MNI EUROPEAN MARKETS ANALYSIS: USD Nudges Lower As Equities Generally Firm In Asia

US TSYS: Richer In Asia, Cross-Market Flows Dominate

TYH3 deals at 112-07, +0-05+, a touch off the top of the 0-11+ range on volume of ~138K.

• Cash Tsys sit 1-2bp richer across the major benchmarks.
• Cross-market flows from ACGBs dominated in early dealing, as Tsys initially followed ACGBs lower pre-Australian labour market report.
• An unexpected uptick in Australian unemployment then saw ACGBs unwind early losses facilitating a recovery from session lows in Tsys.
• Pockets of screen buying in TY futures aided the bid, with a block buyer in FV futures also noted.
• The richening held through the remainder of the session.
• ECB speak from Panetta headlines the European session. Further out we have PPI, Jobless Claims, Housing Starts and the Philadelphia Fed Manufacturing Index. Cleveland Fed President Mester and St Louis Fed President Bullard will cross. We also have the latest 30-Year TIPS supply.

JGBS: Move Away From Session Cheaps Holds Into Close

JGBs recovered from session cheaps after futures initially extended on their overnight session downtick, with spill over from a bid in wider core global FI markets providing some impetus early on.

• Futures are -13 into the bell, while cash JGBs deal either side of unchanged with little in the way of uniform direction noted. 10s have been limited by their proximity of the upper boundary of the BoJ’s YCC settings.
• Domestic headline flow continues to be centred on all things BoJ, with the latest Nikkei survey revealing that all 20 respondents said that “the Bank will likely revise the yield curve control tool sometime this year.”
• Elsewhere, there was confirmation that the government’s choices for the BoJ leadership positions will appear in their respective lower house hearings on 24 February.
• 5-Year JGB supply went well, even with the coupon on the new line being adjusted lower (0.2% vs. last month’s new 0.3% line), adding a fresh firming bias to afternoon trade.
• Local data flow generated a slightly narrower than expected trade deficit for January (although we still saw the widest headline monthly trade deficit on record), alongside softer than expected core machine orders, although that didn’t move the needle for the space.
• Tomorrow’s local docket is virtually empty.

JAPAN: Japan Investor Flows Continue In Same Directions, Small International Flows In Japanese Assets

Weekly international security flow data from the Japanese MoF covering last week revealed a second consecutive week of net purchases of international bonds, alongside a third consecutive week of net sales of international equities. The former saw a moderation when compared to the net purchase size witnessed in the prior week, while the latter represented the largest round of weekly net sales observed since early November.

• Net international investor flows covering Japanese assets were modest.

AUSSIE BONDS: Labour Market Report Sparks A Sharp Reversal

Aussie rates futures extended overnight session weakness ahead of domestic employment data, before reversing sharply on an unexpected uptick in unemployment and a soft headline employment figure.

• While the January employment data appeared to deliver tentative signs of labour market cooling, post-data briefings by the Big-4 banks all signalled caution re: taking a firm view. Factors deemed to be in play included “seasonal patterns”, “a greater than usual ‘holiday effect’” and the fact that “the ABS reported “more people than usual with a job indicating they were starting…work later in the month.”
• YM and XM were -10.0 to -13.0 early, only to surge 15-16bp before closing +2.0 and -2.0, respectively.
• AU/U.S. 10-year yield differential is 4bp lower at -2bp, narrowing post-data.
• Swap rates also reversed the early push higher, with the 3s10s curve 4bp steeper.
• Bills closed 1-6bp, bull steepening, also more than reversing early losses.
• Immediate RBA-dated OIS was a tad lower with an 88% chance of a 25bp hike priced for next month. Terminal rate expectations (Sep/Oct-22) continued to fluctuate between 4.10%-4.22%, closing at 4.12%. It traded near the top of the range pre-data.
• ANZ now forecasts the RBA cash rate target peaking at 4.10% in the current cycle.
• Supply matters headline locally tomorrow.

AUSTRALIA: Signs Of Tentative Easing In Very Tight Labour Market

The January employment data came in worse than expected and posted thesecond consecutive monthly fall. The number of jobs fell 11.5k after a downwardly revised 20k drop in December while the unemployment rate rose to 3.7% from 3.5% even though the participation rate fell 0.1pp. While there are special factors, it seems to be signalling the start of a tentative easing of the very tight labour market, which is going to be good news to the RBA that its tightening is alleviating pressures in the economy. However vacancies remain elevated.

• The ABS notes that January is the “most seasonal time of the year” for the labour market. People often finish a job in January but already have another job. Thus while the number of unemployed rose 21.9k in January, there was also a “larger-than-usual rise in the number of unemployed with a job to go to”. As a result, the January rise in the unemployment rate could be at least partially reversed in February.
• The January trend mentioned above could also have been behind the 43.3k drop in the number of full-time jobs, which was the first drop since July. Part-time employment rose 31.8k but is still down 1% y/y. However, the underemployment rate was stable at 6.1% and down 0.5pp y/y.
• Hours worked fell 2.1% m/m, which was driven by a higher-than-usual number of people taking leave in January. The ABS points out that 43% of employed people “worked reduced or no hours because they were on leave” compared with 41% pre-Covid. Sick leave returned to around average. Hours worked though are 9.1% higher than in January 2022.

Source: MNI - Market News/ABS

Fig. 2: Australia unemployed %

Source: MNI - Market News/ABS

AUSTRALIA: Lowest Inflation Expectations In Almost A Year, CPI Peak?

The Melbourne Institute’s measure of consumer inflation expectations eased to 5.1% in February from 5.6% last month suggesting that households believe that the RBA’s tightening will reduce inflation. The trend is also signalling that inflation may have peaked. This is the lowest rate in almost a year but the real test will be whether it can break through the 5% level. This series has been above 5% since March 2022. If the easing in inflation expectations can be sustained it will be a welcome development, especially given the moderation in the 3-month average of the NAB business survey’s cost and price measures.

Fig. 1: MI Consumer inflation expectations vs monthly CPI y/y%

Source: MNI - Market News/Refinitiv/ABS

NZGBS: Mid-Session Rally On AUS Jobs Data

Today delivered another session of U.S. Tsy-induced weakness in the morning, followed by a solid short-end-led rally sparked by market-friendly Antipodean data.

• Today’s major catalyst was the weaker-than-expected Australian employment data. NZGBs yields were up as much as 7-8bp ahead of the release. By the end of trading the 2-year benchmark had managed to reverse that move, closing 2.5bp richer. Further out, NZGBs rallied but not enough to completely wipe anyway morning weakness with the 5-year benchmark yield ending up 2bp and the 10-year benchmark up 5bp.
• Swap moves were less dramatic with the mid-session turnaround equating to a -4bp move in the 2-year rate and a -0.5bp move in the 10-year. The 2s10s curve was 7bp steeper on the day.
• RBNZ-dated OIS now shows just under 50bp of tightening for this month's meeting, continuing the recent pull lower. Terminal OCR pricing saw a more prominent move, declining to sub-5.35% versus the week’s high of ~5.50%.
• KiwiBank suggested that the RBNZ should stand pat at this month’s meeting, in lieu of Cyclone Gabrielle, although the bank does still expect the RBNZ to ultimately deliver a hike. This view weighed on the OIS strip ahead of the Australian data.
• The NZ Debt Management Office successfully sold NZ$200mn May-28, NZ$150mn Apr-33 and NZ$50mn Apr-37 with cover ratios of 3.48x, 2.57x and 2.72x, respectively (more than smooth passage after last week's uncovered auction in the belly).

FOREX: USD Pressured On Firmer Equities

The greenback is softer in Asia-Pac today as firmer US and Regional equities have boosted risk sentiment.

• AUD was pressured in the immediate aftermath of the January Australian Labour Market report. The unemployment rate ticked higher to 3.7% from 3.5%. AUD/USD fell, finding support below $0.6880.
• Local banks have played down the weakness in the Australian Labour report, as the ABS figures noted a larger than usual increase in the number of unemployed who had a job to go to in the future. This suggests that we may see a rebound in Feb.
• Losses were pared as rising equities boosted risk sentiment, with the AUD/USD rising above $0.69 handle lasting printing $0.6920/25.
• NZD/USD prints at $0.6305/10, ~0.4% firmer today. Kiwi was pressured in early trade, Kiwibank noted that they felt given the impact of Cyclone Gabrielle the RBNZ shouldn't hike rates next week. Support was seen below $0.6260, before a ~0.8% trough to peak rally sees the pair deal above its 200-Day EMA.
• USD/JPY has moderated some of yesterday's gains, and is testing its 200-day EMA. The pair is ~0.3% softer, last printing ¥133.75/85. January Trade Balance printed ~¥3.5tn deficit, which was narrower than expectations.
• The USD weakness has helped EUR and GBP tick higher. Both are ~0.2% firmer. NOK and SEK are benefiting from improved risk sentiment both up ~0.3%.
• Cross asset wise; Hang Seng is up ~2% and e-minis are ~0.2% firmer. BBDXY is down ~0.2%. 10 Year Us Treasury Yields are ~2bps lower.
• ECB speak from Panetta headlines the European session. Further out we have US PPI, Jobless Claims, Housing Starts and Philadelphia Fed Manufacturing Index. Cleveland Fed President Mester and St Louis Fed President Bullard will also cross.

AUD: A$ Correlations Firmer With Yield Differentials, Less So Global Equities

AUD/USD correlations are sitting more elevated across yield differentials and some commodity prices, particularly relative to global equity sentiment. The table below presents the rolling 1 week and 1 month correlations for AUD/USD with key macro drivers (presented in levels terms).

• Short term correlations are running positive for AUD/USD and AU-US government bond yield spreads. We sit slightly higher at the back end (10yr) but for the past month, the correlations are fairly similar.
• Spreads have mostly moved against the A$, although the trend has been volatile. The 2yr spread is back to -119bps, we were at -84bps in early Jan. The post US payrolls low in the spread came around -140bps. The 10yr spread is back close to flat.
• Versus commodities, the A$ correlation is high for aggregate commodities, but less so base metals and iron ore in the past week. For the past month though correlations remain strongly positive.
• The correlation with global equities is also below normal averages for the past week and month.

Table 1: AUD/USD Correlations

Source: MNI - Market News/Bloomberg

FX OPTIONS: Expiries for Feb16 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0750-60(E540mln)
• USD/JPY: Y128.50($550mln)
• EUR/GBP: Gbp0.8930-50(E976mln)
• NZD/USD: $0.6200(N$671mln)
• USD/CAD: C$1.3435-50($1.1bln), C$1.3550($906mln)

ASIA FX: Reprieve For USD/Asia Pairs, Although Follow Through USD Selling Limited

Most USD/Asia pairs have moved off highs from yesterday, although there hasn't been a great deal of follow through in terms of USD weakness. The firmer tone to regional equities, aided by China calls to boost local consumption, have helped. Still to come is the BI decision (no change expected) and BSP (market close to split between +25/+50bps). Tomorrow, Thailand Q4 GDP prints, along with Singapore Jan trade figures.

• USD/CNH got close to 6.8500 in the first part of the session but now sits back at 6.8600/10. This is only slightly firmer for the session in CNH terms. The CNY fixing trend is edging closer to neutral, while local equities have rebounded, which has likely helped curbed upside momentum in the pair.
• 1 month USD/KRW got a to a low of 1278, but we now sit back closer to 1281/82, still higher in won terms for the session. Recent highs in the pair come in around the 1287.50 region. Onshore equities have rebounded, with offshore investors adding +$130mn back to local shares.
• For USD/SGD, the pair continues to be driven by the broader greenback trend. Bulls have faced resistance above the 50-Day EMA ($1.3361) yesterday, and the pair has ticked away from the level and last prints $1.3340/45 ~0.15% softer today. On the wires early tomorrow, we have Jan Export data. Non-oil Domestic Exports are estimated to have fallen 1.0% MoM in the Bloomberg survey (-21.9% Y/Y, versus -20.6% prior). Electronic Exports are also on the wires, there is no estimate, the prior read was -17.9%.
• USD/INR opened softer and is back sub 82.70 as the time of writing. The pair retreated from fresh monthly highs seen in yesterday's trading, just above 82.90. India's Jan Trade Balance was narrower than expectations however a $17.74bn deficit was still observed. The trade deficit continues to narrow from July 2022 extremes, which is in line with improvement in the Citi ToT proxy.
• USD/IDR is down around 0.15% so far today, last just under 15180. The pair remains well within recent ranges ahead of the BI decision later today. Recent selling interest has been evident on moves above 15200. The pair remains wedged between key EMA levels. The BI is widely expected to remain on hold today given recent BI commentary. BI will likely guard against a sharp weakening in IDR, given it continues to value the currency as undervalued (we have the 50 and 100 day EMAs siting higher at 15255 and near 15280 respectively).
• USD/PHP is down from early session highs near 55.40, currently back at 55.15/20 unchanged for the session. Coming up is the BSP decision, a hike is widely expected, although the market is close to split between a 25bps or 50bps move. We see risks as tilted more towards a 50bps hikes given known inflation outcomes in the Philippines and the shift in the US outlook over recent weeks.

EQUITIES: Dip Buyers Emerging?

Regional equities have rebounded today, particularly the higher beta plays. The late US equity rally from Wednesday has helped, while US futures have tracked higher in the first part of trade today (Eminis +0.15%, Nasdaq +0.37%). Talk of China efforts to boost consumption is likely to have aided sentiment for China bourses and across the region.

• The HSI is up 2.20% at this stage, with the China Enterprise Index slightly better at +2.50%. With both indices 8-10% off Jan highs, dip buyers may be starting to emerge.
• Onshore the CSI 300 is up around 1%. Yesterday a speech by Xi Jinping from late last year was released, stressing efforts to boost lower and middle income consumption this year. Local papers reported the President calling on local governments to do more to boost consumption.
• Elsewhere, tech plays in South Korea (1.88%) and the Taiex (0.88%) are firmer. Offshore investors have added +$133.1mn to local shares in Korea. Japan stocks are +0.77% for the Nikkei at this stage.
• The ASX 200 is +0.80%, while Indonesian stocks are the only major bourse within the region lower, off 0.2% at this stage. A big onshore property developer, Waskita, is seeking to delay a bond payment, which has weighed on sentiment at the margin.

GOLD: Bullion Stabilises After Wednesday’s Post-Retail Sales Slump

Gold prices are up 0.2% to $1840.50/oz after falling a percent on Wednesday following the strong US retail sales report driving up yields and the USD. Bullion reached a high today of $1842.64 following a low of $1834.56. The USD DXY is down 0.2%.

• Gold is now trading below its 50-day simple moving average as better US data and Fed comments point to further tightening. Wednesday’s low of $1830.66 has now formed initial support.
• Later today the Fed’s Mester, Bullard and Cook all speak. A hawkish tone from these officials would send bullion down further. In terms of data, there will be more detail on the inflation front from the January PPI, which is expected to see a pickup in monthly increases but the annual rates should ease. There are also January housing starts & permits, jobless claims and Philadelphia and NY business indices for February.

OIL: Crude Rising On Hopes Of Increased Demand From China

Oil prices are higher today as the market is hoping for economic stimulus in China. They fell on Wednesday in the wake of a strong US crude stock build and robust US retail sales. Brent is up 0.5% today to $85.80/bbl after falling 0.35% yesterday and WTI is up 0.6% to $79.09 after -0.7%, both are close to their intraday highs.

• Brent remains above its 100-day simple moving average while WTI is approaching its 100-day MA. Brent and WTI have been holding above the February 9 support levels.
• The US EIA reported a significant 16.28mn build in crude inventories after 2.42mn the previous week. The stock build this year is being driven by a reduction in refining due to maintenance and December’s cold snap and so the usually refined crude is being stockpiled despite lower imports and higher exports.
• The UAE energy minister pointed to the US crude stockpiling as an indicator that there is plenty of supply. It is unlikely that OPEC+ will change its output quotas any time soon.
• The IEA revised up its 2023 oil demand forecasts by 0.1mbd to 2mbd.
• Later today the Fed’s Mester, Bullard and Cook all speak. In terms of data, there will be more detail on the inflation front from the January PPI, which is expected to see a pickup in monthly increases but the annual rates should ease. There are also January housing starts & permits, jobless claims and Philadelphia and NY business indices for February.