Benchmark 10-year bond yields in the US and Europe have been at new highs for the year. The yield was approaching 2.90%, while European rates were mostly 5-8 bp higher.
The 10-year UK Gilt yield was up nine basis points to push near 1.98%. The higher yields were seeing the yen's losing streak extend, and the greenback jumped 1% to around JPY128.45
The dollar was trading lower against the other major currencies, except the Swiss franc. The dollar-bloc currencies and Scandis lead the move. Emerging market currencies were mixed. Of note, central European currencies were mostly higher (the Polish zloty the chief exception) and Asia Pacific currencies and South African rand were softer.
Most of the large Asia Pacific equity markets, except China and Hong Kong rose. Europe's Stoxx 600 was off around 1.4%, giving back nearly twice the gains recorded in the last two sessions.
US futures reversed their earlier gains. Gold was turned back from $2000 yesterday and was consolidating around around $1975. June WTI was also consolidating (~$105-$108).
US natgas was snapping a five-day advance, while Europe's benchmark was up around 6.5% after falling 8.4% yesterday. Iron ore was off 2.6% to extend yesterday's 2.2% fall.
Copper was lower for the first time in five sessions. July wheat came back offered after rising five times in the past six.
Asia Pacific
The yen fell for the 13th session today and had a six-week losing streak coming into this week. Most recognized that the driving force was the divergence of monetary policy and interest rates.
Indeed, based on last week's Commitment of Traders report through Apr. 12 shows traders are holding the largest net short yen positions in four years. Some, like the historian Adam Tooze, wonder if the yen's weakness will reduce Japan's demand for Treasuries.
The dollar had been rising for some time. Leaving aside the panic in 2020 as the pandemic broke, the dollar bottomed against the yen on Jan. 5, 2021, and bottomed against the euro the following day.
The US Treasury's portfolio flow report (TIC), released before the weekend showed Japanese investors were net purchasers of US Treasuries for the past three years, boosting their holdings by about $264 bln.
There were net sellers in the previous four years (2015-2018) of a little the more than $190 bln. The data that was released last week showed that Japanese holdings increased}} by $3.2 bln in February to $1.306 trillion, which is near the record highs set last year.
Yet, while they apparently were buying Treasuries in February, according to Japan's Ministry of Finance weekly data, Japanese investors sold around JPY2.3 trillion (~$19 bln) of foreign bonds.
Note that Japanese life insurers, with around $3 trillion of assets were expected to announce this fiscal year's investment strategy later this month. US Treasuries were an important way that the weakness of the yen can be avoided.
What about other investors? Amid a historic sell-off in bonds, foreign investors have bought a record amount of US securities over the six months through February (average $126 bln a month), according to the TIC data.
Finally, consider that the Federal Reserve acts as a custodian for foreign central banks. The Treasury and Agency holdings in custody ended last year around $3.41 trillion. As of Apr. 13, they stood near $3.46 trillion, a $50 bln increase in 3 1/2 months, during which time the US 10-year yield rose by about 130 bp and the 2-year yield rose slightly more than 170 bp.
Yes, someone has been selling US bonds, but it does not look like it was Japan or central banks. Foreign investors have been significant buyers of US assets through February.
Japanese Finance Minister Suzuki’s rhetoric stepped up a little. He warned about the "rapidly weakening" yen and noted that its weakness generated "strong demerits" for the economy.
Ahead of his trip to the G7 and G20 meetings, he confirmed being in contact with the US. The market was unpersuaded. The dollar was making new highs in Europe near JPY128.45.
The 13th session advance meant that the dollar had not fallen once this month against the yen. Today was the first session since late March, though, that the dollar was above its upper Bollinger® Band (two standard deviations above the 20-day moving average).
It was found near JPY127.90 today. The JPY130 level remained the next big target.
The Australian dollar held yesterday's low slightly above $0.7340 and returned to $0.7400. It needed to move above yesterday's highs (~$0.7415) to boost confidence a low is in place. The Aussie fell in the last four sessions, and eight of the past nine.
The US dollar was trading around CNY6.38, the upper end of its range going back to last December. The PBOC announced nearly two dozen measures aimed at households and small businesses to ease some economic pressures, mostly encouraging lending that may be worth around CNY1 trillion (~$155 bln).
Note too that the PBOC's transfer of CNY600 bln profits to the government (used for tax rebates and transfers to local governments) may be the rough equivalent of another 25 bp cut in reserve requirements.
Although Chinese officials have been restrained on exchange rate, we suspect pressure is building for a weaker yuan. That said, for the second consecutive session, the PBOC set the dollar's reference rate slightly lower than expected (CNY6.3720 vs. CNY6.3730).
Europe
Russia's offensive in Donbas appeared to have begun in earnest. This may signal a new phase in the war. Europe seemed to be moving toward embargoing Russian oil. It may first move to ban oil via Russian ships on the Baltic and Black Sea.
It may be phased in over a few months. This will not satisfy some of the critics and will take some time for it to bite. However, Russia was thought to have little storage capacity and already reports suggested refining capacity was limited.
UK Prime Minister Johnson was expected to offer an apology to Parliament later today. It will be his first appearance in Parliament since the London police fined him (and Chancellor Sunak) for his birthday party during COVID restrictions in 2020.
The war in Ukraine seemed to offer the PM a new lifeline as he appeared to have been facing a backbench rebellion before the invasion. The parliament session could be brutal, and the opposition was pushing for a formal censure and parliamentary investigation.
The key to Johnson's political future may be the local elections on May 5, the same day the BOE meets. The swaps market had about a 33% chance that the central bank hikes by 50 bp.
The euro tested the $1.0760 area, holding a couple hundredths of a cent above last week's two-year low. Although the single currency frayed support at $1.08, it did not close below it until yesterday.
It managed to resurface to reach almost $1.0815 in early European trading, where it met fresh sellers. There was a 1.2 bln euro option struck at $1.08 that expires today. The euro has fallen for the past three sessions. Meanwhile, the latest polls for this weekend's run-off election in France showed a widening lead for Macron.
An average of polls (calculated by Bloomberg) showed a little more than an eight-percentage point gap, after Macon had an almost 5 percentage point lead in the first round.
Sterling dipped below $1.30, but also held last week's low (~$1.2975) and was trying to snap a three-day drop. Like the euro, sterling’s session highs were recorded in early European turnover. It reached $1.3040, which may be the peak. Yesterday's high was closer to $1.3065. There were a set of options for GBP470 mln at $1.30 that expire today.
America
St. Louis Fed President Bullard used his version of the Taylor Rule to press his hawkish arguments. The Taylor Rule related inflation and GDP relative to neutrality to a certain target for the overnight rate.
Bullard, the leading hawk, argued that the Fed funds target ought to be around 3.5% by the end of the year. Even if the Fed were to hike by 50 bp at each of the remaining six meetings, the effective rate will be just below there.
He said yesterday that while it was not his base case, a 75 bp hike may be needed at some point. The December Fed funds futures implied a 2.50% yield at year end. The swaps market saw the Fed funds peaking around 3% next year.
The surge in US interest rates warned that the interest-rate sectors should be among the first to feel the sting. Many see the housing market as a likely candidate. March housing starts and permits will be reported today. A 1.6% decline in starts, the median forecast in Bloomberg's survey would be the second in three months, and put starts lower on the year.
Still, around 1.74 mln, starts will remain at historically high levels. The same is generally true of permits. A decline in March permits would be the second consecutive decline but anything above 1.8 mln must be considered strong.
More pressure is likely to be seen tomorrow with the weekly mortgage applications, which likely fell for the sixth consecutive week (through Apr. 15) and existing home sales. Existing home sales were expected to have fallen for the third month in the past four. They may have slipped below a 6 mln unit annual pace for the first time since last August.
Lastly, Chicago Fed President Evans speaks at the Economic Club of New York at lunch today. He was often perceived to be a dove, but even the doves at the Fed seemed open to a 50 bp hike next month. Evans does not have a vote on the FOMC this year.
Canada reports March housing starts and existing home sales today. Both are expected to have held up better than in the US. However, there was scope for disappointment. After declining by slightly more than a quarter in December-January, Canadian housing starts rose by almost 8% in February.
Existing home sales have risen since last September, which followed a five-month slide. Canada also reports its February portfolio flows. These are not the economic data points that typically move the foreign exchange market. Tomorrow's March CPI report is a different matter.
Price pressures were accelerating, and the market had a 90% chance of a 50 bp hike discounted for the next central bank meeting on June 1.
The Canadian dollar was consolidating. The greenback remained within last Thursday's range (~CAD1.2520-CAD1.2640). It was in 20-30-tick range on either side of CAD1.2600 today. There was a $625 mln option at CAD1.2625 that expires today. The Canadian dollar weakened for the past three sessions and five of the past six. It seemed the best directional cues were still coming from equities.
Mexico's economic calendar was light today and the US dollar was finding support this month in the MXN19.72-MXN19.75 area. The greenback posted an outside down day yesterday (trading on both sides of last Friday's range) and settling below its low. Follow-through selling today took it to MXN19.7625 before bouncing back. It toyed with the MXN20.00 level last week but failed to close above it.
