Australian Bond Carnage, YCC Under Threat, GBP/JPY Month-End Boost

Australian Bond Market

GBP/JPY May Receive a Month End Boost
ECB Unlikely to Provide Fireworks

AUD: All eyes on the Aussie bond market after the AU 3-year yield surged 20bps after the RBA made no offer to purchase the 2024 April yield target bond and thus raising questions as to whether the Bank is giving up on yield curve control. In turn, the 3-year is now yielding 1.15%, up from 0.3% at the beginning of the month. A reminder that the Bank’s target is to cap the yield at 0.1%. That being said, market participants will, however, be on the lookout as to whether the Bank offers to purchase April 2024 bonds tonight.

Australian 3-Year Government Bond Yield

Source: Refinitiv

The impact on the Australian Dollar has so far been minimal, despite markets anticipating a more hawkish RBA, in which money markets are pricing in 3-4 rate rises in a year vs the RBA’s current stance that rates will not rise until 2024. Instead, the currency has been struggling to maintain a foothold above 0.7500, for reasons I noted yesterday. That said, the direction of travel for rates are clear, therefore favouring the AUD against currencies of dovish central banks, such as the ECB remains appropriate.

RBA Rate Hike Expectations

Source: ASX

GBP/JPY Upside on the cards for Final Trading Day

As the S&P 500 is on course to close the month with gains of over 5%, there is potential for a sizeable amount of month-end rebalancing, which in turn could prompt short-term fluctuations for FX. (More on month-end rebalancing here). In turn, looking at prior times when the S&P 500 has closed 5% or more, GBP/JPY has on average posted modest gains of 0.6% On the 17 previous occasions, GBP/JPY has moved higher 82% of the time on the final trading day of the month.

Source: Refinitiv, DailyFX

IG Client Sentiment: GBP/JPY

Retail trader data shows 29.65% of traders are net-long with the ratio of traders short to long at 2.37 to 1. The number of traders net-long is 8.86% lower than yesterday and 19.32% higher from last week, while the number of traders net-short is 0.85% lower than yesterday and 7.28% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBP/JPY prices may continue to rise.

Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed GBP/JPY trading bias.

Source: IG, DailyFX

ECB Fireworks Unlikely

Today’s ECB meeting is unlikely to provide much in the way of fireworks, given that policy settings will remain unchanged, while market participants are expecting the ECB to reiterate their stance and pushback on current market pricing, which signals rate hikes by the end 2022. That said, below is tech sheet of notable Euro cross levels.