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Free AccessMNI EUROPEAN MARKETS ANALYSIS: U.S. FI Flow Headlines Typical Pre-FOMC Asia Trade
- Today's FOMC decision, the impending Sino-U.S. summit in Alaska and ongoing attention on COVID vaccine matters provided the points of focus in Asia.
- A typical round of limited pre-FOMC Asia-Pac trade was dominated by flow in the U.S. FI space.
- Though the FOMC is unlikely to announce any major changes in policy at the March meeting, the latest set of economic projections - including participants' rate hike expectations - will be closely watched.
BOND SUMMARY: U.S. Market Flow Dominates In Asia
A lack of tier 1 headline flow made for a relatively limited round of pre-FOMC Asia-Pac trade, at least range-wise, with block flow in the Tsy options space catching the eye. T-Notes held to a narrow 0-04+ range overnight, last -0-02+ at 131-28. Cash Tsy trade has seen some modest twist flattening of the curve. FVJ1 124.25 calls saw 12K lifted across 3 blocks, the TYJ1 130.00 puts saw a 3,750 block buyer and the TYJ1 131.00 puts saw a 20K block buyer (delta hedged with 5K TYM1 futures). Eurodollar futures sit +1.0 to -0.5 through the reds, with the whites outperforming. A 20K screen lift of EDZ1 and 33K of screen steepener flow in EDZ1/M2 drew attention in an active overnight session for Eurodollar futures. Central bank meetings are at the fore this week, with the aforementioned FOMC decision headlining on Wednesday, while the upcoming Sino-U.S. summit in Alaska is set to bring about little in the way of tangible progress re: any of the well-defined areas of dispute.
- JGB futures stuck to a tight range during the Tokyo session, finishing +1. Local headline flow was light, with the latest round of BoJ Rinban operations seeing no change to the size of the purchases witnessed in each bucket. The 1-10 Year purchases saw upticks in offer/ratio vs. their prev. rounds of buying, although the moves in the respective metrics were minor, while the offer/cover ratio for the ops covering 10-25 Year JGBs moderated. The super long end of the curve unwound its early underperformance in the afternoon against this backdrop (even though the BoJ Rinban ops didn't go past the 25-Year tenor), with the curve a touch flatter at typing as a result. Thursday's local docket is limited at best, with focus on Friday's BoJ decision & the release of the Bank's monetary policy review evident.
- Aussie bond futures stuck to narrow ranges in Sydney hours, YM -0.5, XM -2.5. The Q&A portion of RBA Assistant Governor Kent's latest appearance reaffirmed the Bank's well-known views on several key areas of monetary policy. Elsewhere, A$1.0bn of ACGB Jun '31 supply saw the average yield price ~0.6bp through prevailing mids at the time of supply, representing a smooth passage, even with the cover ratio slipping a little vs. the prev offering of the line (which saw the average yield price above prevailing mids). The monthly labour market report headlines the local docket on Thursday.
MNI Analysis: The Most Important Chart For The RBA?
We suggested the following chart was the most important chart for RBA policy (at least in the immediate term) a couple of weeks ago. Since then we have seen the RBA tweak borrowing conditions surrounding the ACGBs purchased under its 3-Year yield targeting scheme (effectively making it much more expensive to short the bonds covered by the scheme, resulting in the unwind of the increased usage of the RBA's Securities Lending Facility), continued dovish utterances from RBA Governor Lowe and the calming of core global FI markets (at least when compared to the volatility that was seen just a few short weeks ago).
- Click here for full analysis.
Fig. 1: ACGB Apr '24/Nov '24 Yield Spread (bp)
Source: MNI - Markets News/Bloomberg
FOREX: Greenback Outperforms With FX Space In Pre-FOMC Waiting Mode
The greenback ground higher ahead of today's monetary policy decision from the Fed, with G10 crosses treading water through the tight Asia-Pac session. The DXY failed to threaten yesterday's extremes, while e-minis & most regional equity benchmarks lost altitude.
- AUD was the worst performer in G10 FX space as a degree of caution crept in. RBA Asst Gov Kent stuck to the familiar script, reaffirming some key aspects of the Reserve Bank's policy stance.
- USD/JPY resumed gains after the recent formation of the "golden cross" pattern, despite today's expiry of $1.2bn worth of options with strikes at Y108.50-55. USD/JPY overnight ATM implied volatility rose to 13.29%, a level not seen since the U.S. presidential election.
- The PBOC fixed its USD/CNY mid-point at CNY6.4978, virtually in line with sell side estimates. USD/CNH was rangebound.
- Apart from the FOMC meeting, today's highlights include Canadian and final EZ CPIs, U.S. housing starts & building permits as well as comments from ECB's Elderson.
FOREX OPTIONS: Expiries for Mar17 NY cut 1000ET (Source DTCC)
- EUR/USD: $1.1900(E1.65bln-EUR puts), $1.1940-50(E603mln), $1.2000(E1.2bln), $1.2040-55(E1.6bln), $1.2065-75(E671mln)
- USD/JPY: Y108.30($630mln), Y108.50-55($1.3bln)
- GBP/USD: $1.3885-90(Gbp614mln-GBP puts)
- EUR/GBP: Gbp0.8600(E1.2bln), Gbp0.8750(E621mln)
- USD/CHF: Chf0.9200($660mln)
- AUD/USD: $0.7745-50(A$540mln), $0.7765(A$550mln)
- USD/CAD: C$1.2685($793mln)
- USD/CNY: Cny6.40($884mln), Cny6.46($895mln), Cny6.57($500mln)
- USD/ZAR: Zar15.00($531mln)
ASIA FX: You Can't Spell FOMC Without F(X)
Most Asia EM FX declines as the greenback gains ahead of the FOMC and equity markets struggle for direction.
- CNH: Offshore yuan is weaker, having struggled for clear direction during the session. Markets await comments from meetings between US and China officials this week as tensions simmer over Australia, Taiwan and Hong Kong.
- SGD: Singapore dollar is weaker. USD/SGD has moved in a tight range this week, oscillating between highs of 1.3484, and lows of 1.3428. Data earlier showed exports rose, but at a slower pace than the previous month.
- TWD: Taiwan dollar has weakened since the open, a rare occurrence that suggest the lack of central bank smoothing. Markets await the CBC rate announcement on Thursday.
- KRW: Won is weaker, data earlier in the session showed South Korea's unemployment fell to 4.0% in February, a sharp drop from 5.4% in January which was a 20-year high.
- MYR: Ringgit has declined, Malaysia declared just 1,063 new Covid-19 infections on Tuesday, which represented the smallest increase in the daily case tally in over three months.
- IDR: Rupiah is weaker, the Indonesian Palm Oil Association declared that palm oil reserves fell to 4.25mn tons in Jan from 4.87mn tons in Dec, while output shrank to 3.76mn tons from 4.04mn tons. Markets await Bank of Indonesia rate decision tomorrow.
- PHP: Peso is weaker, giving up ground for the fourth straight session. Data earlier showed the January budget deficit at PHP 14.1bn, while revenues fell 11.5%, and expenditures rose 1.18%.
- THB: Baht is weaker, USD/THB hitting one-week highs. The Cabinet has approved a THB3.10tn budget for FY2022, with a deficit of THB700bn (i.e. 15% more than in FY2021). The draft budget is subject to revisions and is expected to be submitted to parliament in May.
ASIA RATES: Supply Dynamics In Play; FOMC Offers Distraction
Debt sales were the name of the game today, subdued tone with participants having one eye on the FOMC announcement later.
- INDIA: Bond space has seen a mild bid in early trade as equity markets in the region slip. 10-Year yield last down 1.1bps at 6.168%. Bidding in the 5-Year sector has not been as strong, possibly due to the announcement of an INR 30bn 5-Year sale from Piramal Capital, while state-run REC seeks bids for INR 20bn 3-Year debt.
- CHINA: The PBOC refrained from large OMO injections again, matching maturities for an eighth straight day, there has been no liquidity added to the system since Feb 25. Overnight repo rates have fallen though, the overnight repo rate last down 16bps at 1.9519%, well below this week's high of 2.2868%. The 7-day repo rate is down 10bps at 2.05%. The higher repo rates this week have seen equities struggle. Futures are higher as equity markets struggle to gain footing. The MOF sold 10-Year debt to robust demand.
- INDONESIA: Yields mostly higher across the curve, some twist flattening seen. Sentiment is weighed on by the bond sale yesterday, even though the finance ministry had bids of over IDR 40tn they only sold IDR 18.9tn, indicating weak bids. This is the fourth straight auction that has disappointed and means there will be a greenshoe option later today to make up the difference to the IDR 30tn target. The finance ministry has lowered the target to IDR 12tn next week.
- SOUTH KOREA: Futures in the 10-year sector are under pressure, while 3-year futures are supported ahead of the 2-Year BoK MSB auction today after the bank said it would reduce the size of short term (1-, 2-year) issuance by 50%. 10-Year yield up 1.2bps at 2.107%, elevated on a historical basis but around 7bps of this week's high.
EQUITIES: Struggle For Clear Direction
Most indices in Asia-Pac have sustained minor losses, even those in positive territory have struggled to make any significant gains. A mixed picture in China, the CSI 300 currently flat, having retreated from highs and recovered from lows. The PBOC refrained from injecting liquidity for the eighth day, this saw equities pressured initially before repo rates actually declined and saw a bid in markets. Markets in South Korea sustained heavy losses, led lower by Samsung who warned over production delays due to a global chip shortage, while markets in Japan are pressured by disappointing trade data. Futures in the US are slightly lower, markets look ahead to the FOMC rate announcement later today.
GOLD: Range Intact Ahead Of FOMC
Spot has added $5/oz since settlement to last deal at ~$1,737/oz, sticking to the confines of yesterday's range, as bulls look to force a technical break above the 20-day EMA to open up the next leg higher. Wednesday's FOMC decision presents the immediate risk event for U.S. Tsys & the USD, and as a result, bullion.
OIL: Firmer Into Europe
Crude futures have firmed into European hours, with WTI & Brent both sitting ~$0.50 better off on the day. Data after market yesterday showed a surprise 1m bbl draw in US crude inventories compared to a massive 12.80m bbl build in the previous week. Downstream product data was less bullish, gasoline inventories fell by a less than expected 926k bls, and distillate inventories increasing by 904k bbls. For more comprehensive inventory data, the market will now be looking towards the DOE report due later today, if the DOE figures confirm the API report it would be the first headline draw since February.
UP TODAY (Times GMT/Local)
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.