Bond markets continue to shape FX flows particularly flows through JPY and USD.

Data over the past 10 days has done nothing abate this trade with the non-farm payrolls strong, but the ADP numbers were not. Confidence is booming but actual investment is not.

Inflation is building but it is transitory or structural? The latest figures from the US were sanguine leaving Central banks to conclude its transitory, the market however still thinks its structural.

However, the mixed data and the sanguine inflation read saw bond bears back off, allowing the long end curve to retrace some of its losses of the past 4 weeks. The 10-year bond yields slipped 7 basis points to 1.53% and has only slight moved since.

With the bears abating the selling at the risk end of the FX market also eased. In fact, the USD fell against all G10 currencies as traders released some of their short positions on the bond market news.

This highlights that our view that spreads in the bond market, the US in particular are driving all things FX.

Quickly running through some of the major moves, EUR/USD bounced off a four-month low of $1.1836 to be back above $1.1900. GBP/USD which had been bucking the bond trend with traders concentrating on the UK budget over the past few weeks to reach $1.40 had fallen to $1.376 once that UK headline story moved away. It has since clawed its way back to $1.3890 on US bonds stabilising.

The most interesting pair in this trade however remains USD/JPY which fell from ¥109.23 its highest read since June 2020 to ¥108.50. It is however the most exposed FX pair to the bond spread trade.

The gap between JGB and US treasuries remains highly attractive to bond hungry Japanese investors. And when you consider the pair at the start of this trend was ¥103.90 it is the biggest ‘conformation spreads continue to drive FX flows and that USD/JPY is the bellwether pair for future opportunities using this set up.