FOREX: Global Curve Dynamics Roil Currencies, USD/JPY Rallies 1.3%
May-27 09:26
- Global bond markets and the shape of yield curves remain the key driver for currencies, as renewed volatility in the JGB market triggers a slump in the JPY and a broad USD rally. According to sources, the Japanese Ministry of Finance solicited market opinions on the curve and the government's issuance approach via a questionnaire - triggering broad speculation that the government would re-orient away from longer-end issuance.
- The ensuing bull-flattening of the Japanese curve worked against the JPY, boosting USD/JPY by over 1.3% off the overnight low, and well within range of the Y144.00 handle. A close at current or higher levels for the pair would snap the short-term downtrend that had reversed the pair off the Y148.65 mid-May high. The initial resistance zone at 144.40, last Thursday’s high and the 20-day EMA. Above here, the 50-day EMA currently intersects at 145.73.
- EUR losses posted off the back of a lower-than-expected French CPI miss are holding, with a new pullback low at 1.1341, dipping the price below the Friday close - and reversing the entirety of the gains posted off the Trump EU tariff threat delay from yesterday. USD strength is also playing a part here - dollar's rallying alongside equities as the inverse relationship between yields and the currency continues - with strong USD/JPY demand adding an extra tailwind.
- Technically, EUR/USD sees scant support until 1.1271, the 20-day EMA, meaning today's dip lower is counter-trend. But a clear break below here would highlight a stronger reversal and signal scope for a deeper retracement. EUR/GBP meanwhile is testing major support at the 200-dma of 0.8383. This level was briefly pierced intraday last week, but hasn't sustained a break below since March earlier this year. Weakness through 0.8380 would result in the lowest print since April 3rd.
- Focus for markets Tuesday rests on prelim durable goods orders and May consumer confidence from the US. Fed's Barkin and ECB's Nagel make up the Fedspeak.
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US TSYS: Extraordinary Measures And Cash Look Sufficient To Head Off X-Date
Apr-25 20:32
Treasury has about $164B in "extraordinary measures" available as of April 23 to avoid hitting the debt limit, per its regular report out Friday. That's out of a maximum total of $375B (they have used $211B).
- With Treasury cash looking healthy (around $600B), that's a fair amount of dry powder to get through the summer months to wait out the debt limit impasse. Tax receipts have looked strong with tariff revenues also starting to boost cash flows, further reducing the near-term urgency to adjust bond issuance.
- This has also helped push back analyst “x-date” expectations to later in the summer/September. We expect to hear from Treasury about its own x-date assumptions next week.
US TSYS: Treasury Market Trading Stayed Orderly In April: Fed Report
Apr-25 20:25
Liquidity across financial markets including the Treasury market deteriorated after President Trump's April 2 reciprocal tariffs announcement but market functioning was generally orderly, according to the Federal Reserve's semiannual report on financial stability, released Friday. (PDF link is here)
- Treasury market liquidity has been poor for years and yields were particularly volatile in early April, contributing to a deterioration in market liquidity, the Fed said.
- Nevertheless "trading remained orderly, and markets continued to function without serious disruption," according to the report, which looked at information available as of April 11.
FED: Ex-Gov Warsh: Fed Has Failed To Satisfy Price Stability Remit
Apr-25 20:22
From our Washington Policy Team - Some fairly sharp words today from ex-Fed Governor Warsh on the central bank (who for what it's worth is seen by betting markets as by far the frontrunner for the next Fed Chair):
- The best way for the Federal Reserve to safeguard its independence is for policymakers to avoid expanding the institution's role over time, including wading into policy areas that are outside its core mission, former Fed Governor Kevin Warsh, a leading contender to replace Jerome Powell as chair next year, said Friday.
- "I strongly believe in the operational independence of monetary policy as a wise political economy decision. And I believe that Fed independence is chiefly up to the Fed," Warsh said in a speech at a Group of Thirty event on the sidelines of the IMF meetings. "Institutional drift has coincided with the Fed’s failure to satisfy an essential part of its statutory remit, price stability. It has also contributed to an explosion of federal spending." His speech made no mention of Trump's tariffs or the appropriate monetary policy to deal with them.
- He said the ideas of data dependence and forward guidance widely adopted by Fed officials are not especially useful and might even be counterproductive.
"We should care little about two numbers to the right of the decimal point in the latest government release. Breathlessly awaiting trailing data from stale national accounts -- subject to significant, subsequent revision -- is evidence of false precision and analytic complacency," he said.
"Near-term forecasting is another distracting Fed preoccupation. Economists are not immune to the frailties of human nature. Once policymakers reveal their economic forecast, they can become prisoners of their own words. Fed leaders would be well-served to skip opportunities to share their latest musings."
