USD/JPY, USD/CHF: How one massive interest rates futures trade moved FX markets

• A record block trade involving US SOFR futures occurred on Wednesday
• The trade was initiated by a seller, driving futures prices lower and bond yields further out the US Treasury curve higher
• USD/JPY, USD/CHF stage key bullish reversals on the dailies, assisted by higher US bond yields

Become rates wise!

If you have a basic understanding of how the front-end rates markets work, you’ll almost certainly have better understanding of how influential it can be across a variety of asset classes. In the interest of improving that understanding, we look at how one trade on Wednesday contributed to a sizeable US dollar rebound, seeing USD/JPY and USD/CHF push sharply off their recent lows.

Big bearish US rates bet

As reported by multiple financial media outlets, a record block trade involving three-month Secured Overnight Financing Rate (SOFR) futures for December 2024 expiry took place shortly after the New York open on Wednesday. 118,000 contracts were involved, equating to around $3 million notional change in value for every basis point movement.

Without going into intricate detail, the contract allows traders or investors to hedge or speculate on future movements in the Secured Overnight Financing Rate (SOFR), a benchmark for short-term US interest rates that replaced scandal-ridden LIBOR.

A block trade is a privately negotiated transaction, typically involving a large quantity of contracts which takes place outside of public markets.

Now, nobody knows the story behind the block trade other than it was initiated by a seller. Was it an outright bet against large-scale rate cuts that were being priced in, or simply hedging a prior trade or interest rate risk? Was it positioning before quarter-end? Who knows! But it was big, towering over the previous record.

It also left an impact on markets, as hopefully the chart below explains.

Higher US yields, stronger US dollar

The left-hand pane shows the price action in the December 2024 SOFR futures contract on Wednesday, with the time around the trade occurred circled for reference. Remember this is price, not yield, so the decline implies higher expected US interest rates. You can see the spike in volumes accompanying the trade.

The middle pane is again the December 2024 SOFR futures contract, but zoomed out to an hourly tick to show that prices had been lower earlier this month before rallying towards the early August highs when concerns about the US economy were particularly acute. Rate cut bets had been getting very big!

The right-hand pane at the top shows the one-minute tick chart of US two-year Treasury yields on Wednesday. As the trade implied less chance of aggressive Fed rate cuts ahead, it acted to push yields further out the US bond curve push higher. Below, USD/JPY and USD/CHF are shown in blue and red respectively, again on a one-minute tick. They often demonstrate a strong positive correlation with US front-end bond yields movements, as was the case on Wednesday.

To recap the linkages, a record block trade looking for higher US interest rates took place in SOFR futures, which flowed through to short-dated US Treasury yields and then eventually the US dollar. Hopefully it makes sense. And while this is looking at a block trade via futures, it’s also relevant for other factors that can change US interest rate pricing, such as economic data.

USD/JPY prints key daily reversal

Looking at USD/JPY on a daily chart, Wednesday’s move delivered a key bullish reversal, seeing the price break above resistance at 144.50, providing a useful level to build trade setups around. With MACD and RSI (14) generating bullish signals on momentum, the bias remains to buy dips unless we get a clear price signal to sell.

If we see a retest and bounce off 144.50 today, you could consider initiating longs with a tight stop below the level for protection. Resistance may be encountered around 145.54, although the 50DMA at 146.49 looms as a more appealing target.

Alternatively, if we see a reversal back through 144.50, you could sell with a stop above for protection. Wednesday’s low around 143 is one target, 140.273 another.

USD/CHF breaks higher

Like USD/JPY, USD/CHF delivered a key bullish reversal on Wednesday, seeing the price break out of the triangle pattern it’s been coiling up in since early September. With MACD and RSI (14) trending higher, it improves the probability that the break may stick.

Those considering longs could buy around these levels with a tight stop below former resistance for protection. .8550 is one potential topside target, with the 50DMA and .86171 the next after that.

If the price reverses back below resistance, you could sell with a tight stop above looking for a potential retest of triangle support.

-- Written by David Scutt

Follow David on Twitter @scutty