MNI EUROPEAN MARKETS ANALYSIS: USD Remains On The Defensive In Asia In Lieu Of Fed

MNI ECB Preview - February 2023: With 50bp Fully Priced For February, Focus Shifts To The March Meeting

EXECUTIVE SUMMARY

• The ECB is set to hike policy rates by 50bp at the February meeting – a position that has now been well telegraphed and fully priced by the market.
• There is unlikely to be any surprise policy innovation beyond some technical details on how QT will be implemented.
• Markets will look for any clues on the March policy rate decision and we believe it more likely than not that Lagarde will hint at a similar sized hike at that meeting.
• For the full publication please see:ECB Preview February 2023.pdf

MNI BOE Preview - Feb 2023: Vote split could see dovish react

EXECUTIVE SUMMARY

• The MNI Markets team expects a 50bp hike at the February 2023 MPC meeting, but see around a 30% probability subjectively of a 25bp hike instead.
• We think there is better risk-reward to position for a dovish outcome than for a hawkish move due to our expectations that there could be a more dovish vote split than the market expects.
• For the full document including summaries of over 20 sell-side views see:MNI BoE Preview - Feb23.pdf

US TSYS: Little Changed In Asia

TYH3 deals at 115-11, -0-04+, a touch off the base of its 0-06 range on volume of ~106K.

• Cash Tsys sit little changed across the major benchmarks.
• Tsys richened at the margins in early Asia trading as regional participants reacted to Fed Chair Powell's post-meeting comments re: the disinflation process beginning.
• The richening held until cross-market pressure, likely stemming from JGBs in lieu of a soft 10-year JGB auction, saw Tsys retreat from session highs.
• Asia-Pac flow was headlined by a 3K block buyer of TYH3, with some downside screen interest noted via the TYH3 115.00/114.50 put spread (+3K).
• In London hours we have the BoE & ECB monetary policy decision, as well as ECB President Lagarde's post-meeting press conference, which presents plenty of scope for cross-market-driven gyrations. Further out U.S. Factory Orders, Initial Jobless Claims and Durable Goods will cross.

JGBS: Futures Unwind Overnight Bid, 10-Year Auction Sloppy At Best

JGB futures have unwound the bulk of their overnight session bid, with the contract +7 into the close. Wider cash JGBs run flat to 6bp richer, with the super-long end outperforming all day. Swap spreads are generally flat to wider, excluding 10s, which are a touch tighter.

• Intermediates moved away from best levels in set up for this afternoon’s 10-Year JGB supply after latching onto the wider bid in core global FI markets post-FOMC.
• Further weakness was observed in the afternoon, after the 10-Year JGB auction saw the cover ratio continue to hover just below the 6-auction average, while the low price missed wider expectations, with the average price also printing below the expectations for the low price. The price tail was also wide. It would seem that uncertainty re: the BoJ kept some on the sidelines (as we suggested may be the case), while the structural richness promoted by the BoJ’s YCC settings probably acted as a further headwind for demand. This resulted in the need for further concession for supply to be absorbed.
• Comments from soon to be departing BoJ Deputy Governor Wakatabe reaffirmed the need for continued easing, while he also pushed back against the idea of a more ambiguous inflation target ahead of a potential tweak to the BoJ-government accord on inflation.
• Friday’s local docket is headlined by final services & composite PMI data as well as the latest round of BoJ Rinban operations.

JAPAN: Run Of Weekly Net Sales Of Japanese Bonds By Foreigners Comes To An End

The latest round of weekly international security flow data from Japan’s MoF revealed fairly limited net flows across the 4 major metrics. While there were some directional changes the limited size of the net flows observed did little to change the overarching flow picture. The only real point of note saw international investors end a streak of six straight weeks of net sales of Japanese bonds, as the test of the BoJ’s YCC settings eased up, although the net purchase lodged was incremental.

AUSSIE BONDS: Off Best Levels Into The Close

Aussie bond futures finished off of best levels after respecting their overnight peaks, leaving YM +6.0 & XM +3.0. The major benchmarks were 6bp richer to flat, as the curve bull steepened.

• The overnight session/early Sydney richening was a product of spill over surrounding the latest FOMC decision.
• The pullback from best levels lacked much in the way of an overt explainer.
• EFPs narrowed on the day, suggesting that receiver-side flows in swaps aided the general bid in bonds, while the pull away from best levels was driven by bonds.
• Bills finished 3-10bp richer across the curve, as the strip flattened. RBA dated OIS continued to show just under 25bp of tightening for next week’s meeting, while terminal cash rate pricing oscillated either side of 3.70%, ticking lower on the day as the impulse from post-FOMC gyrations in the wider FI space was felt. Note that some sell-side names have flagged a non-trivial chance of a larger than 25bp step at next week’s meeting, in lieu of the firmer than expected Q4 CPI data received last week.
• Looking ahead, tomorrow will see the release of housing finance data and A$500mn of ACGB Apr-29 supply.

NZGBS: Early Fed-Inspired Bid Extends On Firm Demand At Auctions

Benchmark NZGB yields were 11bp lower across the curve on Thursday, with the space going out at richest levels of the day, as a parallel shift was observed.

• Feed through from the latest FOMC decision kickstarted the richening, with NZGBs then extending on their early FOMC-inspired bid in lieu of the latest round of NZGB supply, which came in the form of NZGB-28, -33 & -37. The auctions saw strong to very strong demand, with all 3 well covered, providing cover ratios of 2.5-4.6x, as the longest bond on offer generated the firmest cover.
• Swap rates were 9-14bp lower across the curve, with steepening apparent, leaving swap spreads mixed.
• RBNZ dated OIS continues to show just over 50bp of tightening for next month’s meeting, with terminal OCR pricing in a touch to 5.25%, adding to yesterday’s labour market-inspired downtick.
• Locally, building permits data provided a soft outcome, although markets looked through that release.
• Domestic headline flow has been fairly limited elsewhere.
• Looking ahead, Friday’s local docket is headlined by the latest ANZ consumer confidence survey reading.

FOREX: USD Bears Remain In Control

The USD has stayed on the back foot today, although we haven't seen much follow through from early session selling. The BBDXY sit close to 1211 currently, -0.25/0.30% versus NY closing levels, the DXY is slightly weaker, under 101.00, which is comfortably below late NY session lows. The dollar remains on the backfoot post the Fed.

• Cross asset signals have leaned against the USD from an equity market standpoint, with US futures continuing to push higher (as least for the S&P +0.36% & Nasdaq +1%), while regional equities have firmed, particularly for tech sensitive countries. US yields are mixed, slightly firmer at the front end, but with tight ranges overall.
• The better risk tone hasn't prevented slight JPY outperformance. USD/JPY sunk to 128.15/20 in early trade, but we now sit back at 128.50. The bear trigger is at 127.23, the Jan 16 low, from here bears can target 126.81 a Fibonacci projection.
• NZD/USD has also traded with a positive bias, with the pair hitting fresh cycle highs above 0.6535. We are just off these levels currently.
• AUD/USD lost some momentum, despite stronger housing data, last around 0.7145, just +0.10% up on NY closing levels.
• Looking ahead, we have the BOE rate decision before the ECB rate decision and President Lagarde's press conference. Also on the wires is U.S. Factory Orders, Initial Jobless Claims and Durable Goods.

FX OPTIONS: Expiries for Feb02 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0580-00(E1.1bln), $1.0750(E669mln), $1.0855-60(E586mln), $1.0895-10(E1.1bln), $1.0925-50(E741mln), $1.1150(E744mln)
• USD/JPY: Y127.00($1.4bln), Y128.90-05($1.0bln), Y129.30-50($1.3bln), Y130.00($1.8bln), Y131.55-75($1.0bln)
• GBP/USD: $1.2315(Gbp560mln)
• USD/CNY: Cny6.9500($1.2bln)

EUROZONE: Latest Recession Probability Falls Towards 50%

The risk of a recession around mid-year has moderated in the December update of the six months-ahead recession probability model. This is consistent with the better than expected GDP data for the last quarter of 2022, low and stable unemployment and improving economic sentiment. This result is suggesting that the euro area may be able to avoid recession but if there is one, it is likely to be shallow.

• The estimation from 1985 shows a 55% recession probability for mid-2023 down from 63% the previous month. It has been at or above 50% for the last 5 months signalling a possible recession from February 2023.
• The 1998 estimation has been indicating a slightly higher probability of a future recession and has also been above 50% for 5 months. The latest estimate moderated to 56% from 70% last month.
• Higher real equity prices, less negative real 10-year yields and lower real oil prices in euros helped to reduce the risk of a recession, as well as the rise in the EC’s economic sentiment indicator.

MACRO: Housing Correcting At Different Rates But Has Further To Go

House prices continue to correct in countries where monetary tightening has been brisk but also where there are high levels of household indebtedness. Countries where the adjustment has been more gradual or is yet to begin tend to have lower household debt in comparison, such as the US and Portugal. Given slowing growth, poor affordability and refis at higher rates the housing correction likely has further to go, but while it remains orderly central banks are unlikely to be too concerned.

• This week Australia reported a 1.1% m/m drop in home prices in January, NZ -0.3%, the UK -0.6% and the US -0.2% (November). Australia is now down 9.7% from its 2022 peak but the UK is down only 3.2%, even though both countries rose 24% over the pandemic period. The US rose by more over that time at 42.5% but is only down 2.5% from its 2022 peak (see chart).
• Corrections are likely to be deeper where there are high levels of household debt as a share of disposable income in a rising rate environment. Norway, the Netherlands, Australia and Sweden all have ratios above 200% (see chart) and all of them saw soaring house prices during the pandemic. Prices in the Netherlands rose 38.2% over this time but have so far only corrected 4.5%, as there is a lower share of variable rate mortgages and the ECB was one of the last to hike.
• It is worth noting that those countries with a high share of variable rate mortgages have seen some of the largest corrections to date, such as Australia, Sweden and Canada.

ASIA FX: Several USD/Asia Pairs Break To Fresh Cycle Lows, INR Remains A Laggard

USD/Asia pairs are lower today, as fallout from the dovish Powell and firmer regional equities (for the most part), weighed on broader USD sentiment. Gains weren't uniform though, with KRW, TWD and PHP outperforming, while USD/CNH couldn't break to fresh lows. INR remains a laggard. Tomorrow, the China Caixin services PMI is due, along with Singapore's PMI and retail sales. India's services PMI also prints.

• USD/CNH got near 6.7050 in early trade, but has spent most the session between 6.71/6.72. Mid Jan lows came in just under 6.7000, so this remains the level to watch on the downside. Onshore equities have struggled for meaningful upside today, while the fixing bias didn't lean against recent yuan strength.
• 1 month USD/KRW got to fresh lows near 1215 in the first part of trade, amid on-going equity strength and broad USD weakness. The Jan CPI print came in a little stronger than expected, which may tilt the odds for further BoK action. We last sit around the 1218 level, in line with some consolidation in the broader USD/Asia space.
• USD/TWD spot has fallen another 0.90% so far today. This brings spot back to 29.65/70. Spot TWD gains since markets re-opened at the start of the week are now around 1.5%. This is comfortably the best performer in EM Asia FX for this period. Net equity flows are tracking for their best weekly inflow since 2005, while signs of improved economic relations with China are also helped at the margin.
• The SGD NEER (per Goldman Sachs estimates) has eased this morning after dealing higher in the aftermath of Fed Chair Powells press conference where he noted the disinflation process has begun. NEER sits ~0.5% below the upper end of the band at present levels. USD/SGD is ~0.2% softer today last dealing $1.3040/50, the pair printed a fresh cycle low of $1.3032 in early dealing. The pair fell ~0.7% in volatile trade late in the NY session yesterday as Fed Chair Powell spoke.
• USD/INR continues to consolidate, the pair is dealing a touch below its 20-day EMA today. Bulls look to break 82, whilst bears target 100-day EMA at 81.51. INR continues to lag the broader positive trend seen for the ADXY. Yesterday's budget appeared to be well received from the sell-side, with onshore bonds rallying on the reduced forecast borrowing amount for the upcoming fiscal year. Equities continue to struggle amidst on-going Adani saga.
• USD/PHP is off 1.1% so far today, with the pair back sub 54.00, fresh cyclical lows back to June last year. This breaks the pair out of recent ranges (54.30/54.80 roughly), with peso bulls potentially emboldened by the formation of a death cross, as the simple 50-day MA looks to break below the 200-day MA.

EQUITIES: Regional Tech Leads The Way Post The Fed

Regional equities are mostly higher, following the positive US tone from Wednesday, with higher futures (S&P +0.25% & Nasdaq +0.85%) today also helping. The beta with respect to US moves remains a touch lower within the region, but the risk on tone is clearly evident. Tech plays have outperformed in the region today, as the market continues to digest Fed moves from the Wednesday session.

• The HSI is up around 0.4% at this stage, with the underlying tech index up a further 1.74% today.
• China shares also higher, albeit just, with the CSI 300 +0.06% in the first half of trade today. Brokerages weighed on the broader index despite eased IPO rules, which should make it easier for companies to list onshore. For Wednesday's session the Golden Dragon index rebounded 4.34% in US trade.
• The Kospi is up 0.77%, with offshore investors adding +$261.1mn to local shares. The lower pace of Fed hikes, coupled with Powell stating the disinflation process has begun, is seen as benefiting the tech space. The Taiex is slightly outperforming, up 1.00% at this stage.
• There are some laggards in the region, the ASX 200 is +0.20% at this stage, with some commodities not seeing as much risk-in flows post the Fed.
• Indian shares are struggling to gain traction, as the Adani saga continues, while Philippine shares can't sustain moves above the 7000 level.

GOLD: Bullion Holds Onto Its Gains Post The Fed

Gold prices bounced after the Fed announced a 25bp hike and Chairman Powell commented that disinflation had begun. They rose 1.2% to finish the NY session at $1950.52/oz, as the USD DXY index was 0.9% lower. They have traded sideways during the APAC session close and are up 0.1% to around $1952.15 after reaching a low of $1950.47 followed by a high of $1957.33. Gold is at its highest since mid-April 2022. DXY is down a further 0.3%.

• Gold prices have remained above the bull trigger of $1949.20, the January 26 high. The next level to watch is $1963, 76.4% retracement of the March – September 2022 bear leg. Bullion is trading well above its 50-day simple MA, which is itself now above both the 100- and 200-day MA.
• Later the ECB and Bank of England meet and both central banks are expected to hike rates 50bp. In the US, Challenger job cuts for January, jobless claims and Q4 preliminary unit labour cost data are scheduled.

OIL: Crude Recovers Today But Only Partially

Oil has started February on the back foot. Prices fell sharply on Wednesday down 2.8% as US data showed a further inventory build. Crude has only partly unwound those losses during the APAC session rising around 0.8%. DXY is down 0.3%.

• WTI is trading just above $77/bbl close to the intraday high and off the low of $76.69 earlier, but below its 50-day MA. Brent is around $83.45 after a low today of $83.15, and above the 50-day MA. Brent remains above its support of $82.06.
• OPEC+ “reaffirmed their commitment” to current output quotas after their meeting on Wednesday. It is monitoring the impact of China’s reopening on demand.
• Goldman Sachs remains optimistic on oil prices and they continue to forecast Brent at $105/bbl in Q4 supported by a better global growth backdrop. In the short-term, oil should find support from cold weather. It currently has boosted crude demand by 200kbd in recent days.
• On February 5, the EU will ban almost all seaborne imports of Russian refined products and there is talk that the G7 plus EU will include a price cap on Russian fuel with $100/bbl being discussed for diesel. (bbg)
• Later the ECB and Bank of England meet and both central banks are expected to hike rates 50bp. In the US, Challenger job cuts for January, jobless claims and Q4 preliminary unit labour cost data are scheduled.