Yen, Pound Nosedive, BoJ Reminds You Who’s In Charge Here

Right, so first thing Thursday morning we noted that 10Y JGB yields had risen to 0.10% for the first time since mid-February.

“This suggests the upward pressure on DM yields globally is starting to test the BoJ’s YCC,” we continued, adding that “the focus is squarely on BoJ buying including Friday’s purchase operation which the market will now watch to see if Kuroda caps yields.”

Well, sure enough…

BOJ TO BUY 500B YEN 5-10YR GOV DEBT,VS 450B YEN BEFORE

— Heisenberg Report (@heisenbergrpt) July 7, 2017

BOJ Offers to Buy Unlimited Amount in Fixed-Rate Bond Operation

— Heisenberg Report (@heisenbergrpt) July 7, 2017

In other words, Kuroda took one look at JGB yields above 0.10% and said “yeah, fuck that.”

“Market consensus has been set that 0.11% for 10-year govt bond yield will be the top in BOJ’s current yield-curve control scheme after it conducted the fixed-rate operation at the same level for a second time,” Tokyo-based Naoya Oshikubo, a rates strategist at Barclays noted.

Of course no bids were tendered at 0.11%, but that’s not the point. “We should not be surprised that no one wanted to sell to the BOJ today at its offer rate of 0.11% because the JGB was trading at the time at less than 0.10%,” says Joseph Capurso, a senior currency strategist at Commonwealth Bank of Australia in Sydney.

“BOJ’s operation to buy an unlimited amount of 10-year bonds at a fixed rate should restrain the increase in the nation debt yields,” Souichi Takeyama, rates strategist at SMBC Nikko Securities remarked, adding that the “BOJ increased purchase volume for 5-to-10-year sector at Friday’s regular operations because the fixed-rate operation by itself may not be enough to improve overall supply-and-demand balance in the JGB market.”

Right.

And of course yields immediately fell:

Needless to say, USDJPY jumped as soon as the headlines started to hit.

“Algorithmic programs were first to buy dollars versus yen after BOJ announcement,” interbank traders told Bloomberg. As you can see, we flagged this as soon as it started unfolding:

yen is moving on BoJ

— Heisenberg Report (@heisenbergrpt) July 7, 2017

Ultimately, the yen is headed for its fourth weekly loss, the longest streak since May and is now sitting at its lowest level versus the dollar in 8 weeks.

“The recent lift in USD/JPY on the back of these moves is an overreaction and may unwind, but something the BOJ will be quietly happy about,” Joseph Capurso, a senior currency strategist at Commonwealth Bank of Australia in Sydney correctly notes.

So basically, this leaves it to super long JGB yields to react to any further pressure on DM yields going forward, because Kuroda ain’t havin’ it in 10s.

It’s also worth noting that Australian sovereign bonds were under heavy selling pressure today as the 10-year yield rose as much as ten basis points to 2.736% while shares in Sydney were sharply lower.

In Europe, the pound fell hard after U.K. May industrial and construction outputs dropped, against expectations for increases.

“Manufacturing fell 0.2 percent from April as vehicle production posted the biggest drop in more than a year, [while] total industrial production declined 0.1 percent [and] building output shrank by 1.2 percent,” Bloomberg writes, adding that “there was also disappointing news on trade, as the deficit widened more than expected to 3.1 billion pounds ($4 billion).”

“Sterling is going to be highly sensitive to data given the talk of tighter BOE policy,” says Viraj Patel, a currency strategist at ING Groep NV in London. “The Bank of England has put this discussion of rate hikes onto the table and essentially now markets are looking for validation in the data to either support or dismiss the case for a rate hike in 2017.”

Here’s what “highly sensitive” looks like:

Oh, and German May industrial production printed at 1.2% m/m; versus +0.2% estimate, so much better there.

Global equities are jittery amid geopolitical tensions, a crisis of confidence in crude, and the jobs report in the US, which we’ll of course get this morning.