Bonds in the drivers’ seat

When the bond market talks, other markets listen. The fear in bonds Thursday was enough to drown out some solid US economic data. It was a classic risk-off day with JPY leading and NZD lagging. Yellen speaks in the hours ahead. Falling US yields is not only a case of the US, while the rising JPY emerged amid the deterioration of risk appetite following disappointing US industrial production (which fell due to a drop in utilities/heat demand following weather improvement). We are currently sitting on a USDJPY short from April 23 Premium Insights with a 90-pip gain. Do we open fresh shorts or is it time to enter on the long side? We call into focus the meaning of the "-57000" relating to USDJPY in a never-previously posted chart.

Traders combed through a full data slate but the overall picture was solid. Most notably, initial jobless claims improved to the best in 7 years at 297K vs 320K expected and the Empire  Fed jumped to +19 compared with +5 expected.

The sore spots were in April industrial production at -0.6% vs a flat reading expected along with a disappointing NAHB home builders survey. The latter puts a negative bias into Friday's housing starts report.

CPI was a touch higher than expected with core up 1.8% y/y compared to 1.7% expected. That sparked an initial move higher in USD/JPY and yields but the moves almost instantly turned around.

Yields began sliding after Tuesday's soft retail sales report and continued down to 2.47% today, the lowest since the Fed surprised by not tapering in October. Short bonds (ie betting on rising yields) is a crowded trade and the move looks like a squeeze.

That said, when the bond market rallies, traders elsewhere take note and it manifested in a fear trade. Yen crosses remain under pressure and USD/JPY flirted with the 200-day moving average at 101.18 before bouncing back to 101.57.

The euro proved surprisingly resilient by climbing back to 1.3712 from as low as 1.3648.

The focus now shifts to Yellen delivering a speech in Washington to the Chamber of Commerce. In her time as leader so far, Yellen has been extremely guarded but there is a risk she could sound dovish if she focuses on housing or low inflation and that would weigh further on USD/JPY. She speaks at 2210 GMT.