Currency Point: Funding currencies still the go

US equities continues to push high with the S&P 500 clearly on track for the consensus near term target of 4200 points. This has been coupled with US data points that continue to conform the US economy is booming. CPI data, consumer confidence and several state specific activity reads that show the US is going to be the economy to watch in 2021 and beyond.

We don’t normally highlight equities about there are some warning signs for equities that are likely to filter into FX.

These include:
– Rally is at the top of its multi-year channel that begun at the end of the GFC in 2009
– Volumes are low and would suggest they are now confirming the new highs we are seeing – bearish divergence signal
– Over 93 per cent of S&P 500 are above their respective 200-day moving averages.

There is a risk here of it bleeding into DXY and risk pairs.

Interestingly enough the US data was not enough to push US long dated yields higher. In fact, we saw a very successful 30-year US treasury auction last week that sparked a solid rally across the curve and sent yields lower. This was made all the more interestingly by the fact this happened to coincide with the US’ CDC and FDA suspending the Johnson & Johnson COVID-19 vaccine. The US 10-year fell to 1.62 per cent last week a 12-basis point decline over the seven days.

As you know I have been really strong on playing funding currencies JPY and the EUR against the USD.

EUR/USD has risen to $1.1950, we believe the pair will have a range of $1.14 to $1.21 over the coming quarter as we settle into the next phase of the COVID response. We would point out that although the market looked through the CPI data this time, if, as expected, US data continues to beat expectations. There will be pressure on the Fed and its policy and thus bond yield will rise again. Watch for resistance around $1.200/15.

USD/JPY has again failed to hold ¥110.00 and with the fall in US bond yields has only seen shorts increasing in the pair. At ¥109.05 there is every chance the pair continues to ease in the very near period as bonds settle down from the flurry of selling in the first quarter.

However, we believe USD/JPY will trade in a range of ¥106 to ¥114 in this quarter and like EUR/USD would expect upside pressure on USD/JPY if US data continues to improve, seeing the 10-year continue to march up to 2%.

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