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The FX Trader: US dollar plunges on Bessent’s intervention
Summary: The US Treasury made it clear it does not want higher long-term US yields in announcing an increase to its buyback program. The US dollar absorbed the implications and could be headed lower still. Recently popular CHF carry trades especially hard hit by the announcement as CHF rallies the most.
The latest
US Treasury announces doubling and moving forward of its Treasury buyback operations. The amounts in question in this announcement are a mere pittance – an added USD 2 billion (to USD 4 billion total) in purchases of longer-term treasuries of 10 or more years to maturity. The buybacks will start September 9, a hint that the Treasury didn’t feel it could wait until the regularly scheduled November 4 meeting, which will see further details.
While the amounts are tiny, the signal value is loud indeed as it shows the Treasury does not want higher yields, at least not at the longer end of the yield curve. The move is a shot across the bow against speculating against US treasuries, while offering perhaps some solace for longer term treasury holders. And yet, for foreign holders of US treasuries, there is no solace in the risk of a weaker US dollar, which is the main shock absorber now if there is further pressure on global yields. Foreign treasury holders will likely look to hedge their USD exposure, so this is a very bearish signal for the US dollar. Note gold’s massive reaction in particular as spot gold eyes the key USD 4,500/oz. level.
It was rather amusing that the Treasury announcement came ahead of a set of FOMC minutes that showed Fed members wrangling over what to do with the interest rate. This move by the Treasury is something the Fed would normally be doing – a kind of yield curve control in reality – at least signaling the desire to control the yield curve, if not the amounts to do so. It shows who the decider will be from here (the Treasury, not the Fed). The argument that we are in the era of “fiscal dominance” in which Treasury sets policy and the Fed is only an auxiliary is thus strengthened.
Bottom line: This is a straightforward USD-bearish development and may spark a significant further decline in the US dollar. The most critical next step is how the market reads this move for US treasuries. One argument is that the buyback operation is so insignificant that sellers not wanting exposure to treasuries or the US dollar will flush holdings and overwhelm what the Treasury is doing here.
CHF rises the most, far more than the yen. It makes sense that the Swiss franc was the most reactive to this Treasury buyback announcement as the recent chunky rise in yields sparked strong flows into CHF carry trades, encouraged by an SNB that leaked it would like to keep interest rates at zero through 2027. EURCHF plunged from near 1-year highs at 0.9400 by almost a full percent, and USDCHF was punched as low as 0.7970 from 0.8100 before the US Treasury announcement. The JPY was also sharply higher as USDJPY traded almost to 158.00 after trading 159.00 before the announcement, but positioning has lightened there for those not willing to ride the volatility of intervention risks.
It is worth noting that the US Treasury’s move was seen as a huge relief for the JGB market on Thursday. 30-year JGB yields fell even more than the US Treasury yield did yesterday – a full 13 basis points at one point before rebounding and cutting a portion of that move. A bit curious that this relief did not spell additional relief for the yen early Thursday, which weakened from Wednesday’s highs for much of the Thursday session in Asia, although a bid has come in for the yen early in Europe today.
Bottom line: If US yields remain stabilized to lower, this offers the best support for gold, CHF and JPY, but if the market wants to challenge what the US Treasury has done here and yields go back to challenging the cycle highs, we could be in for further JPY weakness challenging Japan’s authorities to dig deeper into the intervention toolkit.
Chart focus: USDCHF
USDCHF was the loudest signal in FX in the wake of the US Treasury buyback operation changes yesterday, which makes sense from a positioning perspective as CHF weakness was a prominent carry trade-driven theme, as seen in EURCHF trading to 1-year highs near 0.9400 this week. A move like yesterday’s plunge in USDCHF, meanwhile, is overwhelming, even if the SNB begins soon to do what it can to lean against further CHF strength. First test lower is perhaps the 0.7910 area, with resistance at 0.8050.
Looking ahead
The stakes grew again for the Jackson Hole speech from Kevin Warsh next week. He has tried to sound credible on inflation fighting, on the reduction of the Fed’s balance sheet and even on Fed independence, but there is no room for maneuver on these issues with the backdrop of the US government’s dire fiscal excess. It’s a case of massive cognitive dissonance. Will Warsh make any major hints on the Fed’s role after what the US Treasury has done here? Will he hint between the lines of a higher Fed inflation tolerance, perhaps on longer-term hoped-for productivity gains from AI or otherwise? It feels like any excuse will be seized upon for dovishness. The theme of Jackson Hole “Financial innovation: Implication for Payments and Policy” offers no clues on these questions. Rather, that title suggests a big focus on stablecoins and the notion that the US can extend its dominance among global currencies in using stablecoin infrastructure to support the US treasury market.
FX Board of G10 and CNH trend evolution and strength.
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USD weakness and CHF strength stand out in the trend and momentum shift readings, respectively. A soft Australian jobs report (Unemployment Rate increasingly unexpectedly to new cycle high of 4.5% despite small drop in the participation rate.) has held the Aussie back here again. The Riksbank offered nothing for SEK today as EURSEK remains anchored in the 11.00 area searching for catalysts.
Table: NEW FX Board Trend Scoreboard for individual pairs.
EURGBP is quietly banging on key chart resistance and trying to flash a new positive trend – the next couple of sessions look pivotal there. It’s hard to believe, but EURJPY is attempting to flip back into an up-trend, reminding that the JPY direction is not yet settled. USDCHF with a decisive flip yesterday – let’s see if it can extend or back fills.