MNI US MARKETS ANALYSIS - EUR/JPY Continues to Defy Consensus & Implied Pricing

TSYS:  Holding Modest Gains Ahead Jan FOMC Minutes

• Cash Tsys modestly firmer, off recent highs but holding above last Friday's pre-PPI levels. Little follow through from softer core/semi-core EGBs as European market awaits flash February consumer confidence data later this morning (1000ET).
• TYH4 currently +2.5 at 110-00.5 vs. 110-02.5 high. Nearing initial technical resistance at 110-17.5 (Feb 15 high), support below at 109-17/15 (50.0% of Oct 19 - Dec 27 climb / Low Feb 16). Curves mildly steeper: 2s10s +.509 at -33.391, 10Y yield at 4.2616 -.0137.
• Limited data today MBA Mortgage Applications up at 0700ET.
• Main focus on Jan 31 FOMC minutes release at 1400ET.
• A few Fed speakers on today's docket - unlikely to be market moving ahead the FOMC Minutes release: Atl Fed Bostic opening remarks airline CFO summit (no text or Q&A) kicks of at 0800ET, with a recorded interview of Richmond Fed Barkin on SiriusXM Monday airing at 0910ET. Meanwhile, Boston Fed Collins fireside chat (no text, Q&A) later this evening at 0730ET.
• US Treasury auction supply: $28B 2Y FRN R/O note (91282CJU6) and 17W bill auctions at 1130ET followed by $16B 20Y Bond (912810TZ1) auction at 1300ET.

STIR: Little Net Movement In Fed Pricing

{US} STIR: The ’24 Fed pricing profile is little changed to 3bp more dovish today (vs;. yesterday’s close), with FOMC-dated OIS showing 94bp of cuts by year end.

• The first 25bp step lower is fully discounted come the end of the June ’24 FOMC.
• ~10bp of cuts are showing through the May ’24 FOMC as we head into NY trade.
• The release of the minutes from the latest FOMC meeting minutes headline the NY docket.
• The immediate focus in the minutes will be on participants' thinking surrounding the prospect for future rate cuts - both timing and magnitude.
• The minutes will also be scrutinized for any discussion surrounding the timeline and contours of a potential slowing of asset runoff and how soon a decision may be reached.
• See our full preview of the release here.
• Elsewhere, Fedspeak from Bowman, Bostic, Barkin & Collins will hit.

TSYS: Roll Completion Update & Sell-Side Bias

Below is a quick summary of the current futures roll completion % (as of yesterday's close) and the variance in sell-side bias re: directionality of the price of the rolls (based on the reports we have seen):

January FOMC Minutes Preview - Rate Discussion And QT Contours In Focus

• The immediate focus in the minutes (out Weds Feb 21, 1400ET/1900GMT) will be on participants' thinking surrounding the prospect for future rate cuts - both timing and magnitude.
• The minutes will also be scrutinized for any discussion surrounding the timeline and contours of a potential slowing of asset runoff and how soon a decision may be reached.
• Of note will be whether the Minutes therefore affirm the December Dot Plot, which implied 3x 25bp cuts in 2024, as providing a reasonable guide to the Committee’s current thinking. While cuts are likely still on the table if inflation roughly aligns with trend in the coming months, the downside rate risk is likely to be limited absent concomitant downside surprises in the inflation data. In other words, we would not be surprised to see the Committee’s discussed approach as being “cautious” and/or “patient”.
• We assess FOMC participants' commentary since the January meeting, alongside sell-side expectations for what to watch for in the Minutes.

PDF LINK BELOW

FedMinutesPreviewFeb212024.pdf

EUROPE ISSUANCE UPDATE: 

UK Gilt Auction Results:

• An average auction of the short 5-year 4.50% Jun-28 gilt, despite the tight tail of 0.4bp and solid bid-to-cover of 3.34x. The LAP of 101.557 did exceed the pre-auction mid-price of 101.548, but only because of a concession priced into the market around 2 minutes ahead of the auction close. If there had been a decent premium for the LAP over the prevailing price through the auction window this would have been a much stronger auction.
• The 4.50% Jun-28 gilt is now trading around the LAP (after falling a little post-result publication).No reaction in gilt futures to the results publication. GBP4bln of the 4.50% Jun-28 Gilt. Avg yield 4.095% (bid-to-cover 3.34x, tail 0.4bp).

• E4.5bln (E3.712bln allotted) of the 2.20% Feb-34 Bund. Avg yield 2.38% (bid-to-offer 1.71x; bid-to-cover 2.07x).

EUR/JPY: Rengo Tallies in Focus as Cross Outstrips Consensus and Implied Pricing

• Markets are pricing in a considerably higher chance of further EUR/JPY gains relative to the beginning of the year, as the consensus for JPY gains across 2024 gets off to a poor start.
• Given the Bank of Japan's expected shift away from negative interest rates in 2024, markets headed into 2024 with a broad consensus for JPY strength - median had looked for EUR/JPY to fade from Y157 in Q1, to Y154 at year-end.
• With February FX month-end due next week, worth noting current spot moves leave the cross comfortably above consensus, making for a more-than one standard deviation move across the first two months of 2024.
• The gyrations in spot have prompted markets to price in a higher likelihood of further gains in the cross, despite the potential for hawkish tilts at either the March 19th or April 26th BoJ decisions.
• Markets now price a near 20% chance that EUR/JPY will have cleared 164.30 - the cycle high from November last year - after the March decision - an implied pricing that's more than tripled since the beginning of the year - and grows to near 1/4 when capturing the April meeting.
• This shifts focus to the first of several tallies for Rengo pay deals due in mid-March - which should provide the latest firm indication for wages ahead. Consensus looks for pay growth of near 4% this year - the highest since 1992.

FOREX: NZD/NOK Divergence Puts Cross Within Range of YTD Highs

• Equity market sentiment is a touch softer headed into the NY crossover, putting the three major US equity indices into negative territory a few hours out from the opening bell. Resultingly, haven currencies are very modestly bid - aiding CHF higher. The USD is rangebound, however, keeping the USD Index within range of the 100-dma - a level that's proved definitive for prices across February so far.
• NOK is the session's poorest performer so far, with softer equity market sentiment and a pullback in the oil price working against commodity- and high beta currencies. EUR/NOK is trading just above the 50-dma at typing - a level that markets have struggled to maintain momentum above - with the level pierced, but not meaningfully broken since October last year.
• NZD is bucking the trend, however, likely thanks to strong demand at the latest long end NZGB syndication (which is usually dominated by offshore investors). NZD saw support, tipping AUD/NZD toward the YTD lows of 1.0586.
• EUR/AUD saw a brief spell of downside on headlines confirming that France's Saint-Gobain were to place a cash offer for Australia's CSR, valuing the company at A$4.3bln - but the impact has faded slightly headed into the NY crossover.
• Focus for the Wednesday session rests on the Fed minutes release, with markets on watch for any further details on the FOMC's deliberations over the easing cycle and any fresh approach to quantitative tightening.

Expiries for Feb21 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0778-80(E2.4bln), $1.0815(E732mln), $1.0895-05(E1.1bln)
• USD/JPY: Y148.50-55($566mln), Y149.72-75($595mln), Y149.95-00($1.8bln)
• NZD/USD: $0.6060(N$700mln)

EGBS: Softer in Spite of Crude Weakness

Core/semi-core EGBs have recovered from the day's weakest levels but remain softer on the day. This morning's oil market weakness will have eased pressure on the space, but did little to reverse the course of price action.

• Bunds are -16 at 133.10, trading within well-defined technical parameters that have contained price action through this week.
• The German and French cash curves have bear steepened, with the impending 10-year Bund supply also weighing on the wider space.
• Periphery spreads to Bunds are generally a touch tighter, with European equity markets having pared this morning's losses. The 10-year BTP/Bund spread remains below 150bps, currently -1.2bps at 147.5bps.
• Flash February consumer confidence headlines today's Eurozone data docket at 1500GMT/1600CET, expected at -15.5 (vs -16.1 prior).
• Tomorrow sees the release of February flash PMIs, with the usual focus on inflation dynamics.

EQUITIES: Eurostoxx 50 Futures Remain Close to Recent Cycle Highs

• Eurostoxx 50 futures remain in a bull cycle. The contract has resumed its uptrend and traded to a fresh cycle high on the last upleg. This reinforces current conditions and the importance of the recent break of resistance at 4634.00, the Dec 14 high. Moving average studies are in a bull-mode position, highlighting positive market sentiment. Sights are on 4800.00 and 4848.00, a Fibonacci projection. Initial firm support lies at 4701.60, the 20-day EMA.
• The trend condition in S&P E-Minis is unchanged and remains bullish, despite the pullback off last week’s highs. The weakness off 5066.50 is considered corrective and support to watch lies at 4967.25, the 20-day EMA. A clear break of this average would suggest potential for a deeper retracement, possibly towards the 4866.00 key support, the Jan 31 low. The trigger for a resumption of gains is 5066.50, the Feb 12 high.

COMMODITIES: Gold Extends Bounce Off Last Week's Lows

• Recent gains in WTI futures, since Feb 5, still appear to be a correction. Key short-term resistance has been defined at $79.75, the Feb 16 high. Clearance of this level would be a bullish development. On the downside, support to watch lies at $71.41, the Feb 5 low. A break of this level would reinstate the recent bearish theme and pave the way for a move towards $69.56, the Jan 3 low.
• Gold traded lower early last week and the sell-off resulted in a break of $2001.9, the Jan 17 low and a key short-term support. The breach highlights a resumption of the bear leg that started Dec 28. A continuation lower would open $1973.2, the Dec 13 low and the next key support. On the upside, the yellow metal needs to clear resistance at $2065.5, the Feb 1 high, to reinstate a bullish theme.