MNI US MARKETS ANALYSIS - JPY Position Tips Net Long

MNI (LONDON) - Highlights:

• Democratic National Convention kicks off, but payrolls revisions, Fed minutes & Jackson Hole in greater focus
• Short-covering phase tips JPY position to net long for first time in three years
•  Both Daly and Kashkari acknowledge pressure to cut rates

US TSYS: Modestly Firmer Ahead Of A Thin Docket

• Treasuries are off highs but hold onto modest rallies ahead of a thin docket, underperforming rallies in EGBs. 
• The thin docket could see some attention on headlines from the Democratic National Convention but greater focus is likely on Wednesday’s preliminary payrolls benchmark revision and FOMC Minutes before Powell’s Jackson Hole appearance on Friday. 
• Goldman Sachs on recent data: “After the July jobs report released on August 2 triggered the “Sahm rule,” we raised our 12-month US recession probability from 15% to 25%. Now, we have moved it back down to 20% because the data released since August 2—including retail sales and jobless claims this week—shows no sign of recession.”
• Cash yields are 0.3bp higher (3s) to 1.5bp lower (30s), with declines led by the long end for a modest bull flattening. 
• 2s10s at -17.6bps (-1bp) keeps to Thursday’s post-jobless claims further pull back from recent steeps. 
• TYU4 at 113-06+ (+ 03) is at the high end of today’s initial levels but remains within Friday’s range, amidst low volumes nearing 250k. 
• The trend structure is deemed bullish, but volatility of recent weeks leaves some way to go before resistance at 114-03 (Aug 6 high) before a bull trigger at 115-03+ (Aug 5 high). 
• Data: Conference Board leading index (1000ET)
• Fedspeak: Waller gives opening remarks (0915ET)
• Bill issuance: US Tsy $76B 13W bill, $70B 26W bill auctions (1130ET)
• Politics: Democratic National Convention Aug 19-22 in Chicago, Illinois 

STIR: Daly and Kashkari Acknowledge Cuts But Urge Prudence

• Fed Funds implied rates are little changed from Friday’s close, holding with a little less than 100bp of cuts over the three meetings to year-end. 
• Cumulative cuts from 5.33% effective: 33bp Sep, 63bp Nov, 96bp Dec, 120bp Jan. 
• There have been further unscheduled Fed appearances since Friday, with both Daly and Kashkari pushing back on 50bp cut expectations. 
• Kashkari (non-voter), recently one of the most hawkish on the FOMC, in an interview with WSJ released today from Fri: "The balance of risks has shifted, so the debate about potentially cutting rates in September is an appropriate one to have”. 
• From the WSJ’s write-up: “Still, Kashkari said he didn't see any reason to lower interest rates in increments of larger than a quarter percentage point because layoffs remain low and claims for unemployment benefits don't suggest a notable deterioration.” 
• Daly (’24 voter) in an interview with the FT, released overnight from Thu: Recent US economic data have given [SF Fed’s] Daly “more confidence” that inflation is under control and it’s time to consider adjusting benchmark borrowing costs, but the economy is “not in an urgent place,” […] Daly urged a “prudent” approach to policy, pushing back against concerns about the risk of a sharp slowdown in the US economy. 
• Ahead, Gov. Waller (voter) gives welcoming remarks at a 2024 summer workshop at 0915ET with the topic and style of appearance likely limiting market-moving headlines. 

US TSY FUTURES: Short Cover In FV Future Seen On Friday

STIR: OI Suggests Long Setting Dominated In SOFR Futures On Friday

Short-Covering Spur Tips JPY Position Net Long

• The much-watched JPY short-covering rally posted off the July lows in spot may have reached a peak in Friday's CFTC report, which shows the overall net position has tipped into neutral/net long for the first time since early 2021.
• Sharp covering of shorts across the leveraged funds and asset manager investor classes is largely responsible (however we note these two groups are still marginally net short the currency) and has tipped the 52w Z-score aggressively higher, hitting 3.2 on an outright basis and 4.1 when measured as a % of open interest.
• Outside of the JPY, Friday's CFTC update shows a deterioration of the net longs across both GBP and MXN, which slip further of recent highs in positioning. CAD has now solidly replaced JPY as the currency against which markets hold the largest net short, holding close to a 52w low of 55.6% of open interest last week.
• Full update here: 

MNI UK Deep Dive: FQ3 DMO Operations

• We set our our expectations for the DMO's issuance operations in the FQ3 period (October to December) where there are 19 auctions and a linker syndication scheduled.
• The only new conventional gilt that we are expecting in the quarter is a new 3-year.
• We set out our expectations for issuance in each maturity bucket for the upcoming quarter.

For the full PDF click here.

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FOREX: JPY Re-Engages Rally, Keeping Greenback Subdued

• Pervasive JPY strength has taken focus early Monday, with a confluence of light volumes, short-covering, pre-Jackson Hole positioning building on a JPY rally that was potentially initially triggered by news of a takeover offer from Japan's Seven & I from Canada's Couche-Tard. The move lower has raised focus on intraday support and levels seen lower at 145.52 (the 50% retracement of the corrective bounce off 141.70) while 15 min candles identify ~146.55-60 as a key pivot point.
• USD/JPY losses have worked against the USD Index and kept the greenback subdued across the board. Resultantly, GBP/USD has broken higher and is extending the bounce off medium-term support at the 200-dma, which successfully contained the sell-off into the early August low. Resistance at 1.2955 has been cleared on Monday's strength, but the bull trigger and mid-July high at 1.3044 is out of reach for now. Prelim UK PMI numbers due later this week should provide the latest look at services prices and overall economic performance ahead of September's BoE decision on the 19th.
• Elsewhere, antipodean currencies trade well, with NZD and AUD firmer against most others. AUD/USD has struggled to make headway toward $0.67 so far, but a solid start for equities at the Wall Street open could lend support toward resistance at 0.6693.
• Focus for the duration of the Monday session turns to July's Leading Index from the US as well as opening remarks from Fed's Waller at a policy workshop, and a late appearance from ECB's Rehn. 

OPTIONS: Expiries for Aug19 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0850(E529mln), $1.0980(E625mln), $1.0996-02(E569mln), $1.1010-15(E595mln), $1.1090(E765mln)
• USD/JPY: Y147.75-80($842mln)
• GBP/USD: $1.2850(Gbp645mln)
• AUD/USD: $0.6675(A$781mln)
• USD/CAD: C$1.3700($575mln), C$1.3900($1.3bln)
   

Gold Trades Close to Friday Highs, Targets Resistance at $2528

• WTI futures rallied sharply higher on Aug 12 . The move undermines a recent bearish theme and price traded through both the 20- and 50-day EMAs. A resumption of gains would signal scope for a climb towards $80.77, a Fibonacci retracement. Clearance of this level would open $83.58, the Jul 5 high. On the downside, the contract has pulled back from its recent high. A stronger sell-off would refocus attention on key support at $71.67, Aug 5 low.
• Gold is holding on to its latest gains. Friday’s rally delivered a fresh all-time high and the breach of resistance at $2483.7, the Jul 17 high, confirmed a resumption of the primary uptrend. Note that moving average studies remain in a bull-mode set-up and this continues to highlight a dominant uptrend. The focus is on a climb towards $2528.4, a Fibonacci projection. Initial support to watch lies at $2432.6, the 20-day EMA.

E-Mini S&P Holds Onto Last Week's Gains

• Eurostoxx 50 futures traded sharply higher last week, extending the recovery that started Aug 5. The contract has traded through the 20-day EMA and attention is on resistance at the 50-day EMA, at 4866.49. A clear break of this average would undermine the recent bearish theme and highlight a stronger reversal. This would open 4951.00, the Jul 31 high. For bears, a reversal lower would refocus attention on the bear trigger at 4494.00, the Aug 5 low.
• S&P E-Minis traded higher last week and the contract is holding on to its gains. The rally last week resulted in a break of the 50-day EMA. This highlights a stronger reversal and signals the end of the corrective cycle between Jul 16 - Aug 5. Sights are on 5600.75, Aug 1 high. A break would set the scene for an extension towards key resistance and the bull trigger at 5721.25, the Jul 16 high. Initial support lies at 5363.8, the 50-day EMA.

Date	GMT/Local	Impact	Country	Event
19/08/2024	-		GB	DMO to hold quarterly consultation investors / GEMM consultation
19/08/2024	1315/0915		US	Fed Governor Christopher Waller
19/08/2024	1530/1130	*	US	US Treasury Auction Result for 26 Week Bill
19/08/2024	1530/1130	*	US	US Treasury Auction Result for 13 Week Bill
20/08/2024	0600/0800	**	DE	PPI
20/08/2024	0730/0930	***	SE	Riksbank Interest Rate Decison
20/08/2024	0800/1000	**	EU	EZ Current Account
20/08/2024	0900/1100	***	EU	HICP (f)
20/08/2024	0900/1100	**	EU	Construction Production
20/08/2024	1100/0700	***	TR	Turkey Benchmark Rate
20/08/2024	1230/0830	***	CA	CPI
20/08/2024	1230/0830	**	US	Philadelphia Fed Nonmanufacturing Index
20/08/2024	1255/0855	**	US	Redbook Retail Sales Index
20/08/2024	1530/1130	*	US	US Treasury Auction Result for Cash Management Bill
20/08/2024	1845/1445		US	Fed Governor Michael Barr