In the world of bonds, there is one sure sign that we are in a bear market – Japanese Government Bonds (JGBs) are participating in the selloff. Putting the trade ideas for bonds trading to one side, we FX traders do need to be aware of it as it will cause directional flow as investors jump from one international market to the next.
In times like this where bonds are being shed, flows tend to go to the highest risk-free rate which is the US 10-year. It probably also means that one of the better strategies is to be neutral USD and look to widening spreads and yield steepeners between US bonds. So, risk-positive trades in the short term are likely to win out, i.e., EUR, AUD, and NZD.
USD/JPY is likely to be bullish as the JGB trade is likely to shift the JPY.
If we apply this to the technical movements with bond bearish trends going global and strengthening, there is an option to follow the momentum of shorts in this space. In G10 FX, GBP/USD and EUR/JPY a making new technical gains. USD/JPY had retested a major downtrend line that it had broken in January and bounced – this is a strong bullish sign and it backs the fundamental points made above.
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