Profit-taking pause for breath

US dollar retreats as US yields fall

A wave of profit-taking swept markets overnights as US bond yields gave back some recent gains. That prompted traders to trim long US dollar positions, with the dollar index and USD/JPY having a tough day at the office. I had noted this week that both were overextended on a short-term technical basis, so the correction itself wasn’t much of a surprise. Notably, neither oil, gold, or Asian FX showed much reaction. In fact, the price action by the Chinese yuan screamed the opposite.

US equity markets moved lower after the bonfire of Netflix’s share price spread to other companies exposed to the streaming sector. But equity markets are a FOMO law unto themselves, and I don’t believe that was what prompted the reversals elsewhere. Tesla blew its Q1 results out of the water after the markets closed, sending its share price 5.0% higher, and that will likely underpin equities in Asia today. It also triggered another USD 23 billion of awards into Elon Musk’s bank account apparently, so I guess he can tweet that “50% of funding is achieved” vis-à-vis his Twitter bid.

More likely was a combination of factors that prompted the US bond, and US dollar reversal. The US 10-year bond auction got away at 3.095%, and the strong bid-to-cover ratio hinted that 3.0% was a magic number for institutional investors to start slurping up US yields (in bond markets, yields fall when prices go up). The Fed’s Daly repeated the 2.50% terminal Fed Funds mantra, further mollifying the Bullard ultra-hawkish nerves previously. US Existing Home Sales also fell once again on a monthly basis, and it will be interesting to see the data from the New Home and Pending Home Sales next week.  Finally, the Fed Beige Book suggested that wage pressures could be easing. In totality, it added up, at least temporarily, to a few decent reasons to pause for breath.

In Asia, regional markets are likely to take a wait-and-see approach, to see if the corrections overnight in US markets are a one-day wonder or will extend for some days yet. The Fed uber-hawk, James Bullard, speaks again tonight and he may continue to be a bull in a monetary China shop. The final runoff for the French presidency this weekend is likely to limit any gains by European markets, currency, or equities, as will the progress of Russia’s new offensive in Ukraine.

Asia-Pacific data is thin on the ground today. New Zealand inflation hit 6.90% YoY; levels not seen since 1990 when I was a fresh-faced young currency trader in Wellington. Ironically, the British bank I worked for had a higher credit rating than the New Zealand government in those days (it doesn’t now). The New Zealand dollar is 0.40% lower today as the markets price the ever-deeper hole the Reserve Bank of New Zealand has dug itself, and the shrinking options it has to extricate itself. Most of them lead to a hard landing I believe.

South Korean March PPI rose 1.30% MoM and rose to 8.80% YoY. Unsurprisingly, energy prices were the main culprit, something that all of Asia will continue grappling with this year. Japan’s Foreign Bond Investment also fell with Foreign Stock investment easing to yen 407 billion. Headlines are dominated by the Bank of Japan placing another unlimited 10-year JGB bid at 0.25% to cap yields again today, the main reason why I believe the USD/JPY dip will be temporary. Far more market reaction should come from its release of the Jibun Bank PMIs tomorrow and its core and headline inflation rates. Core Inflation is expected to rise to an eye-watering 0.80% YoY (by Japanese standards). Expect QE forever to be as intact tomorrow in Japan, as it is today.

The rest of the day’s calendar is non-descript in Asia, leaving markets vulnerable to headline-driven volatility, especially as China’s PBOC set a neutral USD/CNY fix today, after the weaker one yesterday. China’s President Xi Jinping speaks today, but I can’t imagine he will signal a rollback of Covid-zero. Eurozone Inflation this evening has upside risks and a print above 7.50% could see euro selling emerge again as ECB officials stay dovish, and with a war on its eastern border. In addition to James Bullard, Fed Chairman Jerome Powell has two speaking engagements today. An “on message” Powell should cancel out any hawkish Bullard comments and could see the correction lower by US yields and the US dollar continue.

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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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