Gold, USD/JPY: Batter up, bond auctions. It’s your turn to steal the spotlight

• The US Treasury will auction 5, 7 and 20-year debt next week
• Monday’s long bond offering looms as a key market event for yield sensitive assets such as gold and USD/JPY
• A 30-year auction two weeks ago was poor, resulting in a big back-up in long bond yields

Batter up, bond auctions. In a week when there’s little market moving macroeconomic events scheduled in the United States before Thanksgiving, it’s your turn to steal the spotlight (and perhaps wreak some havoc on financial markets). Yield sensitive assets such as gold and USD/JPY will be paying particularly close attention.

Without much ado, here’s a snapshot from Refinitiv showing the scheduled US Treasury auctions for next week. The big event arrives early with a fresh 20-year bond offering, testing the resolve of buyers with yields significantly lower than when the last equivalent auction took place on October 18. If last week’s 30-year bond auction was any guide, where a record tail was reported with primary dealers forced to take up nearly 25% of the entire offering, it has the potential to be ugly.

Source: Refinitiv 

At least we’ll have a strong indication on demand for long bonds early on, likely setting the tone for shorter dated five and seven year note offerings later in the week. While it looks increasingly likely that yields at the front-end of the US bond curve (two years and under) have likely seen the highs this cycle, there’s still great uncertainty whether that’s the case for longer-dated securities, especially those 10-years and longer.

While there’s likely to be some trepidation among traders that the 20-year offering will be horrendous, potentially elevating the risk of a relief rally if demand holds up ok, trying to predict which direction yields will move in the current environment is incredibly difficult given how volatile movements have been across the entire US bond curve in recent weeks. It’s like trying to guess how a toddler is likely to behave days in advance. Good luck with that!

But what we do know is that under most circumstances, falling US bond yields usually assist assets that have no or little yield, such as gold and the Japanese yen.

Gold inching towards retest of $2000

Ahead of Monday’s debt auction, gold is looking constructive on the daily chart, bouncing strongly this week after testing its 200-day moving average. RSI has broken its downtrend, adding to the sense that we may see a retest of resistance above $2000 should bond yields remain behaved. MACD looks like it’s about to crossover from below and it also on the cusp of breaking its downtrend.

Should gold managed to establish a foothold above the big figure, resistance around $2050 will be eyed, opening a potential pathway to fresh record highs. On the downside, support is located at $1980, $1946 and the 200DMA. Those considering taking long positions could place a stop below $1980 for protection.

USD/JPY above 150 despite narrowing yield differentials

As discussed earlier this week, relative to benchmark bond yield differentials between the United States and Japan, USD/JPY is higher than at other points this cycle, suggesting there may be downside risks forming for the pair, especially with the run of higher highs this cycle now over. However, USD/JPY remains a buy-on-dips prospect until proven otherwise.

Right now, the pair continues to find buying on tests of uptrend support, bouncing on multiple occasions off this level since late October. But with narrowing yield differentials between the US and Japan, amplifying the threat the Bank of Japan (BOJ) may be instructed to intervene in the FX market to support the yen, upside from these levels appears limited in the absence of another big lift in US yields.

A break of uptrend support may open the door to a deeper push below 150 with 149.85, 149.37, 148.80, 148.33 and 147.50 the downside levels to watch. On the topside, continued bounces off uptrend support brings resistance at 150.76, 151.20, 151.40 and 151.60 into play.

-- Written by David Scutt

Follow David on Twitter @scutty