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Rising U.S. Yields Push The Yen To New Five-Year Lows

By Marc ChandlerForexJan 04, 2022 06:14AM ET
Rising U.S. Yields Push The Yen To New Five-Year Lows
By Marc Chandler   |  Jan 04, 2022 06:14AM ET
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The surge in US yields helped lift the dollar but did not block the equity rally. The 10-year Treasury yield surged 12 bp yesterday and the 10-year break-even widened amid ideas that the Omicron variant will boost price pressures.

Japanese and Australian markets re-opened and led the regional equity advance with nearly 2% gains. Taiwan and Singapore also posted strong advances. The PBOC withdrew liquidity from the banking system, and this seemed to weigh on Chinese and HK activity.

The US 10-year yield steadied near 1.63%, while Australian bonds played catch-up, with yields rising nearly seven basis points to 1.74%. European bonds yields were mostly little changes to slightly softer, while UK Gilts, which did not trade yesterday, were up about 8 bp today to around 1.06%. Europe's Stoxx 600 was trading about 0.8% higher to extend yesterday’s gains. US futures indices were a little higher.

The dollar was consolidating yesterday's gains at lower levels against most of the major currencies. The yen was the notable exception. We continue to underscore the sensitivity of the exchange rate with the 10-year Treasury yield. The greenback approached JPY115.90, its highest level since in five years.

Ahead of what is expected to be a 50 bp hike from Poland's central bank, most of the regional currencies were higher. However, the freely accessible and liquid emerging market currencies were lower, led by the Turkish lira and South African rand. The JP Morgan Emerging Market Currency Index was off about 0.25%.

Iron ore prices were rising for the fourth consecutive session, while copper was trading a little heavier. February WTI was firm above $76.50 and within the consolidative range. OPEC+ was expected to confirm plans to boost output by 400k barrels a day next month. Gold steadied above $1800 after falling 1.5% yesterday in the face of the surging yields. Natgas was a little firmer in the US, rising for a third session, while the European benchmark re-opened and surged nearly 30% to snap the seven-day drop.

Asia Pacific

The PMI data from China, Japan, and Australia were better than expected. China's Caixin manufacturing PMI rose to 50.9 after slipping to 49.9 in November. Recall that the "official" manufacturing PMI was also stronger than expected rising to 50.3 from 50.1. Japan's final manufacturing PMI rose to 54.3 from 54.2 flash reading. This still leaves it slightly lower than November's 54.5. The Q4 average was about 54 after 52.4 Q3 average.

Australia's story was similar. The manufacturing PMI was revised to 57.7 from the 57.4 preliminary estimate after November's 59.2 print, which was the highest since May. It averaged 58.4 in Q4 and 55.2 in Q3.

Indonesia declared its intention to limit coal exports to ensure sufficient domestic supplies. Since Beijing cut its coal imports from Australia in 2020, to protest its foreign policy, China has relied more on supply from Indonesia. Bloomberg figures suggest it may account for almost three-quarters of China's thermal coal imports. 

Japan's 10-year JGB yield rose to its highest level since November just below 0.09%. The sharp jump in US yields were partly responsible. There was also supply looming. Tomorrow, Japan will sell JPY2.6 trillion 10-year bonds and JPY900 bln 30-year obligations on Friday.

Tokyo traders returning from the long holiday weekend were dollar buyers out of the gate. The greenback stalled near JPY115.40 yesterday and Tokyo took it to around JPY115.80. Early European traders pushed it a little higher. The market seemed hesitant given the proximity of JPY116.00 and limited follow-through selling of Treasuries. A nearly one-billion-dollar option at JPY115.50 expires today.

The Australian dollar was stabilizing after falling 1% yesterday, the most in a month. It was finding support by the 20-day moving average (~$0.7190). Look for resistance in the $0.7220-$0.7230 area.

The broad US dollar gains were helping the PBOC's efforts to cap the yuan. The dollar rose about 0.25% against the yuan today. The reference rate was set at CNY6.3794, near market expectations (Bloomberg survey) of CNY6.3790. The PBOC money market operation resulted in a net drain of CNY260 bln, the most since October.


UK markets were closed yesterday for the long holiday weekend. Gilts sold off and stocks rallied. The economic data were better than expected. The December manufacturing PMI was revised to 57.9 from the preliminary estimate of 57.6 after November's 58.1. The UK's consumer credit, mortgage lending and approvals for November also were stronger than projected. The swaps market had a 25 bp hike at the February 3 BOE meeting nearly fully discounted. It had almost 100 bp of tightening priced in for this year. 

Germany offered pleasant surprises today. November retail sales, which were expected to have fallen by 0.3% instead rose by 0.6%. The October series was revised to show a 0.5% gain instead of a 0.3% loss. Also, the unemployment queues fell by 23k in December. The median forecast (Bloomberg survey) was for a 15k decline. The unemployment rate unexpectedly slipped to 5.2% from 5.3%.

Separately, Spain reported its December unemployment fell by almost 77k, the most since August. Lastly, ahead of the aggregate figure at the end of the week, French December harmonized CPI was unchanged at 3.4%. The median forecast (Bloomberg) expected a small increase.

Poland was expected to deliver the first hike of the New Year. The central bank hiked the reference rate by 50 bp in December after a 75 bp increase in November and 40 bp in October. The December CPI is due at the end of the week, and it is expected to rise to 8.2% from 7.8%. Separately, Hungary's central bank has lifted the rate (one-week repo rate) seven times in as many weeks. It sets it on Thursday. It stands at 4.0% now and was at 1.80% as recently as mid-November.

The euro was confined to about a quarter of a cent range today. It fell by nearly 0.65% yesterday, the most since Dec. 17 and was straddling the $1.1300 level. Since the middle of November, it has mainly traded between $1.12 and $1.14. It had approached the upper end of the range in the last couple of weeks of December. The US two-year premium over Germany is near 140 bp, the upper end of its recent range, the highest since March 2020. At the end of 2019, it was about 80 bp higher.

Sterling buckled under the dollar's surge yesterday, falling to a three-day low near $1.3430. Although still within yesterday's range, cable popped back above $1.3500 in the European morning but was at risk of stalling. Initial support was seen in the $1.3460-$1.3480 area. Meanwhile, the euro slumped to about GBP0.8360, its lowest level since March 2020.


The US reports the December ISM and auto sales and the November JOLTS data. The manufacturing ISM has held up better than the manufacturing PMI, which eased for five consecutive months through December. That said, the ISM headline and new orders are expected to have softened. Prices paid are also expected to have eased.

Employment is expected to be a bright spot. Auto sales are expected to have risen for the second time in three months and the median forecast (Bloomberg) looks for a 13.1 mln unit annualized pace. If so, it would be the best since July. Also, on today’s agenda, the Fed's Kashkari, usually a dove, speaks. A couple of Federal Reserve nominations are expected any day now. Fed veteran Jefferson, and Raskin are expected to be nominated. A third is expected to be open soon.

Canada reports some November commodity indices, but the December manufacturing PMI is more important. It has been stuck with 57-hand since August. November trade figures are due Thursday ahead of the employment report on Friday. The swaps market had a hike fully discounted for the Mar. 2 Bank of Canada meeting. Separately, note Ontario is reintroducing social restrictions to avoid overwhelming hospitals. Nearly 3/4 of the province's adult ICU beds are occupied.

The Canadian dollar rallied into the end of 2021. It gained against the greenback in seven of the last ten sessions. However, it gave by 0.85% yesterday and was trading quietly today. The US dollar was hovering around CAD1.2740 near midday in Europe. There was a $355 mln option at CAD1.2750 that expired today.

The Canadian dollar looked vulnerable to the falling premium Canada offered over the US for two-year borrowings. The premium today was around 17 bp. It was near 60 bp two months ago. It was the least since June. A convincing move above CAD1.2750 will target CAD1.2800.

Mexico (and Brazil) have light economic calendars today. From the late November peak near MXN22.1550, the US dollar fell around 8.5% to MXN20.3270 at the end of last month. We look for the greenback to recover. Initial resistance was seen in the MXN20.65-MXN20.75 band. The US dollar also appeared poised to test the BRL5.70-BRL5.75 area.

Rising U.S. Yields Push The Yen To New Five-Year Lows

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Rising U.S. Yields Push The Yen To New Five-Year Lows

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