Three is a magic number

US Treasury yields push above 3%

US yields were on the move last night, with the curve from the 5-year to 30-year tenor now all above three per cent. That was enough to crimp the perpetual FOMO bulls of the stock market, with Wall Street finishing just above flat, while the US dollar also booked some gains. Gold fell slightly while oil also gave back early gains, Brent crude finishing almost flat, just shy of USD 120.00 a barrel.

One notable loser was the Japanese yen, with USD/JPY climbing to two-decade highs around 131.90 overnight, before adding another 0.50% to 132.60 today. With the US/Japan rate differential hollowing out the cross, Japanese authorities resorted to verbal intervention this morning, BOJ officials saying a rapid yen weakening was undesirable.

The US yield curve is starting to look pretty flat now between the 5-year and 30-year tenors, which is making me a little nervous. An 8.50%+ US inflation print could see it start to price in a recession and head to inversion in parts, as the data reinforce Fed tightening. In a stagflationary environment, central banks don’t have a good choice, just least bad ones. That said I don’t think the US is at stagflation yet, but if oil stays above USD 120.00 a barrel, it might soon be.

Looking at the price action overnight, I am not entirely convinced that the US bond move was driven by inflation and Fed tightening fears. Yes, the US dollar rallied, but stripping out the yen, it wasn’t a currency bonfire. US equities still finished modestly higher, and gold’s retreat was limited, it is still boring everyone to death with range trading. The move higher in US yields could well be in anticipation of the USD 96 billion of US government bond sales hitting markets this week in the 3, 10 and 30-year tenors. Time will tell although if most of the US curve is still above 3.0% come Friday, the post-US inflation price action could be frisky indeed.

Turning to the Asia-Pacific, all eyes are on the Reserve Bank of Australia policy decision at 1230 SGT today. The market is heavily weighted to a 0.25% rate hike to 0.60%, as am I. It would be a huge surprise if the RBA did a reverse Prince, didn’t let the doves cry, and hiked by 0.40%. That would see AUD/USD a lot higher and the battlers on the stock market having a bad day, as well as sending a message that the RBA had entered panic mode. A 0.25% hike is priced in and should have minimal impact on the Australian dollar which remains at the mercy of US-derived sentiment flows, like its flightless bird cousin across the Tasman. A change in tone to a more hawkish post-rate-decision statement could see some AUD strength though.

Japanese Household Spending also disappointed this morning, improving slightly from March, but falling by 1.70%, it was well below forecasts. That would have been another reason to buy USD/JPY today, with the rhetoric emanating from the Bank of Japan this morning sounding a bit more nervous than previously.

The rest of the Asian calendar is dead today, although we did get UK BRC Retail Sales YOY for May this morning, Retail Sales improved ever so slightly, but are still solidly negative at -1.50%. The UK has a post-Jubilee railway strike yesterday, and Boris Johnson survived a no-confidence vote. In BoJo’s case, TINA came to his rescue, there is no alternative. The railway strike is what I believe will be a summer/autumn/winter of discontent for the UK as the cost of living soars and the Bank of England waves the white flag. War in Eastern Europe and a UK government still seemingly intent on invalidating the Brexit agreement over Northern Island all add up to me struggling to find a reason for GBP/USD to ever see a 1.3000 handle in 2022.

The data calendar across Europe is similarly second-tier with a few construction PMIs, and the US releases its April Balance of Trade. That is expected to improve to a mere deficit of USD 89.5 billion; however, this data is not usually market-impacting. It looks like we have 24 hours ahead of markets being driven by headlines and sentiment swings once again. Roll on Friday.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific, from 2016 to August 2022
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley was OANDA’s Senior Market Analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV and Channel News Asia as well as in leading print publications such as The New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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