FX Update: US Treasury rally sparks comeback for lowest yielders
Summary: The sharp rally in US treasuries and fall in yields in recent sessions has brought some profound relief to the lowest yielding currencies, from the euro to the most negative yielding of them all, the Swiss franc. The move could yet deepen further, but far too early to call a change of trend. Elsewhere, India and Russia are worth mention in the EM space.
Chart: USDCHF
A USDCHF correction has set in, one with somewhat greater amplitude relative to the recent rise than the correction we are seeing in the US treasury market, though the latter is clearly the driver. But the late rally has altered the structure of the chart, neutralizing the former down-move, so whether here, or in USDJPY, we’ll be looking out for support to come in sooner rather than later. With a correction back to 1.50% for the US 10-year benchmark, the USDCHF pair may move back to something like 0.9200 or perhaps even 0.9100, the 200-day moving average.
EM divergences – TRY, INR, RUB, ZAR
In aggregate, things are fairly quiet on the EM front, but there are a few stories worth noting here. The Turkish lira exchange rate continues to triangulate while the forward implied yields have calmed considerably, rewarding those who took the plunge and bet against immediate chaos by selling USDTRY forwards. And the credit spreads on Turkish debt have also tightened a bit less than half way back to where they were before Erdogan’s shock shuffle of the central bank leadership. TRY is still a risky proposition – have to watch the next signals from the new central bank chief – especially on next Thursday’s rate decision.
The Ruble is very weak relative to crude oil and the tightening message from the Russian central bank and has to be an expression of a geopolitical risk discount that is growing. Rumblings of the situation in Ukraine and the overhanging concerns on sanctions could continue to weigh until something sets the situation in a different direction.
The Indian rupee, INR, is in focus after the central bank there moved forward with a modest QE programme, with plans to purchase a trillion rupees (south of $15 billion) in Indian government bonds. The INR was down about 1.5% on the story as of this writing. India is experiencing a vicious new rise in Covid cases, though hopefully the latest jump in the pace of vaccinations can accelerate further in coming days and weeks.
The South African rand is back close to the cycle highs versus the US dollar, held in part aloft by calm seas in EM credit, the stories above notwithstanding, but also by a strong platinum price, which all ZAR traders should track as an important input.
John Hardy
Head of FX Strategy
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Chart: USDCHF
A USDCHF correction has set in, one with somewhat greater amplitude relative to the recent rise than the correction we are seeing in the US treasury market, though the latter is clearly the driver. But the late rally has altered the structure of the chart, neutralizing the former down-move, so whether here, or in USDJPY, we’ll be looking out for support to come in sooner rather than later. With a correction back to 1.50% for the US 10-year benchmark, the USDCHF pair may move back to something like 0.9200 or perhaps even 0.9100, the 200-day moving average.
EM divergences – TRY, INR, RUB, ZAR
In aggregate, things are fairly quiet on the EM front, but there are a few stories worth noting here. The Turkish lira exchange rate continues to triangulate while the forward implied yields have calmed considerably, rewarding those who took the plunge and bet against immediate chaos by selling USDTRY forwards. And the credit spreads on Turkish debt have also tightened a bit less than half way back to where they were before Erdogan’s shock shuffle of the central bank leadership. TRY is still a risky proposition – have to watch the next signals from the new central bank chief – especially on next Thursday’s rate decision.
The Ruble is very weak relative to crude oil and the tightening message from the Russian central bank and has to be an expression of a geopolitical risk discount that is growing. Rumblings of the situation in Ukraine and the overhanging concerns on sanctions could continue to weigh until something sets the situation in a different direction.
The Indian rupee, INR, is in focus after the central bank there moved forward with a modest QE programme, with plans to purchase a trillion rupees (south of $15 billion) in Indian government bonds. The INR was down about 1.5% on the story as of this writing. India is experiencing a vicious new rise in Covid cases, though hopefully the latest jump in the pace of vaccinations can accelerate further in coming days and weeks.
The South African rand is back close to the cycle highs versus the US dollar, held in part aloft by calm seas in EM credit, the stories above notwithstanding, but also by a strong platinum price, which all ZAR traders should track as an important input.
John Hardy
Head of FX Strategy
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
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