MNI EUROPEAN MARKETS ANALYSIS: Risk Aversion Drives USD & JPY Outperformance

US TSYS: Futures Cheaper, No Cash Trading With Japan Out

TYH4 is trading at 111-17, -0-06 from NY closing levels, with little meaningful newsflow in today's Asia-Pac session.

• There has also been no cash trading, with Japan out for a public holiday.
• Traders await this week's CPI and PPI inflation measures on Thursday and Friday respectively.

STIR: Australia Will No Longer Boast The Lowest Official Rate By End-2024

STIR markets within the $-bloc remain poised for a significant easing cycle in 2024, although the trajectory appears to be marginally less (10-15bps) assertive than what was reflected in late-December pricing.

• The US and Canada are the only $-bloc markets now with expectations of a greater than 100bp reduction in policy rates by year-end.
• Australia stands out as an outlier, with less than two 25bp cuts factored in by December 2024.
• Interestingly, it is projected that Australia will no longer boast the lowest official rate within the $-bloc by the conclusion of 2024.

Figure 1: $-Bloc STIR

Source: MNI – Market News / Bloomberg

AUSSIE BONDS: Cheaper, Mid-Range, Retail Sales & Bldg Apps Tomorrow

ACGBs (YM -4.0 & XM -3.5) are cheaper but off Sydney session cheaps. With the domestic calendar light, trading ranges have been relatively narrow. Considering that, local participants have likely used dealings in US tsy futures in today’s Asia-Pac session for directional guidance.

• US tsy futures are dealing at 111-17+, -0-05+ compared to NY closing levels on Friday. Cash US tsys have not traded in today’s Asia-Pac session due to Japan being out for a public holiday.
• Cash ACGBs are 3bps cheaper, with the AU-US 10-year yield differential unchanged at +12bps. A simple regression of the AU-US cash 10-year yield differential against the AU-US 1Y3M swap differential over the current tightening cycle indicates that the 10-year yield differential is currently 15bps too low versus its fair value (i.e., +13bp versus +28bp). (See link)
• Swap rates are 3-4bps higher.
• The bills strip is cheaper, with pricing -1 to -4.
• RBA-dated OIS pricing is flat to 5bps firmer across meetings out to December. A cumulative 42bps of easing is priced for 2024.
• Tomorrow, the local calendar sees Retail Sales and Building Approvals. Tokyo CPI is also due in Japan.

AUSSIE BONDS: AU-US 10-Year Yield Differential Still Too Tight

Today, the AU-US 10-year cash yield differential is unchanged at +13bps. As a reminder, there is no cash US tsy dealing today until the London session with Japan closed for a public holiday.

• At +13bps, the cash AU-US 10-year yield differential currently sits in the top half of the range of +/-25bps which has been observed since November 2022.
• However, a simple regression of the AU-US cash 10-year yield differential against the AU-US 1Y3M swap differential over the current tightening cycle indicates that the 10-year yield differential is currently 15bps too low versus its fair value (i.e., +13bp versus +28bp).
• The 1y3m differential is a proxy for the expected relative policy path over the next 12 months.

Figure 1: AU-US Cash 10-Year Yield Differential (%) Vs. AU-US 1Y3M Swap Differential (%)

Source: MNI – Market News / Bloomberg

NZGBS: Closed Cheaper & On A Weak Note, Light Local Calendar Again Tomorrow

NZGBs closed on a weak note, with the benchmarks 2-4bps cheaper. The domestic calendar was empty today and will be relatively light for the remainder of the week, with House Prices, Commodity Prices and Building Permits as the highlights.

• Given that, local participants appear to have turned to US tsy futures for directional guidance. TYH4 is dealing at 111-19, -0-04 compared to the NY closing level. Notably, there was no cash US tsy trading during today's Asia-Pacific session with Japan out for a public holiday.
• On a relative basis, the AU-NZ 10-year differential is unchanged at -44bps.
• A simple regression of the AU-NZ 10-year yield differential versus the AU-NZ 3-month swap rate 1-year forward (1y3m) differential suggests fair value is around -38bps. (See link)
• Swap rates are 4-5bps higher, with the 2s10s curve flatter.
• RBNZ dated OIS pricing is flat to 8bps firmer across meetings, with November leading. As a result, the cumulative easing by year-end has subsided to 89bps.
• Tomorrow, the local calendar is empty, but Australia sees Retail Sales and Building Approvals. Tokyo CPI is also due in Japan.

AU/NZ BONDS: AU-NZ 10Y Yield Differential Not Far From Fair Value

A simple regression of the AU/NZ 10-year yield differential versus the AU-NZ 3-month swap rate 1-year forward (1y3m) differential suggests fair value is around -38bp versus the 10-year differential’s current level of around -44bp.

• The current regression error of -6bp compares with -23bp seen in early October.
• The widening in the regression error in early October came not long after the Pre-Election Economic and Fiscal Update.
• Therefore, the narrowing in 10-year differential and the regression error since then likely reflects investors capitalising on more favourable entry points.

EQUITIES: Headline Hong Kong & China Indices Back Close To Late 2023 Lows

Regional equities are mostly lower, led by weakness in HK and China markets. This comes despite a modestly positive cash lead from US markets in Friday trade. US equity futures opened higher today but haven't been able to sustain those gains. Eminis last in the red at 4732, likewise for Nasdaq futures, down nearly 0.10%.

• There hasn't been a clear macro catalyst for further weakness in HK and China stocks. Tech related plays have definitely underperformed. The HS TECH sub index off 3.15% at the break, the headline HSI down just over 2%.
• Headlines crossed of Evergrande's NEV unit being suspended from trading, with later headlines crossing that an official in this unit has been detained on suspicion of criminal activity. The China Golden Dragon Index was also weaker, off 1.8% in Friday trade.
• The CSI 300 is off nearly 0.90% at the break and back sub 3300. Both this index and the HSI are close to late 2023 cyclical lows.
• Elsewhere Japan markets are out today, while the Kospi has dipped 0.35%. The Taiex has outperformed, up 0.40%, aided by better a SOX performance in US trade on Friday.
• In SEA, trends are mixed. Thailand stocks are off 0.90%. Earlier headlines crossed the PM calling for a potential rate cut amidst a lower inflation backdrop. This has driven baht underperformance.

FOREX: Risk Aversion Drives USD & JPY Outperformance

Modest risk aversion has been the feature of G10 markets as the Monday Asia Pac session has unfolded. USD trends were mixed in the first part of trade, but equity weakness, particularly in HK/China markets has weighed on AUD and NZD, which have lost ground against the yen.

• Overall moves have been modest though. The BDDXY is slightly above Friday closing levels, last 1224.70/75. Tsy futures have had a slight downside bias, but lows from Friday for TYH4 remain comfortably intact.
• US equity futures started higher, aiding FX risk appetite but now sit modestly lower.
• HK equities sit 2% weaker, the CSI 300 off 0.90% in China. No clear macro catalyst has been evident for the weakness, although tech stocks have a clear drag.
• AUD/USD sits back at 0.6700, close to session lows, while NZD/USD is in the 0.6235/40 region, both marginally weaker for the session.
• Commodities are weaker across the metals space (iron ore & copper), while oil is also down on Saudi price cuts from the weekend.
• JPY has outperformed on the risk averse tone, with USD/JPY back sub 144.50. Earlier highs were above 144.90.
• Looking ahead, German factory orders and Swiss inflation data kick things off later Monday, however, the focus on the docket will be Thursday’s release of US CPI.

OIL: Saudi Price Cut Sparks Demand Concerns

Brent crude has spent most of the Asia Pac session tracking lower. We were last near $77.90/bbl, which is back close to Friday session lows and down more than 1% for the session so far. The WTI front month benchmark is back under $73/bbl, off by a similar amount.

• Demand concerns appear to be a key driver of today's weakness, following weekend news that Saudi Arabia cut its selling prices to all regions, including Asia (BBG). The drop for Asia was more than expected at $2 per barrel. This is likely renew demand fears for crude.
• This overshadowing further concerns around Red Sea tensions and the risks of wider conflict in the Middle East. US Secretary of State Blinken will meet with key figures starting today in Abu Dhabi, including the U.A.E President and Saudi Crown Prince in a bid to avoid further escalation.
• Broader risk aversion in the HK/China equity space hasn't sentiment either today, although it hasn't been a key driver of oil price weakness.
• For Brent, current levels are close to the 20-day EMA, while the 50-day sits further north at $80.33/bbl. Recent lows rest under $75/bbl.

GOLD: Weaker Again After Friday’s Small Decline

Gold is 0.5% weaker in the Asia-Pac session, after closing +0.1% at $2045.45 on Friday.

• Volatility in Friday’s session was tied to swings in the USD index after mixed results from economic data releases.
• The impact of a higher-than-expected jobs gain was tempered by downward revisions for the two prior releases (Dec jobs gain of 216k vs. 175k est, prior revised to 173k from 199k).
• Meanwhile, ISM services data came in lower-than-expected at 50.6 vs. 52.5 estimate, with ISM Services Employment (43.3 vs. 51.0 est) and Services New Orders (52.8 vs. 56.1 est).
• The US Treasury 10-year yield finished up 5bps at 4.05%, with the 2-year rate unchanged at 4.38%. It was the second consecutive session with the 10-year closing above 4%, the first time since December 13.
• According to MNI’s technicals team, Friday’s low cleared support at $2040.2 (20-day EMA), with a more pronounced move lower potentially opening $1973.2 (Dec 13 low).

ASIA FX: Baht Slumps As PM Srettha Pushes Rate Cuts

Most USD/Asia pairs are higher, although baht is clearly the weakest link in Asia FX today. This follows calls by PM Srettha that the central bank could consider cutting rates. USD/CNH has firmed on the back of further equity losses. Trends elsewhere are mixed. Tomorrow, South Korean Nov current account figures are due. Taiwan trade figures for Dec are out later.

• USD/CNH dips sub 7.1600 were supported in early trade as USD sentiment softened. As HK/China equity losses grew USD/CNH found more support. We probed above 7.1700 (high of 7.1734), but have found selling interest around this level. Note the simple 200-day MA is close by near 7.1715.
• 1 month USD/KRW has been supported on dips, last in the 1314/15 region. We remain within recent ranges, with post NFP highs near 1320. Onshore equities have been weighed by negative spill over from China moves.
• USD/THB has surged back to 35.00, down nearly 1% for the session so far. PM Srettha stated that with inflation low the Thailand central bank could consider rate cuts. He added that he will seek to meet with the Governor of the BoT. Given the low starting point for the policy rate (2.50%) an early pivot to easing policy may weigh on the THB.
• We saw similar rhetoric from the Philippines Finance Chief who also sits on the BSP board. Diokno stated rates could be cut by 100bps this year, although such a move is data dependent. There hasn't been much fall out for PHP. USD/PHP sits slightly higher, last near 55.60. Unlike Thailand, its policy rate sits much higher (6.50%), so at least we have a higher starting point.
• Trends elsewhere were relatively muted.

PHILIPPINES: Finance Chief Looks For 100bps in BSP Cuts This Year

Philippines Finance Secretary Diokno has stated in a BBG TV interview that the BSP policy rate will likely be cut by 100bps this year (which would take the policy rate down to 5.50% from 6.50%).

• Diokno, who sits on the BSP board, stated that inflation will be within the BSP's target band (2-4%) in Q1 and that it will likely be in the middle of the target band in 2025. The rate cut will be data dependent and also dependent on how much the Fed delivers.
• This contrasts with recent comments from BSP Governor Remolona. The governor has stated that while the central bank doesn't want to over tighten, the current elevated inflation backdrop is unlikely to see a policy pivot in the near term.