JPY blasts out of gates on yield drop, but the currency remains choppy as market struggles to draw conclusions.
The market initially tried to put a brave face on the weekend’s SNB-arranged takeover of Credit Suisse by UBS, with sentiment strong and the USD and JPY weak. But this quickly yielded to risk off and sharp JPY rally and another big drop in global bond yields. Unease remains and the specifically unsettling story was the wipeout of Credit Suisse’s Tier1 debt, which saw further negative focus on banks overnight and into early European trading today on the unprecedented move. But by the lunch hour today, yields in Europe are rebounding and the JPY strength had eased somewhat. More on the relative euro- and JPY moves in the chart below
EURJPY was marked sharply lower as the crumpling yields supported the JPY overnight once again, while the SNB-arranged wipeout of Credit Suisse’s Tier1 debt in its sale to UBS unsettled the huge market for similar bonds from European banks. As yields recovered today from new lows and EU regulators are out trying to reassure that Tier1 debt ranks above common equity in the capital structure, the euro is recovering today and the JPY strength if fading. As well, the JPY has traditionally proven more sensitive to longer yields, which have retreated far less as yield curves steepen. The interpretation of the latter could be that central bank may have to ease soon because of the damage from this tightening cycle to financial conditions, but that will also mean that they are more likely to fail in their fight against inflation – this is far less JPY-positive than would be the case had we seen a stronger move lower in long yields, which would suggest a higher risk of a more traditional deflationary economic slowdown. From here, we’ll be watching global longer bond yields as the key coincident indicator and the 200-day moving average near 141.80 to the upside an the range lows near 137.50 to the downside if we are set for a more significant capitulation.