US Dollar Talking Points:
- We’re going into quarter-end this week but there’s much more going on, including the breakout in yields and the breakdown in gold.
- In FX markets, USD/JPY is still the dominant driver as the crowded carry trade remains tilted to the long side from a fundamental vantage point, even as the force of intervention has pushed notable pullbacks over the past couple months.
- As covered in this morning’s video, if looking for US Dollar weakness there may be better avenues, such as EUR/USD or GBP/USD. And for USD strength, USD/CAD has been in an incredibly strong up-trend.
It’s quarter-end but there’s much more going on, as a recent hawkish shift at the Fed has markets looking for another two hikes into the end of the year. That puts more onus on the data but to qualify there, there’s another major factor of importance and this is likely something playing into the Fed’s decision making.
Massive government spending and an expanding debt-to-GDP ratio have increased supply in US Treasury markets. And with a trove of longer-term debt coming due over the next year, markets have been anticipating a wave of supply, which pushes prices lower and yields higher. This isn’t a secret, nor has it really caught anyone by surprise. We’ve seen effort from US Treasury Secretary Scott Bessent to address the matter via larger Treasury buybacks, but that’s like trying to stop a river with a toothpick.
This is the kind of week where things can change, however, and if markets do gain confidence that inflation is getting more under control then we can see demand flow into bonds and that can help to ease the picture around yields. Core PCE and NFP are both particularly important for this as markets are, right now, looking at a 60% probability of two hikes in the remaining two meetings at the Fed this year.
In the US Dollar, the currency just pulled back from overbought RSI conditions on the daily chart.
US Dollar Daily Chart
Chart prepared by James Stanley; data derived from Tradingview
USD/JPY
Given the size of the crowded carry trade USD/JPY still holds an incredibly amount of sway over the DXY basket. And while both Japan and the US would like to see lower spot values in the pair, the fact of the matter is the fundamentals remain tilted to the long side of the pair, evidenced by the still positive rollover for longs and the negative rollover for shorts.
This doesn’t mean that the pair cannot go down, as we’ve seen multiple prior episodes where pullbacks played out even against the direction of the carry – but in each of those there was the prospect of shift in fundamentals, by weaker US inflation and less hawkishness at the Fed. That is not what we have right now so, instead, the bearish force for the pair has been dual intervention from both the US and Japan along with threats of more.
USD/JPY Weekly Chart
Chart prepared by James Stanley; data derived from Tradingview
USD/JPY Tug-of-War
While there’s been a clear shift from the weekly chart above, the delta between US and Japanese inflation combined with the still positive carry on the long side of the pair has helped USD/JPY to hold higher-lows on pullbacks, and we’re seeing another of those this morning.
Last week the pair jumped all the way up to 159 before finding sellers. A couple of comments with one particularly direct comment from Scott Bessent helped the pair to retrace. But, price has simply grasped on to support at a familiar level of 156.68, and that has since led to another bounce. This is the same structure I had looked at last Thursday and that remains in-place as we go into a really big week ahead.
USD/JPY Four-Hour Chart
Chart prepared by James Stanley; data derived from Tradingview
--- written by James Stanley, Senior Market Analyst, Global Macro
