MNI US MARKETS ANALYSIS - NZD Positioning Nears Multi-year Highs

US TSYS: Off Friday’s Highs, Harker To Headline A Thin Docket

• Cash Tsys have sold off 2.5-3bps across the curve as they pull back from Friday’s highs seen in fallout from the miss for the ISM mfg survey. The sell-off currently sees Treasuries underperform core EU FI peers.
• TYM4 has held to tight ranges overnight, currently at 110-27 (-05+) on solid volumes of 310k. Friday’s high of 111-02 marked initial resistance in a move closer to resistance at 111-06+ (50-day EMA).
• Fitch affirmed the U.S. at AA+; Outlook Stable late on Friday.
• Data: No data today, with ISM services and factory orders tomorrow.
• Fedspeak: Harker (non-voter) at 1100ET incl text – see STIR bullet. Powell speaks on Wednesday.
• Bill issuance: US Tsy $79B 13W, $70B 26W bill auctions – 1130ET

STIR: Fed Rate Path Modestly Trims ISM Mfg Slide

• Fed Funds implied rates have lifted 0.5-2bp since Friday’s close, but hold most of Friday’s ISM mfg miss-driven decline, especially for meetings further into 2024.
• Cumulative cuts: 0.5bp Mar, 6.5bp May, 22.5bp Jun, 38bp Jul and 89bp Dec.
• Gov. Kugler (voter) was last to speak on Friday, but ultimately with limited remarks: she’s optimistic that the disinflation progress will continue and that the Fed is laser-focused on bringing inflation down to 2%.
• Philly Fed’s Harker (non-voter) at 1100ET provides the sole scheduled Fedspeak today in a blank data docket. It is however on the economic impact of higher education and his comments are likely overshadowed by Chair Powell’s congressional appearances this week. Harker said Feb 22 that we’re close to cutting, just give us a “couple meetings” with his preference beyond that for a steady and slow approach to easing.

MNI Eurozone Inflation Insight – Feb 2024

Services Stickiness Defies Expectations

• Eurozone flash inflation for February printed at an unrounded +2.58% Y/Y (vs +2.5% cons;+2.77% prior) while core (ex-energy/food) was +3.08% Y/Y (vs 2.9% cons; +3.27% prior).
• While the ECB's headline inflation forecast is likely to be revised lower (owing largely to lower natural gas prices), the same is not certain for core inflation, where disinflation progress has been slower than analyst projections (highlighted in the latest instance by the February flash print).
• Our review of February's preliminary Eurozone inflation data includes breakdowns and analysis of the national inflation prints and sell-side reactions.

FOR FULL PDF ANALYSIS:

Feb2024EZCPIReview.pdf

Low FX Vols Persist, But StanChart See Normalization This Year

• Low levels of underlying FX volatility persist – with 3m implied vols across both G10 and emerging markets uniformly holding close to multi-year lows. We have written in recent weeks that low vols have helped fuel carry trade dynamics - keeping downward pressure on JPY despite expected BoJ policy normalisation.
• CHF, ZAR and CLP are the sole exceptions as the currencies capture CB uncertainty in Switzerland, election risk premium in South Africa and a strong string of economic data in Chile.
• Standard Chartered write that low levels of implied and realized vols are tied partly to the lack of CB policy rate changes over the past five months and that while global yield curves are erratic, they are moving erratically together - meaning FX volatility can remain low.
• Looking ahead they see an upward normalization of FX volatility - however this is unlikely to damage existing carry trades as risk appetite may pick up on rate cuts - but recent tight ranges across global currency rates could break out.

NZD Positioning Continues to Gain, Tipping Net to Largest in a Year

• The net NZD position continues to improve (had seen largest net additions in recent weeks) with 3.4k contracts added last week, putting the net long position at 10,057 contracts, or 20.8% of open interest - this is the largest net long since early February last year. Of the currencies surveyed, the 52w Z-score is the highest, hitting 2.27 in last week's report.
• JPY saw the most significant gain on the short side, as the net position dropped to a new 52w low of -132,705, or 42.9% of open interest. Filing coincides with USD/JPY's continued upside pressure above Y150, with the net position now lowest since late 2017 and the third lowest since the lead-up to the GFC in 2007.
• AUD saw a minor improvement of 1.2% of OI, while markets trimmed GBP, CHF and MXN in the latest week.

FOREX: EUR Furtively Firmest, But Ranges Contained For Now

• The single currency is furtively the strongest performer in G10 - showing above the Friday high with little difficulty, allowing EUR/GBP to edge further off the 50-dma resistance tested, but not broken, last week at 0.8575.
• JPY trades poorly, softer against most others after last week's uptick in volatility. Low levels of implied vols persist, with G10 and EM currency vols holding close to cycle lows - and allowing carry trade dynamics to persist and weaken the JPY.
• GBP fares well, but ranges are generally contained, as local press continues to speculate and run ahead of this week's pre-election Spring Budget. Space for tax giveaways is seen as slim - which should keep the budget less eventful and more contained, despite the generally poor polling of the ruling Conservative Party.
• GBP/USD remains gravitated to the 1.2675 50-dma, with 1.2709 marking the next resistance.
• The Monday data schedule is typically light, with few macro cues ahead of the Fed chair Powell's semi-annual testimony on Wednesday. Fed's Harker is set to speak, however his topic of focus is higher education, meaning policy-relevant comments could be limited.

Expiries for Mar04 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0800(E2.3bln), $1.0830(E500mln), $1.0850-70(E1.3bln), $1.0890-00(E620mln)
• USD/JPY: Y149.70-80($537mln), Y149.95-00($665mln), Y150.45-55($626mln), Y150.85-00($742mln)
• GBP/USD: $1.2650-55(Gbp2.1bln)
• AUD/USD: $0.6515(A$1.3bln), $0.6630(A$2bln)
• USD/CAD: C$1.3335-40($841mln), C$1.3460-65($1.8bln)
• USD/CNY: Cny7.1800($510mln), Cny7.2010($653mln)

RATINGS: Fitch Affirmed U.S., S&P Upgraded Portugal

Sovereign rating reviews of note from after hours on Friday included:

• Fitch affirmed the United States at AA+; Outlook Stable
• S&P upgraded Portugal to A-; Outlook Positive
• DBRS Morningstar confirmed Latvia at A, Stable Trend
• DBRS Morningstar confirmed the Netherlands at AAA, Stable Trend

EQUITIES: Trend Condition in E-Mini S&P Bullish With Contract Close to Cycle Highs

• Eurostoxx 50 futures traded higher Friday, delivering a fresh cycle high and this confirms a resumption of the current uptrend. Moving average studies remain in a bull-mode position too, highlighting positive market sentiment. Sights are on 4939.30 next, a Fibonacci projection. Further out, scope is seen for a climb towards a bull channel top at 4995.30. The channel is drawn from the Oct 27 low. Initial firm support lies at 4796.80, the 20-day EMA.
• The trend condition in S&P E-Minis remains bullish and the contract traded higher last week. Price action also continues to highlight the fact that corrections remain shallow - a bullish signal. Support to watch is 5036.11, the 20-day EMA. A clear break of this average would signal potential for a deeper retracement towards 4936.50, the Feb 13 low. For bulls, sights are on 5170.86, a Fibonacci projection.

COMMODITIES: WTI Futures Trading Above Key Resistance at $79.09

• WTI futures traded higher last week and in the process, the contract delivered a print above key resistance at $79.09, the Jan 29 high. The clear breach of this hurdle strengthens a bullish theme and highlights potential for a continuation higher near-term, towards $81.70, a Fibonacci retracement. On the downside, support to watch is $76.06, the 50-day EMA. A break would instead signal a possible top.
• Gold traded sharply higher Friday, extending the recovery that started Feb 14. The climb has resulted in a break of resistance at $2065.5, the Feb 1 high. This strengthens a bullish theme and attention turns to resistance at $2088.5, the Dec 28 high. Clearance of this level would open $2097.1, a Fibonacci retracement point. Initial firm support to watch lies at $2025.8, the 50-day EMA.