and we can look for a further topside test of 0.73-0.74 cents. The yield on Australia’s 10-year bond fell 5 basis points to 2.45%.

  1. EUR/USD – the multi-currency maintains its trading range between 1.1320 and 1.1420 and its difficult to see that break just yet. The Euro looks poised for a break-out soon and the risk is for higher, given the backdrop in the markets. It all boils down to the US Payrolls tonight provided there are no further surprises on the US—China trade front. With the speculative EURO market short, prefer to buy dips to 1.1300. The epic drop in US bond yields tell us that a Dollar correction move lower is coming. And the Euro could be a main beneficiary.
  2. US Ten-Year Bond Yield – Unless the US NFP data is much weaker than forecast later today, the 10-year yield should find good support at 2.80-2.85%. The low last night was 2.83% and we have come a long way down in a very short span of time. Any rally to the 2.95% should be contained. For now, it looks likely that we will consolidate between 2.85 and 2.95%.

Markets Reverse, Trump’s Tariff Talk – “A Damp Squid”, Stocks Plummet

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Summary: “What a difference a day makes”.. Manic Monday’s euphoric risk-on mood reversed. Markets saw no meaningful progress on the China-US trade negotiations. Wall Street plummeted, dragging global equities lower. The Dow sank 2.28%, the S&P 500 not far away, down 2.24%. The yield on the benchmark US 10-year bond extended tumbled by 6 basis points to 2.91%, the lowest since September. Global yields followed. Germany’s 10-year Bund fell 4 basis points to 0.26%. The Dollar ended mixed, up against the Euro, Sterling and Aussie, down versus the Yen and Swiss Franc. Emerging Market assets and currencies slumped. The Turkish Lira ended 2.7% lower against the Greenback.

  • USD/JPY – slumped 0.70% to close at 112.78 from 113.60 on Monday. The Japanese currency is always the most sensitive to moves in the US 10-year yield. The souring of risk sentiment will also weigh on this currency pair. As will a short JPY market that looks to be over-extended.
  • GBP/USD – had another volatile trading session, initially climbing to 1.2840 on a weaker US Dollar before plummeting on another Brexit setback to 1.2659, June 2017 lows. Sterling closed little-changed at 1.2717. The roller-coaster ride continues.
  • S&P 500 – After rallying 0.8% on the initial euphoria of trade hopes following the US-China “ceasefire”, investors realised that this means little. The pattern of the Trump administration’s habit of overstating success is wearing thin. The S&P 500 plummeted 2.24% to close at 2730 from 2785 Monday. Early Sydney sees further selling to 2702.00. Looking shaky.

On the Lookout: Risk sentiment took a hit following the euphoria on Trump’s tariff truce which carried no meaningful follow-through. Stocks and Emerging Markets tumbled. The Dollar though was little-changed. USD/DXY finished at 97.00 (96.98 Monday). History has shown the FX markets that many G20 meetings have come and gone with little to show for. However, the US Dollar cannot ignore the sharp fall in the US 10-year bond yield. In less than a month the US Ten-year treasury yield has fallen to 2.88% low last night from 3.23% (Nov 9). Are bond traders seeing the end of the Fed’s tightening campaign?  Watch those bond yields.

Trading Perspective:

  1. USD/DXY – The Dollar Index is overextended and is vulnerable to a down-side squeeze. The latest CFTC report on the Commitment of Traders (week ended 27 November) saw Total Net US Dollar longs increase to US$ 30.2 billion, an increase of US $ 1.2 billion into the G20 meeting. Speculators are currently long of US Dollars in 7 out of 8 IMM currencies, which are all the Majors except for the Mexican Peso. This currency pair traded to a high of 97.13, closing at 97.00. Look for a drift lower to the 96.00/20 support level.
  2. USD/JPY – this currency pair is slip-sliding away with risk sentiment souring and US yields tumbling. The yield on the Japanese 10-year JGB was down one basis point to 0.06%. Its US counterpart US 10-year yield was down 6 basis points. The latest CFTC report (week ended 27 Nov) saw net speculative JPY shorts increase to -JPY 104,324 contracts from -JPY 100,065. The largest net short JPY position for 2018 was -JPY 125,536 in January. Which is not far away. Look to sell USD/JPY rallies to 113.00 for a test of 112.20
  3. EUR/USD – The Commitment of Traders report of the CFTC in the latest week indicated that most of the USD buying came against the Euro. Net speculative total Euro shorts increased to -EUR 55,071 contracts from the previous week’s -EUR 47,224. Last night the Euro traded to a high of 1.14186 before settling at 1.1343, 0.11% lower. The support between 113.00/20 should hold for another attempt at 114.00/20. Net short Euro bets are at their biggest since January 2017.
  4. US Ten-year Bond Yield – slumped to a low of 2.88% before settling at 2.91% (2.97% Monday). The next target support is at 2.85% which was last seen in September this year. We should hold the levels between 2.85/2.90 % as markets consolidate. US markets will be closed today as the country honours deceased ex-President George HW Bush with a national day of mourning. Federal Reserve Head Jerome Powell’s testimony to the US Congress has been cancelled. Next up is the US Payrolls data on Friday. We may well have peaked around 3.20 %. Expect more volatile times ahead.

US Dollar, Stocks, Bonds Rally – US 10-Year Yield Falls Below 3.0%

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Summary: Stocks, bonds, and the US Dollar rallied into the G20 weekend leaders meeting in Buenos Aires. At the meeting’s conclusion, US President Trump and China’s Xi Jinping agreed not to impose additional trade tariffs upon each other for 90 days while talks are being held. The Dollar Index (USD/DXY) rallied above 97.00 to close 0.42% higher at 97.32 (96.98 Friday). EUR/USD fell 0.7% while the British Pound slipped 0.4%. Wall Street stocks rallied with the US S&P 500 jumping 0.8% to 2764.00, it’s biggest weekly gain in 7 years. Global bond prices rose. The US Ten Year yield slipped to close at 2.99% from 3.03%. Brent Crude Oil prices slid 1.4% to US$59.10 (US$60.00 Thursday).

  • EUR/USD – closed lower at 1.1315, trading to a low of 1.1305, just above the 1.13 crucial support level. Late last week, the multi-currency dropped to 1.1267, matching yearly lows. Euro-zone Annual Headline and Core CPI data were a tad lower than expected. German Retail Sales missed forecasts with a -0.3% reading for November against 0.4% expected.
  • AUD/USD – finished 0.3% lower at 0.7312 on general USD strength. The Aussie rallied on Friday to a near-4 month high at 0.7344 as risk appetite grew into the G20 leadership summit. Hopes for a China-US trade agreement buoyed risk sentiment.
  • US S&P 500 – jumped to close 0.8% higher for its best weekly performance since December 2011. Optimism on a trade deal between Trump and Xi Jinping in Buenos Aires lifted Wall Street.

On the Lookout: Markets face an eventful and data packed week ahead which culminates with the US Payrolls on Friday. This may well be one of the busiest weeks for the year before markets start to slow down into the December holiday season. For today, one can see Australia building approvals while China, Japan, Spain, Italy, France, Germany, Switzerland, the Euro-Zone, UK, Canada, and the US report on their respective manufacturing PMI data for November 2018.
FOMC members, Richard Clarida, John Williams and Randall Quarles all have speaking engagements. Fed Chairman Jerome Powell speaks anew on Thursday (early Sydney) as he addresses the Joint Economic Committee of the US Congress.

Trading Perspective:

  1. EUR/USD – The recent slowdown on Euro area economic data has weighed on the multi-currency. Euro-zone Headline and Core CPI were both printed lower-than-forecast. Technically the Euro has failed to breach the 1.1400-20 resistance area on the topside while a test if 1.1300 is on the cards. Tonight sees further data out of the Euro area as they report on their respective Manufacturing PMI’s. Market sentiment is bearish – a clean break of 1.1300 could yield 1.1200. The political climate in Europe is still fragile as the Italian government grapples with its budget. Weekend riots in Paris to protest high fuel taxes and rising living costs highlight the fragile environment. However, the last CFTC report (week ended Nov 27) saw net speculative Euro short bets increase to -EUR 55,100 contracts from the previous -EUR 47,200. The net Euro short bets are the highest reported since January 2017. Which is a warning sign that the Euro shorts are getting crowded and a squeeze higher is likely. If 1.1260-1.1300 holds we could see this back to 1.1500 again. Likely range today 1.1280-1.1380, look to buy dips. 
  1. USD/JPY – This pair rallied a touch, climbing to 113.55 from 113.45 on Friday. A rise in risk appetite on Wall Street’s optimism on the US/China bilateral meeting at the G20 on trade lifted the Dollar against the Yen to an overnight high of 113.72. USD/JPY has strong resistance at the 114.00-10 level which has held firm since early October when we hit 114.50-ish. I was in Tokyo last week for a short holiday and met with my ex-Japanese trader colleagues and they predict that without yield support, USD/JPY won’t break 114.00. Speculators are also short JPY contracts. The latest CFTC/Reuters report saw net speculative JPY shorts increase to -JPY 104,300 contracts from the previous -JPY 100,100. Total net speculative JPY shorts are the largest since February this year. Another danger sign that the short JPY trade (long USD/JPY) is getting crowded. Look for a likely trading range today of 113.10-70. A break of 113.10 will yield 112.60.  
  1. USD/DXY (US Dollar Index) – This Pair closed firm at 97.32, up 0.7% which mainly reflected the fall in EUR/USD. The Euro takes almost 60% of the basket of foreign currencies against the US Dollar in the Index. Euro area and Eurozone economic data have slowed with many leading indicators missing forecasts. That said, US data has not been consistently beating forecasts either. Germany’s Retail Sales dropped to -0.3% from a previous gain of 0.1. US Housing data continue to see dismal performances. US Pending Home Sales slumped to 2.6% in November (against a forecast gain of 0.8%). Net speculative USD long bets increased in the week ended November 27. Likely range for the Dollar Index today is 97.00-50. Look to sell rallies. Without yield support, it’s hard to see USD/DXY rallying any further. 
  1. US Ten Year Bond Yield – This Bond fell 4 basis points to 2.99% from 3.03%. At the start of November the US 10-year Bond Yield was 3.15%. The markets verdict on Jerome Powell’s latest speech, although he didn’t change much, was dovish. While the Fed is expected to hike rates this month, the outlook for further rate rises in 2019 is less likely. Powell’s speech to the US Congress Joint Economic Committee mid-week will be closely watched. The US Ten Year bond yield has been trading between 2.97 and 3.24 since mid-September. It’s difficult to see that range break just yet although the pressure now remains on the downside, with 2.80 in sight.

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