MNI EUROPEAN MARKETS ANALYSIS: USD Nudges Higher As Fed QT Gets Underway

US TSYS: A Touch Cheaper Overnight, Fed QT To Commence

A light bid in e-minis and Atlanta Fed President Bostic (’24 voter) fleshing out his thought process re: a potential September pause when it comes to tightening (the idea of a Fed put never factors into his thinking, coupled with the reaffirmation that he is willing to take policy settings beyond neutral, if inflation doesn’t slow significantly) placed some light pressure on Tsys in early Asia dealing. TYU2 traded through Tuesday’s base, before the space pulled back from session cheaps. This was perhaps aided by slightly softer than expected Chinese Caixin manufacturing PMI data and geopolitical angst, as China conducts military drills near Taiwan and Russia’s nuclear forces conduct their own drills in Ivanovo province.

• Still, ranges were tight, with TYU2 last -0-07+ at 119-07, 0-02 off the base of its 0-08+ Asia range. Cash Tsys run 1.0-2.5bp cheaper across the curve, with the belly leading the weakness.
• Note that some also attributed the start of the Fed’s QT scheme (which goes into action today) as a contributary factor to the early cheapening.
• 2x block buys of TYU2 futures (+4.5K apiece) provided the highlight on the flow side as we moved towards London hours.
• Looking ahead, NY hours will bring the ISM m’fing print, JOLTS jobs data, weekly MBA mortgage apps and the latest Fed Beige Book. Fedspeak will come from NY Fed President Williams & St. Louis Fed President Bullard (’22 voter), while the latest BoC decision will provide some interest in goings on across the border (a 50bp hike is expected by all but 1 of the 30 economists surveyed by BBG).

JGBS: BoJ Presence Facilitates Twist Steepening

Spill over from the U.S. Tsy space has seemingly applied some pressure to the super-long end of the JGB curve (30s and 40s), with twist steepening in play in the JGB space as the Fed gets set to implement its quantitative tightening program from today (some reaction to the cheapening of longer dated U.S. Tsys observed since the NY open is also feeding in). Remember that the BoJ has less relative control over the longer end of the JGB curve, which is likely promoting the twist steepening.

• Note that the 5- to 7-Year zone of the JGB curve outperformed, with the major JGB benchmarks running 1bp richer to 2bp cheaper across the curve. The outperformance in the belly was once again likely linked to BoJ control, given the continued presence of 10-Year JGB fixed rate operations to fortify the upper end of the Bank’s permitted 10-Year JGB yield trading range (10s last yield 0.24%, ~1bp off the upper limit of the aforementioned band). This allowed JGB futures to unwind their overnight losses and more, hitting the lunch bell +4 vs. yesterday’s settlement
• Domestic Q1 data was mixed, with capex disappointing and company profits beating.
• Commentary from Japanese PM Kishida re: his economic policy outlook failed to provide fresh impetus for the space, with no fresh information divulged.
• Elsewhere, BoJ Deputy Governor Wakatabe maintained his usual reflationist tone.
• 10-Year JGB supply headlines domestically on Thursday.

AUSSIE BONDS: Cheaper, With GDP Providing A Modest Beat

The ACGB space underperformed vs. U.S. Tsys, with the AU/U.S. 10-Year yield spread widening by ~6bp on Wednesday; aided by setup into domestic Q1 GDP, which ultimately topped estimates (+0.8 Q/Q vs. median +0.7%), even after yesterday’s partials data resulted in a mark up of sell-side expectations when it came to the GDP release.

• Still, the sell off observed since Tuesday’s partials data, coupled with the ability of U.S. Tsys to find a bit of a base, meant that the post-data extension lower or Aussie bond futures was limited, leaving both YM & XM -9.5 at typing, at/just above worst levels of the day. Cash ACGB trade sees a relatively parallel cheapening shift across the entire curve.
• A firm ACGB Apr-25 auction saw the weighted average yield price 1.47bp through prevailing mids (per Yieldbroker), while the cover ratio printed comfortably above 3.00x. We would suggest that the carry & roll aspect and potential short covering demand (indicated via RBA SLF demand) that we highlighted in the auction preview were the most prevalent supportive factors for the auction.
• Bills run flat to 11bp cheaper through the reds, with EFPs a touch wider again today, as the 3-/10-Year box. bull flattens once again.
• Monthly trade balance data headlines the domestic docket on Thursday.

BOC: MNI BoC Preview - Jun-22: A Stepping Stone To July?

EXECUTIVE SUMMARY

• The Bank of Canada is almost unanimously expected to hike its overnight rate by another 50bp to 1.5% on Wednesday (28 of 29 analysts on Bloomberg) as part of its journey to neutral, defined as 2-3%.
• The statement-only release is likely to maintain its hawkish tone to keep inflation expectations from de-anchoring but offer little in the way of new guidance – i.e. rates need to increase further with timing and pace guided by the inflation target.
• Hawkish surprises could come from language around moving further into excess demand or inflation being increasingly persistent and broad-based, but the market is likely more sensitive to dovish commentary concerning the global growth backdrop and/or moderation in Canadian housing activity.
• Any further steers will then be left to Dep Gov Paul Beaudry on Thursday with the Economic Progress Report.

PLEASE SEE THE FULL NOTE AT THE BELOW LINK:

BOCPreviewJun2022.pdf

FOREX: Yen Extends Losses Amid Higher U.S. Tsy Yields

Yen weakness persisted in Wednesday's Asia trade as U.S. Tsy yields kept pushing higher. BBG trader sources cited USD/JPY purchases by CTA and real-money accounts, with demand seen into and after the Tokyo fix. In addition, upticks in all three main e-mini futures reduced the yen's safe haven allure. Spot USD/JPY pierced Y129.00, rising to best levels since May 18 in tandem with its 1-month 25 delta risk reversal.

• BoJ Dep Gov Wakatabe said that the central bank should not rule out additional easing steps if downside risks to the economy materialise.
• Firmer U.S. Tsy yield allowed the U.S. dollar to outperform, but the BBDXY index struggled to rip through yesterday's peak.
• Above-forecast Australian Q1 GDP data supported the AUD, although to a limited degree, with sell-side economists noting the challenges facing the economy going forward.
• The kiwi dollar retreated as AUD/NZD climbed to a one-week high, with AU/NZ 2-year swap spread advancing.
• Spot USD/CNH turned bid ahead of the release of China's Caixin M'fing PMI and extended gains thereafter. The index improved to 48.1 in May but remained in contractionary territory and slightly missed expectations.
• PMI data from across the globe will keep hitting the wires through the day. Elsewhere, the BoC will announce its monetary policy decision, while a number of Fed, ECB, BoE & Riksbank members are set to speak.

FOREX OPTIONS: Expiries for Jun01 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0565(E657mln), $1.0640(E529mln), $1.0740-60(E1.5bln)
• USD/JPY: Y127.50-55($1.3bln), Y129.82-00($612mln)
• AUD/USD: $0.7171(A$1.1bln)
• NZD/USD: $0.6620(N$725mln)
• USD/CAD: C$1.2465($600mln), C$1.2700($751mln)
• USD/CNY: Cny6.64($850mln), Cny6.70($2.3bln), Cny6.78($1.5bln), Cny6.80($2.0bln)

ASIA FX: Weak PMIs Weigh

Asian FX is weaker against the USD, USD/CNH is back above 6.7000.

• CNH: USD/CNH has played catch up with the broader USD trend. The pair is back above 6.7000, unwinding some of the recent outperformance. The weaker than expected Caixin PMI didn't help, remaining well below the 50 expansion/contraction line. China and Hong Kong equities have also struggled, after finishing May quite strongly.
• KRW: Korean markets have been closed for local elections today, but we still had trade figures. Exports were better than expected, which helped lower the trade deficit. The USD/KRW 1 month NDF is back at 1246 from 1243, note the 50 day MA comes in at 1248.
• TWD: USD/TWD spot has rebounded, +0.40% on the day so far, to 29.17. The TAIEX is struggling to make further headway after hitting resistance from the congestion of its 50-DMA/May 5 high/38.2% recovery of the Jan 5 - May 12 sell-off around the 16,760-16,800 area. The PMI also fell in May to 50.0 from 51.7 previously.
• MYR: USD/MYR has pushed higher to 4.3880, in line with the regional trend and softer oil prices. The PMI also fell to 50.1 from 51.6. Yesterday, PM Ismail Sabri told the Nikkei that now is not the right time to call a snap election.
• PHP: Spot USD/PHP has oscillated around the 52.45 level after opening higher. The domestic data docket is virtually empty during the remainder of this week, which turns focus to next week's CPI report. On that note, outgoing BSP Gov Diokno said headline inflation likely settled within +5.0-5.8% Y/Y range in May, accelerating from April's +4.9%.
• THB: USD/THB continued to push higher today, a likely carry over from yesterday's poor current account figures. We are close to 34.38, nearly +0.50% on the day. The deficit was nearly twice as wide as forecast (-$3351mn versus the -$1800mn forecast).

EQUITIES: Mixed In Asia; China’s COVID Easing Optimism Moderates

Major Asia-Pac equity indices are mixed at typing, broadly bucking a negative performance from Wall St. while Hong Kong and Chinese equity benchmarks underperformed.

• The Hang Seng Index leads losses, dealing 0.7% softer at typing and on track to snap a three-day streak of gains. China-based tech names lead losses, with the Hang Seng Tech Index sitting 1.7% worse off, led by losses in Baidu Inc (-5.0%) and Meituan (-3.2%), and ahead of the latter’s earnings call on Thursday.
• The CSI300 is virtually unchanged at writing, having struggled to rise above neutral levels throughout the session. The benchmark ultimately trades a little below five-week highs made on Tuesday however, with a weaker-than-expected Caixin Manufacturing PMI reading for May (48.1 vs median 49.0) being assessed against the country’s well-documented efforts to lift COVID lockdowns in Shanghai. Richly-valued consumer staples and healthcare equities underperformed while tech names caught a bid, with the ChiNext index adding 1.2% at writing.
• The Nikkei 225 sits 0.6% better off at typing, paring gains after hitting fresh six-week highs earlier in the session. Financials and export-oriented names (particularly automakers) outperformed amidst another bout of JPY weakness, while real estates stocks rebounded from a dismal performance on Tuesday.
• U.S. e-mini equity index futures deal 0.2% to 0.5% firmer, operating around the middle of their respective ranges on Tuesday at typing.

GOLD: Little Changed In Asia

Gold is virtually unchanged, printing $1,837/oz at typing. The precious metal trades a little above two-week lows made earlier in the session, operating within a tight ~$5/oz channel in fairly limited Asia-Pac dealing.

• To recap Tuesday’s price action, gold closed ~$18/oz lower as U.S. real yields broadly rose off of their respective pre-Memorial Day troughs, sealing a second straight month of declines for bullion. The day’s sharpest moves came after the MNI Chicago PMI and U.S. consumer confidence data crossed, with the latter pointing to consumer confidence weakening by less than expected, possibly sapping some demand for the safe haven metal.
• OIS markets are pointing to ~196bp of Fed tightening through the remaining five FOMCs for calendar ‘22, with well-documented comments from the Fed’s Waller’s (calling for “several” 50bp hikes) on Monday continuing to facilitate a limited move higher in tightening expectations.
• Elsewhere, Atlanta Fed Pres Bostic earlier clarified his comments made last week for a September “pause” on rate hikes, stating that it will not translate into a “Fed put”, eliminating already slim expectations from some quarters for a Fed-led market rescue later in ‘22.
• From a technical perspective, rallies in gold are still considered corrective, with the broader trend direction remaining bearish. Resistance is seen at $1,869.7 (May 24 high), while support is situated at $1,807.5/oz (May 18 low) - a break of which would expose further support at $1,787.0 (May 16 low and bear trigger).

OIL: A Little Higher In Asia; OPEC, Russian Crude Supply Outlook Receives A Lift

WTI and Brent are ~$0.40 better off apiece at writing, operating within tight ~$1.00 bands in limited Asia-Pac dealing.

• To recap, both benchmarks backed away from multi-month highs on Tuesday following WSJ source reports of some OPEC members considering the idea of suspending Russia from OPEC+ while preparing to increase output over the next few months. This has raised expectations from some quarters for prominent OPEC members Saudi Arabia and the UAE to pump more crude, with the duo recognised as possessing spare production capacity that can be quickly deployed.
• Libya’s Agoco has reported a 220K bpd loss in crude output from a leak on the Sarir-Tobruk pipeline, while Argus Media source reports have pointed to a narrowly-averted worker strike at the Es Sider terminal (estimated 300K bpd capacity).
• Looking to China, Shanghai’s COVID lockdown was (mostly) lifted today, although a recent BBG report has highlighted that Chinese authorities are continuing to invest in vast, seemingly permanent networks of testing infrastructure, suggesting the likelihood of the country’s COVID Zero strategy remaining in place for the long run.
• Elsewhere, a RTRS source report has pointed to Russian companies led by Rosneft planning to open recently shuttered oil wells in June, corroborating comments earlier in May from Russian Deputy PM Novak that the country would increase oil production during the same period, while increasing exports to Asia. A note that seaborne Russian crude has been on a steady rise, while crude shipments meant for Europe have so far been increasingly diverted to Asia, helping to reduce the impact of Western sanctions on Russian exports.