MNI ASIA MARKETS ANALYSIS - USD/JPY Recovers Into BoJ Decision

BOND SUMMARY: Weak Tone With U.S. Out

Core bonds weakened in a US holiday-thinned trading session Monday as equities gained, with Gilts underperforming Bunds. Europe cash yields closed near session highs.

• Yields on the German curve moved higher in parallel; the UK belly outperformed on the curve. Greece underperformed on the periphery.
• Tsy futures fell in overnight Asia-Pac trade but spent most of the rest of the session edging higher, albeit all on low volumes (~360k traded by 1230ET, close at 1300ET), with cash trading closed.
• Focus turns to the BoJ decision overnight and UK jobs and German data Tuesday.

Closing Prices/ Yields / 10-Yr Periphery EGB Spreads To Germany:

• Mar 10-Yr futures (TY) down 13.5/32 at 127-24.5 (L: 127-20.5 / H: 128-01.5)
• Germany: The 2-Yr yield is up 1.2bps at -0.571%, 5-Yr is up 1.4bps at -0.35%, 10-Yr is up 1.6bps at -0.03%, and 30-Yr is up 1.3bps at 0.265%.
• UK: The 2-Yr yield is up 3.3bps at 0.829%, 5-Yr is up 2bps at 0.99%, 10-Yr is up 2.9bps at 1.179%, and 30-Yr is up 3.1bps at 1.286%.
• Italian BTP spread down 0.1bps at 131.8bps / Greek up 5.2bps at 163.2bps

EUROPE OPTION FLOW SUMMARY: Decent Flow In Schatz, Feb TYs

Monday's rates / bond options flow included:

• DUH2 112.00/10/20/30 call condor bought for 2.5 in 17k all day
• OEH2 131.75/25/00 put fly bought for 5 in 1.5k, 3.5k all day
• RXG2 169.00/170.50 combo bought for 2 in 2k (bought the put)
• RXH2 170.00/167.00ps, sold at 95 in 3.5k
• RXH2 165/164ps, bought for 4 in 5k
• IKH2 142/141ps, bought for 12 in 1k
• 0RZ2 99.375/100.375 RR, bought the put for 7.75 in 10k
• TYG2 127p, sold at 6 in 34k
• TYH2 128.5/127.5ps, trades 73 in ~1.5k

CANADA: BA Futures Retrace Post BoC Surveys Move

• BA futures have been led lower by whites and reds today although much of this came before the BoC surveys.
• BAU2 had led the move, down as much as 10.5 ticks on the day at 98.185 (a new low since Oct 28), but has almost fully unwound the reaction lower to leave it down 7.5 ticks at 98.215.
• The survey showed more firms reporting impacts from labor shortages and supply-chain disruptions, and a record two-thirds estimating that inflation will exceed 3% over the next two years.
• The separate consumer survey, which received less attention, also showed 1y and 2y out inflation expectations reaching new survey highs but this hasn’t yet fed into longer-term expectations, with the suggestion that “expectations remains well anchored”.
• Data ahead: Housing starts tomorrow will likely be overshadowed by CPI for Dec on Wed, before the BoC rate decision the week after (Jan 26).

FOREX: Narrow Holiday Ranges, USDJPY Extends Bullish Reversal

• The US Dollar index trades marginally in the green to start the week, as G10 currency ranges remained fairly tight due to the US Martin Luther King holiday.
• USDJPY had a notable 0.35% uptick, extending on its firm bounce off the 113.50 mark during Friday’s session. The move higher in USDJPY coincides with modest strength in equities, with stock markets across Europe all in positive territory.
• The broader trend condition remains bullish and the recent sell-off is likely a correction. Friday’s low of 113.49 marks a key short-term support and note that Friday’s price pattern is a doji - a bullish reversal signal. Attention on the topside is at 114.79, the 20-day EMA.
• A continuation of buoyant sentiment in oil markets has seen both Brent and WTI crude futures further extend above the October’s highs. This lent support to both CAD (+0.34%) and NOK (+0.5%) which were the clear outperformers to start the week.
• Last week’s break of a key support in USDCAD at 1.2621, the Dec 31 low strengthened a bearish case and has opened 1.2448, 76.4% of the Oct - Dec rally. A move through this chart point would signal scope for an extension lower and open 1.2387, the Nov 10 low.
• Overnight, the Bank of Japan decision/statement will be released before UK employment data kickstarts the European session. The focus then turns to German ZEW sentiment figures, which precedes the US Empire State Manufacturing Index.
• UK and Canadian CPI on Wednesday will be the focus this week before the live central bank meetings over the following fortnight.

FX OPTIONS: Expiries for Jan18 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.1250(E1.7bln), $1.1370-75(E566mln)
• USD/JPY: Y114.00($1.5bln), Y115.00($566mln), Y116.00-25($1.4bln), Y117.00($1.6bln)
• AUD/USD: $0.7200(A$882mln)
• USD/CNY: Cny6.3500($775mln), Cny6.4100($505mln), Cny6.65($1.0bln)

GOLD: Bullish Positioning Deteriorates, Technicals Remain Firm

• With yields across the curve moving convincingly higher market participants trimmed bullish positioning, according to the latest CFTC report.
• The latest data for the week ending Jan. 11 showed money managers dropped their speculative gross long positions in Comex gold futures by 4,955 contracts to 119,297. At the same time, short positions increased by 243 contracts to 44,987. Gold's net length now stands at 74,310 contracts, down more than 6% compared to the previous week.
• One analyst at Commerzbank commented that "In our opinion, market participants are likely to refrain from buying gold ahead of the US Fed's first rate hike. They may be hoping that the Fed's meeting next week (25/26 January) will give them further and/or clearer signals that the Fed will be commencing its rate hike cycle in March."
• Separately, commodity analysts at TD Securities said, “Hawkish signals coming from the Fed, market expectations suggesting a March Fed funds hike is imminent, and increasing speculation that QT is in the cards over the next twelve months prompted specs to aggressively decrease their long gold exposure.” However, they added that there is a chance gold could catch a bid on short-covering as real interest rates are expected to remain low even as the Fed looks to tighten policy.
• Technically, Gold conditions remain bullish. The yellow metal recently found support at the base of its bull channel drawn from the Aug 9 low - the Jan 7 low of $1782.8 and the recovery from this level means the yellow metal remains inside its bull channel. Focus remains on key resistance at $1831.9, Jan 3 high and a bull trigger.