US Treasury Yields Come Back Softer After Moody’s Cut Outlook, and the Dollar Rises to New Highs Against the Yen

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Marc Chandler
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Overview: The dollar is beginning the new week narrowly mixed against the G10 currencies. Sterling seems largely unaffected by the cabinet reshuffle that has seen former Prime Minister Camron return as the foreign minister, replacing Cleverly who replaces Home Secretary Braverman. The dollar rose to new highs for the year against the Japanese yen (~JPY151.85). The market has shown little reaction to the pre-weekend news that Moody's cut the outlook for US credit to negative from stable. The 10-year US yield is off almost three basis points to 4.62%. European benchmark yields are off mostly 2-3 basis points, but Italy's yield is down five basis points.

Most equity markets in the Asia Pacific region traded heavier despite the outsized gains on Wall Street ahead of the weekend. The Hang Seng and mainland companies that trade there rallied 1.3%-1.5% were notable exceptions. Europe's Stoxx 600 has returned bid after falling by 1% before the weekend. On the other hand, US index futures are sporting a softer profile. Meanwhile, gold is stuck near the pre-weekend lows around the 200-day moving average (~$1935). The yellow metal fell by 2.6% last week. December WTI is steady, in a narrow range slightly below three-day high set at the end of last week near $77.75.

Asia Pacific

Iron ore prices reached seven-month highs before the weekend, rising for the third consecutive week. Inventories are low and traditionally restocked before the Lunar New Year (mid-February 2024). China's Securities Journal reported last week that 16 major cities have abolished the price cap on land auctions. This may encourage developers to acquire new lands. The gains were extended today. Since October 20, iron ore prices have risen by 16%. The iron ore is needed to produce steel, and the property market accounts for around 40% of China's steel demand.

The 10-year JGB yield slipped three basis points last week to 0.84%. It peaked about 10 bp higher. The 30-year yield peaked on November 1, slightly above 1.90%. It fell to almost 1.70% late last week before settling near 1.72%. Over the past 30 sessions, changes in the exchange rate are more correlated with changes US two-year yield (~0.45) than changes in the 10-year yield. As the dollar rose every session last week, nary a word threatening "appropriate action."  Deputy Finance Minister Kanda, who is in charge of fx policy, may have his hands full with a tax issue (he failed to pay property taxes), but the lack of verbal intervention encouraged the dollar bulls to press further ahead of the weekend, lifting the dollar to almost JPY151.60 and sending the euro to a marginal new15-year high. The decline in producer prices last month (-0.4% vs. median forecast of a flat report) coupled with the sharp decline in October machine tool orders (-20.6% year-over-year vs. -11.2% in September) may have helped maintain the pressure on the Japanese yen, which fell to new lows for the year against the dollar and euro.

The market seems to be emboldened a bit, taking the dollar higher for the sixth consecutive session today. It reached about JPY151.85. There are options for nearly $2.2 bln at JPY152 that expire Wednesday. Initial support is seen int he JPY15140-60 area. The euro poked above JPY162.35 and is gaining on the yen for the ninth session in the past 11. Ahead of the weekend, the Australian dollar recovered from the $0.6340 area, a new low for last week, stopping just ahead of the A$1 bln in options that expire in the middle of the week at $0.6335. The Aussie's recovery stalled near $0.6365 ahead of the weekend and the 20-day moving average slightly higher, but today surpassed both hurdles to reach $0.6385. Intraday momentum indicators are stretched, warning that the $0.6400 resistance area may be too far today. The Chinese yuan steadied after falling to a new six-day low. The dollar reached almost CNY7.30 before stalling and pushing back to session lows near CNY7.29. China reported aggregate lending slow more than expected in October (CNY1.85 trillion vs CNY4.12 trillion in September). This will likely have been blunted by the surge in new bond issuance. The PBOC set the dollar's reference rate at CNY7.1769 (CNY7.1771 on Friday). The average forecast in Bloomberg's survey was for CNY7.2891(CNY7.2947 on Friday). Note that the greenback has traded on both sides of Friday's range against the offshore yuan. A close below Friday's low (~CNH7.2970) would ostensibly be a bearish development. 

Europe

Eurozone's quiet week begins off slowly. The November ZEW survey is due tomorrow alongside the revisions and details of Q3 GDP (initial estimate was -0.1% quarterly contraction). The EU updates its economic forecast in the middle of the week. The market will likely be more sensitive to UK's data. Tomorrow is about jobs and wages and Wednesday is the October CPI. Average weekly earnings are expected to have slowed and the year-over-year pace of CPI is likely to fall dramatically due to the base effect.

The rumored UK cabinet reshuffle took place. Home Secretary Braverman, who had been brought back by Sunak after being dismissed by Truss, has been dismissed and replaced by Foreign Minister Cleverly. In a surprise development, former Prime Minister Cameron, is the new Foreign Minister. Note that the UK Supreme Court is expected to rule on Wednesday the government's plan to deport asylum seekers to Rwanda, a policy championed by Braverman. 

The pre-weekend session was the first in six sessions that the euro did not trade above $1.07. It recorded a marginal new low for the week ahead of the weekend near $1.0655. The lows for the last four sessions with within about 5/100 of a cent of $1.0660. The euro is in a narrow range today above $1.0680 and did briefly trade ever so slightly above $1.07. Sterling may have formed a bullish hammer candlestick ahead of the weekend. It broke down to within a couple of hundredths of a cent of the November 3 low (~$1.2185) and recovered back toward session highs (~$1.2240) and closed higher on the day. Follow-through buying today lifted sterling to almost $1.2255. However, this has over-extended the intraday momentum indicators and a return to the $1.2200-20 area look likely in North America.

America

The preliminary University of Michigan's survey showed a jump in consumer inflation expectations. The one-year expectation rose to 4.4% from 4.2%. That is the highest since April. The 5–10-year inflation expectations rose to 3.2% from 3.0%. That is the highest in the dozen years. The market was unimpressed. The 10-year yield was a smidgeon softer on the day. The five- and 10-year breakevens closed slightly lower ahead of the weekend. Still, the implied yield of the December 2024 Fed funds futures contract rose four basis points to 4.68%. The current effective rate is 5.33%. That implies 65 bp of easing next year. That is two cuts and 60% of a third. On November 8, the December 2024 contract implied a yield of about 4.49%, or 84 bp of cuts (three cuts and about 35% of a fourth cut). Moody's cut in the US credit outlook to negative is the subject of much talk but little action. It remains the only one of the big three rating agencies that recognize the US as a AAA credit. That said, the federal government faces a partial shutdown unless Congress either passes new appropriation bills or a continuing resolution by the end of the week.

The US dollar reached CAD1.3855 ahead of the weekend, a six-day high. It reversed lower, perhaps encouraged by the risk-off mood that fueled strong gains in US equities, and a further recovery in oil prices. A potential bearish shooting star candlestick may have been forged. However, there has been no follow-through selling of the greenback today and it continues to straddle CAD1.38 (approximate range so far today: CAD1.3790-CAD1.3820). A push below CAD1.3770 would encourage ideas that a near-term top is in place, but a break of CAD1.3740, and ideally CAD1.3700 is needed. The Mexican peso also recovered smartly ahead of the weekend. First, the dollar extend is Powell/Banxico rally to almost MXN17.94 before turning tail and falling slightly through MXN17.62. This effectively retraces half of the greenback's gains from the November 3 post-US jobs data low near MXN17.2835. The greenback has come back from the weekend with a firmer bias and reached MXN17.71 in the European morning. This could be the session high. Initial support is seen around MXN17.62, and a break could signal a move toward MXN17.5350.