Peak US exceptionalism?

USD: Further signs of the US dollar peaking out

Have we reached peak “US exceptionalism”? The 10-year UST bond yield broke above the 5.00% level yesterday for the first time since 2007 and no sooner had that happened that the comment from one well-known market participant that the yield then reversed sharply and fell over 15bps. While Bill Ackman is a very well respected investor, when you get a response in the US Treasury market to one post on ‘X’ you know we have likely reached stretched levels and it is time for some reassessment. The price action had a clear impact in FX too with a sharp reversal of US dollar strength that has been evident of late versus certain currencies. I say “certain currencies” given there was already pretty impressive evidence of resilience in EUR/USD, which prior to the Ackman comment was trading around the 1.0600-level.

Prior to yesterday, the last time we were at that level was back on 25^th September and in that time, the UST bond 10yr yield had jumped around 50bps; the 10year UST/Bund spread had widened in favour of the US by 30bps, the BTP/Bund spread widened by about 15bps and the TTF natural gas price in Europe had advanced by about 12%. All of these developments in the past have been clear negatives for EUR/USD yet the spot rate was basically unchanged over that period. That was certainly a signal of softening positive US dollar momentum and the Ackman comment and drop in US yields simply encouraged more aggressive US dollar selling.

Ackman made reference to the fact that the US economy is slowing more than the data suggests. That was a point we made in yesterday’s FX Daily based on our own text analysis of the Beige Book that indicated deeper pessimism in regard to consumer spending going forward, despite data later this week that will confirm real GDP growth in Q3 in the region of 4.0% Q/Q SAAR driven largely by the US consumer. Fed President Harker also made the same point on the economy in regard to information he was hearing.

Ultimately though it will only be a turn in the official data that will prompt a more lasting sustainable turn lower in US yields. Hence, it would be premature to conclude that the US dollar is now set to weaken on a sustained basis. Still, positioning does appear to have been quite short and yesterday’s bounce in EUR/USD took us to a high not seen since 20^th September (intra-day high 1.0737) and positioning given the surprise bounce yesterday could see the move to the upside extended further.

RECENT LIQUIDATION OF EUR LONGS BY LEVERAGED FUNDS

Source: Bloomberg, Macrobond & MUFG GMR

JPY: Limited reversal of JPY on dollar sell-off

The sharp intra-day sell-off of the US dollar was broad-based but the scale of dollar selling versus the yen was limited and the yen was the 3^rd worst performing G10 currency yesterday. The divergence in yield remains so compelling that the FX impact has been limited.

The actions of the BoJ also continue to point to a renewed focus on containing yields from moving higher rather than containing the yen from moving weaker. Today, the BoJ announced its fifth unscheduled JGB purchase operation since it lasted tweaked its YCC framework in July. The JGB market reacted positively with a 2bp drop in yields although given this operation took place after a much sharper drop in UST bond yields, the drop in JGB yields was relatively modest. The BoJ also increased the size of purchases in regular scheduled auctions and offered 5-year loans to commercial banks at yields below market rates to incentivise bond purchases by banks.

There has been media speculation that the BoJ is considering another shift in its YCC stance, possibly at the January policy meeting although speculation has increased over a move before the end of this year.

Political pressure is also mounting on the government to take action to protect Japanese households from the inflation surge. The BoJ’s actions and USD/JPY threatening to break above 150 will not help form an impression that the government is doing all it can to fight inflation. This is an impossible task given the BoJ’s stance is targeted more toward eliminating the risk of deflation. The LDP lost a bi-election on Sunday and only just scraped through in another with PM Kishida’s public support at its lowest since he took office two years ago. Polling points to inflation as being one reason for his poor level of popularity.  

This prompted a speech in parliament yesterday by PM Kishida who outlined plans for policies to protect households from the ongoing inflation shock. PM Kishida promised to return more revenues to households through subsidies for gasoline, electricity and household gas, that were previously in place until the end of the year, being extended to the spring. The political damage from inflation could certainly change the political incentives to intervene in the FX market as well given the focus on yen weakness being a key factor in driving inflation. That could prove difficult right now given the stability in the USD/JPY market but the poor showing in these elections will certainly encourage intervention at the earliest feasible moment.

CHANGE IN USD/JPY CONSISTENT WITH CHANGE IN US SHORT-TERM YIELDS

Source: Macrobond & Bloomberg

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
GE	08:30	German Composite PMI	Oct	46.7	46.4	!!!
GE	08:30	German Manufacturing PMI	Oct	40.0	39.6	!!!
GE	08:30	German Services PMI	Oct	50.0	50.3	!!!
AU	09:00	RBA Gov Bullock Speaks	--	--	--	!!!
EC	09:00	ECB Bank Lending Survey	--	--	--	!!
EC	09:00	Manufacturing PMI	Oct	43.7	43.4	!!!
EC	09:00	S&P Global Composite PMI	Oct	47.4	47.2	!!
EC	09:00	Services PMI	Oct	48.7	48.7	!!!
UK	09:30	Composite PMI	--	48.8	48.5	!!!
UK	09:30	Labour Productivity	Q2	0.7%	-1.4%	!!
UK	09:30	Manufacturing PMI	--	45.0	44.3	!!!
UK	09:30	Services PMI	--	49.5	49.3	!!!
UK	11:00	CBI Industrial Trends Orders	Oct	-16	-18	!!
CA	13:30	New Housing Price Index (MoM)	Sep	0.1%	0.1%	!!
EC	13:30	ECB President Lagarde Speaks	--	--	--	!!!
US	14:45	Manufacturing PMI	Oct	49.5	49.8	!!
US	14:45	S&P Global Composite PMI	Oct	--	50.2	!!
US	14:45	Services PMI	Oct	49.9	50.1	!!!
US	18:00	2-Year Note Auction	--	--	5.085%	!!

Source: Bloomberg