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Bond-mania ups yen buying as Trump escalates trade war

Publication Date: 31 May 2019 - By ReachX Team By ReachX Team
Actionable
Differentiated

FX & Rates FX Global

US President Donald Trump’s vow of rapid and high trade tariffs on Mexico “unless illegal immigration ends” has spooked the equities market and sparked another mad rush to buy bonds on Friday (31 May). 

From a forex market perspective, collapsing bond yields means one thing only - a stronger yen, according to Kit Juckes, Head of FX at Société Générale. “Abenomics used negative rates and quantitative easing (QE) to weaken the currency and get inflation expectations up. Now, Japanese yields are higher than German ones and the economy is in better shape too.”

The SocGen expert said there have been a few “also dawns” for yen bulls so far this year but they are having another day in the sun. “The Mexican peso isn't having a fun time, and it's taking the Canadian dollar down with it. Oil price slump following US inventories doesn't help CAD or NOK, for that matter."

Turning his attention to G10FX forecasts, Juckes said patience was required for dollar bears. “As global growth fears challenge high asset valuations, safe-haven currencies will benefit. The JPY is our top G10FX pick and the likelihood of it rallying sooner than the EUR will place further downward pressure on EUR/JPY.” 

Carry trade barely impacts the performance of a EUR/JPY spot position, while it makes a short USD/JPY prohibitive. “Growth expectations remain the core FX driver, and Japan's 1Q GDP was a positive surprise. EUR/JPY remains correlated with 10y relative rates, as they discount a growth term premium. This spread is now pointing downwards and is unlikely to widen any time soon.” 

Meanwhile, EUR/USD is on its way for a fifth consecutive quarterly fall, and is well on track to register the smallest quarterly range in its history. “For pattern watchers, we are seeing a very slow, remorseless grind lower, each quarter registering a lower low, despite miniature ranges,” Juckes concluded. 

 

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