Yen Extended Down Trend as US 10-Yr Yield Hit 2.5, Euro Vulnerable Again

Yen was once again the runaway loser last week as global benchmark treasury yields, except JGB, surged. BoJ has clearly put a cap in 10-year JGB yield and the result is widening spread and persistent Yen selloff. Euro showing some renewed weakness but it’s so far still range bound against Dollar. Nevertheless, extended decline in Euro against Swiss Franc could finally prompt a breakout in EUR/USD.

Commodity currencies are the clear winners, with Aussie leading the way. While RBA is still in wait-and-see mode, traders are probably starting to price in more aggressive tightening should the cycle start late. Also, as a major export of agricultural product and raw materials, the Aussie would continue to be benefited from surging commodity prices.

Global benchmark yields surge, US 10-year yield to break multi-decade channel?

Global benchmark treasury yields extended recent up trend as bet intensified on faster monetary policy normalization and higher inflation for longer. Germany 10-year bund yield rose 0.218 for the week to 0.589, highest since 2018. UK 10-yield gilt yield closed up 0.197 at 1.697, back to the level last seen in 2016.

US 10-year yield also jumped sharply by 0.344 to 2.492, after even breaching 2.5 handle. Near term outlook will stay bullish as long as 2.299 support holds. And next target if 161.8% projection of 1.343 to 2.065 from 1.682 at 2.850.

But even more importantly, TNX is now eyeing multi-decade channel resistance at around 2.65. Sustained break of this level would be a strong sign that it’s finally reversing the whole down trend from 15.84, made during the early 80s. 2018 high of 3.248 would be the next target and firm break there would confirm the start of a new “era”. The pandemic and then the Ukraine war are the turning point to be marked in history.

AUD/JPY and CAD/JPY extend long term up trend, as BoJ caps JGB yields

Yen’s extreme weakness could easily be explained by the sluggishness in Japanese yields. 10-year JGB yield did rose 0.032 to 0.240 last week. But rally slowed at it approached 0.25 handle. It should be remembered that BoJ pegs the 10-year yield to 0%, with an allowance to fluctuate up or down 25bps. Also, 0.25% was the level that triggered BoJ intervention with its market operation last month. So unless BoJ re-calibrates its policy, the yield gap with others will more likely grow larger than not.

Commodity Yen crosses were the biggest movers last week on expectation of further rise in commodity prices. AUD/JPY rose 3.76% to close at 91.73 and there is no sign of topping. Further rise is expected this week for 61.8% projection of 59.85 to 85.78 from 78.77 at 64.79 next. On the downside, break of 89.91 support will bring near term consolidations first, before staging another rally.

More importantly, AUD/JPY broke through 90.29 long term resistance with solid strength. Rise form 59.85 (2020 low) is seen as reversing the whole down trend from 105.42 (2013 high). That is, there is prospect of more medium-to-long-term upside to zone of 105.42 and 107.88 (2007 high).

CAD/JPY rose 3.40% to close at 97.83. Further rise is expected to 100% projection of 73.80 to 91.16 from 84.65 at 102.01 next. On the downside, break of 95.69 support will bring near term consolidations first, before staging another rally.

Similar to AUD/JPY, CAD/JPY is now reversing corresponding down trend from 106.48 (2015 high). There is prospect of break through this resistance in the medium-to-long-term, towards 125.54 (2007 high).

Euro and Sterling weak against Aussie and Loonie too

The strength of Loonie and Aussie is also apparent against European majors. EUR/CAD’s down trend resumed last week and hit 100% projection of 1.5096 to 1.4162 from 1.4633 at 1.3699 already. Near term outlook will remain bearish as long as 1.3856 support turned resistance holds. Next target is 161.8% projection at 1.3122.

From a long term point of view, EUR/CAD is reversing whole up trend from 1.2126 (2012 low). The above mentioned projection target is also closed to 1.3122 long term support.

GBP/CAD’s down trend also resumed and hit as low as 1.6437. Near term outlook will stay bearish as long as 1.6719 resistance holds. Next target if 100% projection of 1.7623 to 1.6636 from 1.7375 at 1.6388. Decisive break there will pave the way to 161.8% projection at 1.5778.

The fall from 1.8047 (2020 high) could either be a leg of the corrective pattern from 1.5746 (2016 low), or resuming the down trend from 2.0971 (2015 high). In either case, based on current momentum, GBP/CAD could have a test on 1.5746/5875 support zone before bottoming.

EUR/AUD’s rebound from 1.4561 has likely completed at 1.5327 already. Further break of 1.4561 support will resume larger down trend. from 1.9799. Next target is 61.8% projection of 1.9799 to 1.5250 from 1.6434 at 1.3623, which is close to 1.3624 long term support.

Also, EUR/AUD’s decline from 1.9799 (2020 high) should be reversing whole rise from 1.1602 (2012 low). Decisive break of 1.3624 will pave the way back to 1.1602 low.

GBP/AUD has yet to resume the corresponding down trend from 2.0840 (2020 high). But it should be a matter of time only. Break of 1.7412 low will target 61.8% projection of 2.0840 to 1.7412 from 1.9218 at 1.7099.

Fall from 2.0840 is seen as the third leg of the pattern from 2.2382 (2015 high). Hence sustained break of 1.7099 would pave the way to 100% projection at 1.5790, which is close to 1.5693 support.

EUR/CHF Weekly Outlook

EUR/CHF gyrated lower last week but stays above 1.0184 minor support. Initial bias remains neutral this week first. On the downside, break of 1.0814 will indicate that rebound from 0.9970 has completed at 1.0400, ahead of 38.2% retracement of 1.1149 to 0.9970 at 1.0420. In this case, intraday bias will be turned back to the downside for retesting 0.9970 low. On the upside, break of 1.0400 will resume the rebound to 1.0610 key structural resistance.

In the bigger picture, long term down trend from 1.2004 (2018 high) is still in progress. Next target is 100% projection of 1.2004 to 1.0505 to 1.1149 at 0.9650. In any case, sustained break of 1.0505 support turned resistance is needed to be the first sign of medium term bottoming. Otherwise, outlook will remain bearish.

In the long term picture, capped below 55 month EMA, EUR/CHF is seen as extending the multi-decade down trend. There is no prospect of a bullish reversal until some sustained trading above the 55 month EMA (now at 1.0909).