USD/JPY, TLT ETF: CPI, bond auctions, Fed make this a huge week for yield sensitive assets

Risk assets have been rallying on hopes the Fed is done hiking
Several Fed officials have flagged higher bond yields are doing the work for them
Bond yields have been falling in response, creating a dilemma
Fed minutes, US CPI, US bond auctions and the conflict in Israel make this a potentially big week for the higher for longer narrative

Talk of higher yields has risk rallying on hopes for a Fed pause, but yields are falling

Want to know something ironic? Risk assets have been rallying on hopes higher yields will prompt a Fed pause, as promoted by notable policy hawk Lorie Logan of the Dallas Fed on Monday.

But here’s the thing: yields have moved lower on her and other similar remarks from Fed officials, with financial conditions loosening as a result. It makes you wonder how long policymakers can run with the view that market-based forces are making the job easier to lower inflation when the exact opposite outcome is occurring?

Will the Fed push back against looser financial conditions?

Know one knows the exact answer, but I suspect we’ll find out soon enough with five FOMC members scheduled to speak on Tuesday, followed by numerous others later this week. The minutes of the Fed’s September FOMC meeting – the one that spooked the markets and ruptured the entire US yield curve higher – are like the cherry on top when they arrive on Wednesday, as will fresh 10 and 30-year US Treasury auctions to close out the week.

Perhaps the Fed are willing to tolerate a loosening in financial conditions? Perhaps risk aversion takes hold given the events in Israel? Perhaps we get a big undershoot on US core CPI, acting to promote a further bid in bonds? A lot of ifs and buts, for sure, but if there’s one thing we’ve learnt this cycle, it’s the Fed seems intent on seeing the inflation challenge through. It means we could easily see another coordinated hawkish tilt to re-tighten financial conditions to *actually* make its job easier.

That’s the risk this week, bringing into focus anything sensitive to shifts in bond yields.

Yield sensitive assets on the radar

TLT – iShares’ 20-year plus Treasury Bond ETF – is an obvious candidate, especially with the challenge posed by two chunky longer-dated Treasury auctions. It bounced from just above $84.05 following the latest payrolls report, adding to gains on Monday. With RSI breaking its downtrend, MACD threatening to crossover from below, and the price forcing its way back through prior downtrend support, a few traders may be thinking the bottom is in. But a lot have though that recently, only to be runover by another wave of relentless selling. That’s why this week seems important.

There’s not a lot of technical support left for TLT with only $84.05, $82.20 and $80.40 evident on the data available. On the upside, $87.50 and $91.50 are the first resistance levels to watch.

Outside long bond ETFs, USD/JPY is standout yield play in the FX universe that may also be at or nearing a turning point. The abrupt slide triggered on the brief probe above 150 has likely scared a lot of bulls off already. Throw in warning momentum on RSI even as the price pushed to fresh highs and some may be thinking the path of least resistance is lower. But a change in direction in US yields will play a major role, you’d think, making rhetoric from Fed officials in response to the loosening in financial conditions all the more important.

For USD/JPY, traders pushed the pair just above 149.50 last week before having second thoughts on making another attempt on 150. On the downside, 147.35 and 145.00 are the big levels to watch.

-- Written by David Scutt

Follow David on Twitter @scutty

StoneX Europe Ltd makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. We are not under any obligation to update any such material. Any opinion made may be personal to the author and may not reflect the opinion of StoneX Europe Ltd.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Please ensure you fully understand the risks involved by reading our full risk warning.

FOREX.com is a trading name of StoneX Europe Limited, and FOREX.com/ie is a domain operated by StoneX Europe Ltd, a member of StoneX Group Inc. StoneX Europe Ltd, is a Cyprus Investment Firm (CIF) company registered to the Department of Registrar of Companies and Official Receiver with a Registration Number HE409708, and authorized and regulated by the Cyprus Securities & Exchange Commission (CySEC) under license number 400/21. StoneX Europe is a Member of the Investor Compensation Fund (ICF) and has its registered address at Nikokreontos 2, 5th Floor, 1066 Nicosia, Cyprus.

StoneX Europe Limited is registered with the German Federal Financial Supervisory Authority (BaFin). BaFin registration ID: 10160255

FOREX.com is a trademark of StoneX Europe Ltd, a member of StoneX Group Inc.

The statistical data and the awards received refer to the Global FOREX.com brand.

This website uses cookies to provide you with the very best experience and to know you better. By visiting our website with your browser set to allow cookies, you consent to our use of cookies as described in our Privacy Policy.

Through passporting, StoneX Europe is allowed to provide its services and products on a cross-border basis to the following European Economic Area ("EEA") states: Austria, Bulgaria, Croatia, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden.

Additionally, StoneX Europe Ltd is allowed to provide Investment and Ancillary Services to the following non-EU jurisdiction: Switzerland.

StoneX Europe Ltd products, services and information are not intended for residents other than the ones stated above.

Tied Agent Information: KQ Markets Europe Ltd with Company No. HE427857.
Address: Athalassas 62, Mezzanine, Strovolos, Nicosia Cyprus.
Services Provided: Reception and Transmission of Orders.
Commencement Date: 06/12/2022
Website: KQ Markets - CFD Trading | KQ Markets

We may pay inducements, such as commissions or fees, to affiliates or third-party introducers for referring clients to us. This is in line with regulatory guidelines and fully disclosed where applicable.

StoneX Europe Ltd may make third party material available on this website which may contain information included but not limited to the conditions of financial markets. The material is for information purposes only and does not contain, and should not be construed as containing, investment advice and/or investment recommendation and/or an investment research and/or an offer of or solicitation for any transactions in financial instruments; any decision to enter into a specific transaction shall be made by the client following an assessment by him/her of their situation. StoneX Europe Ltd makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. We are not under any obligation to update any such material. Any opinion made may be personal to the author and may not reflect the opinion of StoneX Europe Ltd.