We keep coming back to a theme we have been strong on since mid-January, the reflation trade.
Global reflation has awoken bond bears from a deep hibernation and are working to the idea that central banks will have to react to the rapidly increasing inflation data.
There is no surer sign we are in a bond market bear market than seeing Japanese Government Bonds (JGBs) participating in the selloff. The flicking out of JGBs gives us confidence that the fixed income market will trend one way for the short foreseeable
The question from a fast-moving bond bear market is what does it mean for us FX traders?
The biggest point is directional flow – we know from previous bond market sell off is it’s not linear and fixed income investors jump from one international market to the next. Flows also tend to go to the highest risk-free rate, which as a start point is the US 10-year and then look to steepness again the 10-year for opportunities.
With that in mind one of the most common strategies from a FX standpoint is to be neutral USD and look to widening spreads against US bonds to direct trade. So, risk-positive trades in the short term are likely to win out because of their natural positive spreads i.e. EUR, AUD, NZD.
We would also suggest looking at long USD/JPY as the JGB trade is likely to shift the JPY.
Looking technically the GBP/USD and EUR/JPY a making new technical gains. USD/JPY had retested a major downtrend line it had broken in January and bounced – this is a strong bullish sign and backs the fundamental points made above. The AUD/USD is now is a solid uptrend and every test of the lower band has seen it bounce, the Aussie-US 10 year spread partly explains this, as does the movement in iron ore.