MNI US MARKETS ANALYSIS - JPY Firms, But Kanda Stops Short of Intervention Confirmation

US TSYS: Midrange at Midweek

• Cash Treasuries running lower, yields near steady after a quiet overnight session, curves are steeper (2s10s +0.192 at -36.156). Quiet overnight session, month end extension trade absent as yet ahead of the early week close for the Easter holiday.
• Treasury futures trade mildly weaker, off recent lows as rates hold to a narrow overnight range: light volumes, the Jun'24 10Y (TYM4) contract is just over 200k, trades 110-19 last (-1.5) with initial technical support at 110-08+/109-24+ (Low Mar 21 / 18 and the bear trigger); resistance at 110-30.5 (Mar 21/22 high).
• Economic data limited to MBA Mortgage Applications at 0700ET, capped by revised Wholesale sales, inventories at 1000ET.
• Scheduled Fed-speak: Fed Governor Christopher Waller will discuss his economic outlook at an event hosted by the Economic Club NY this evening at 1800ET, text and Q&A is expected.
• US Treasury auctions continue with $28B 2Y FRN and $60B 17W Bills at 1130ET, $43B 7Y Notes (91282CJU6) at 1300ET.
• Short end SOFR futures mildly weaker while projected rate cut pricing continues to ebb: May 2024 at -13.9% w/ cumulative -3.5bp at 5.291%; June 2024 -63.1% w/ cumulative rate cut -19.3bp at 5.134%. July'24 cumulative at -29.6bp, Sep'24 cumulative -48.6bp at 4.841%.

US TSYS: OI Points To Long Setting In The Belly After 5-Year Auction

The combination of the twist flattening of the Tsy futures curve on Tuesday and preliminary OI data points to a mix of long cover (TU), long setting (FV, TY & US) and short cover (UXY & WN).

• The most notable movement in net positioning came via the apparent net long setting across the FV & TY contracts, with the smooth passage of 5-Year supply helping Tsys rally ahead of the close.

EUROPE ISSUANCE UPDATE:

Italian BTP/CCTeu auction results

• E3.5bln of the 3.35% Jul-29 BTP. Avg yield 3.21% (bid-to-cover 1.42x)
• E1.25bln of the 3.85% Dec-29 BTP. Avg yield 3.24% (bid-to-cover 1.70x)
• E3.5bln of the 3.85% Jul-34 BTP. Avg yield 3.67% (bid-to-cover 1.39x)
• E1.5bln of the 1.15% Oct-31 CCTeu. Avg yield 5.1% (bid-to-cover 1.76x).

• E3bln (E2.461bln allotted) of the 2.40% Nov-30 Bund. Avg yield 2.3% (bid-to-offer 1.74x; bid-to-cover 2.12x).

FOREX: JPY Surges as Markets Wary of Intervention Risks

• Having touched fresh multi-decade highs overnight, USD/JPY trades sharply lower headed into NY hours as wires confirmed that the Bank of Japan, Ministry of Finance and FSA are set to meet to discuss financial markets, raising speculation that currency market intervention could be imminent. USD/JPY corrected sharply lower on the headlines, fading 50 pips to new daily lows, and opening a ~75 pip cap with the overnight high. Resultingly, JPY is comfortably the strongest performer in G10.
• No surprise to see a spike in volumes for JPY futures on these Japanese headlines - over 8,000 contracts traded inside 60 seconds - but worth noting we saw similar moves and volumes spikes on a handful of occasions in October last year that generated speculation of intervention (e.g. ~10k on Oct26, ~20k on Oct17), after which the BoJ confirmed that no intervention had taken place at all over that month.
• The USD is mixed, with the USD Index broadly flat - early strength was reversed on BoJ headlines, allowing the likes of EUR/USD, GBP/USD to edge off daily lows. NOK is the poorest performer on the day, following oil market softer, as Brent crude futures edge just over 1% off highs.
• The Riksbank kept policy unchanged - as expected - but flagged May and June as potential meetings at which the bank could ease policy going forward. EUR/SEK traded firmer in response, but stopped short of a material test on the 200-dma at 11.5173.
• Focus shifts to the post-meeting media briefing from Japan's top currency diplomat and an appearance from Fed's Waller, who is set to address the economic outlook.

FX OPTIONS: USD/JPY Downside Pervades Following Intervention Chatter

• Front-end JPY vols turned bid on the initial Japan headlines, with the news confirming a meeting between the BoJ/FSA/MoF putting overnight vols clear of 10 points as markets rushed to price the risk of imminent intervention - a premium that's hold well in 1w vols, which have partially reversed the decline posted off the initial BoJ rate hike.
• Following the initial flurry of headlines and the spike in JPY futures volumes, downside exposure in USD/JPY was in firm demand via options, as Y152.50 and Y151.00 put strikes traded in decent size - tipping the put/call ratio to 4/3 over the past hour or so - bolstering overall options notional to sit ahead of average for this time of day.
• Outside of JPY markets, CHF remains a currency of focus, with trades consistent with large USD/CHF vol hedges helping prop up activity (0.8955 straddles) as well as large ITM puts, with 0.9360 and 0.9140 put strikes seeing solid interest.

EQUITIES: Eurostoxx 50 Futures Reach Fresh Cycle High

• A bullish trend condition in Eurostoxx 50 futures remains intact and the contract traded to a fresh cycle high Tuesday. The climb once again confirms a resumption of the uptrend as the contract pulls away from the 5000.00 handle. Moving average studies remain in a bull-mode position, highlighting positive market sentiment. Sights are on 5074.7, a Fibonacci projection. Initial firm support is at 4926.10, the 20-day EMA.
• The trend condition in S&P E-Minis is unchanged and remains bullish. Last week’s extension reinforces this theme and the break of 5257.25, Mar 8 high, confirmed a resumption of the uptrend. Note that moving average studies remain in a bull-mode position reflecting positive market sentiment. Sights are on 5407.23, the top of a bull channel drawn from the Jan 17 low. Initial firm support is 5218.00, the 20-day EMA. A move lower is considered corrective.

COMMODITIES: Gold Briefly Trades to $2200 Tuesday, Conditions Remain Bullish

• A bull theme in WTI futures remains intact and the latest pullback appears to be a correction. Recent gains resulted in a break of $79.87, the Mar 1 high. The move higher confirms a resumption of the uptrend that has been in place since mid-December last year. Sights are on $83.87 next, the Oct 20 ‘23 high. A break of this level would open $84.87, the Sep 15 ‘23 high and a key resistance. Support to watch is $79.83, the 20-day EMA.
• The trend condition in Gold remains bullish and the move higher on Mar 21, reinforces this condition. The initial rally delivered another all-time high and confirmed a resumption of the primary uptrend. Moving average studies are in a bull-mode condition, reflecting positive market sentiment. This signals scope for a climb towards $2230.1, a Fibonacci projection. Key short-term trend support has been defined at $2146.2, the Mar 18 low.