MNI US MARKETS ANALYSIS - USD/JPY Crests at New Cycle High Post-BoJ

US TSYS: A Modest Further Rally With FOMC Ahead

• Cash Tsys rally a little further after the late open following a Japanese holiday.
• Yields are 1-1.5bps lower across the curve. The move has been aided by softer than expected UK CPI after yesterday’s CAD CPI miss, with the long-end still seeing support after yesterday’s strong 20Y auction.
• TYM4 at 110-08+ (+ 04) has continued its lift off Monday’s low of 109-24+, a move that probed the bear trigger at 109-25+ (Feb 23 low). Resistance is seen at 110-24 (20-day EMA).
• TY volumes are on the lower side at 245k, weighed by the holiday and likely to remain lackluster ahead of the FOMC decision.
• Fed: FOMC decision and SEP (1400ET), Powell’s press conference (1430ET)
• Data: Weekly MBA mortgage data (0700ET)
• Bill issuance: Tsy to sell $60bn 17-W Bills (1130ET)

STIR: Fed Rate Path Dips But Holds Three Cuts For 2024

• Fed Funds implied rates have dipped a little further overnight (0-1bps), as softer UK CPI added to yesterday’s larger spillover from CAD CPI.
• Cumulative cuts from 5.33% effective: 0.5bp Mar, 2.5bp May, 17bp Jun, 27bp Jul and 74bp Dec.
• Despite cooling, the Dec’24 implied rate remains slightly above the median dot from the Dec SEP, as has been the case since late last week.
• Today’s refreshed dot plot is in focus – see the full MNI Preview here: https://roar-assets-auto.rbl.ms/files/60396/FedPrevMar2024%20-%20With%20analysts.pdf

CENTRAL BANK PREVIEWS

MNI FED PREVIEW - MARCH 2024: Countdown to Confidence

The FOMC will hold rates at the presumed peak of 5.25-5.50% at its March 19-20 meeting, while reiterating its cut-leaning forward guidance. Incoming data provides the FOMC with both the justification and the flexibility to be patient before making the first cut. It’s unlikely the signal provided by the Dot Plot / economic projections will be much different to the last edition in December, while the Statement will be little changed after January’s overhaul. It would only take two participants getting slightly more hawkish on 2024 rate prospects to move the median dot from 3 cuts to 2.

MNI BOE PREVIEW - MARCH 2024: Vote and Guidance

The March MPC meeting will be in focus this week with two key aspects: first the vote split and second the guidance. The MNI Markets team, and the majority of analysts, expect an unchanged vote, although we do note the possibility that either Haskel, and also possibly Mann, could vote for unchanged Bank Rate at this meeting. We also expect no material change to guidance. We look at risks to both of these - as well as potential changes to the guidance.

MNI NORGES BANK PREVIEW - MARCH 2024: Cuts Still Some Way Off

The Norges Bank are unanimously expected to leave the policy rate on hold at 4.50%. Main interest will lie in the updated policy rate path projection within the March Monetary Policy Report, which will inform the guidance around how long rates will be held at current levels. The MNI Markets Team expects a small downward revision to the rate path, with key variables tracking below the December MPR forecasts. This will likely see the first full 25bp rate cut brought forward a little earlier in Q4 2024 than the current rate path indicates.

MNI SNB PREVIEW - MARCH 2024: Dovish Tilt on the Cards

Market pricing and consensus views for the SNB’s March decision are on a knife-edge between a 25bps cut or a hold at 1.75%. The decision will depend on the SNB’s longer-term assessment of inflation against deflation risks, as headline CPI has printed close to the middle of the SNB’s target range in recent months. A hold would likely be accompanied with a clearly dovish tilt in communication. Markets currently price 8-9bps of easing for the meeting, corresponding to about a 2/3 implied probability of a hold, while a 25bps cut to the deposit rate would likely be accompanied with cautious language on policy ahead.

MNI BCB PREVIEW - MARCH 2024: Focus on Potential Guidance Adjustment

All surveyed analysts believe that the Copom will continue the easing cycle with another 50bp cut, bringing the Selic rate down to 10.75%. Prior guidance in the January statement reiterated that economic conditions remain consistent with this strategy. However, several BCB officials have recently indicated the possibility of changing the forward guidance, and market participants will therefore be alert for any tweaks to the statement that provide clues on whether the easing pace could be adjusted in the coming meetings.

MNI CNB PREVIEW - MARCH 2024: Keeping Pace

Last-minute comments from Bank Board members, inspired reflection on market wagers, with remarks from Eva Zamrazilová and Jan Kubíček reducing the perceived odds that the push for a faster pace of rate cuts could muster sufficient support. Consensus looks for another 50bp reduction in the two-week repo rate, possibly coupled with cautious rhetoric from Governor Aleš Michl. We think that the sentiments of individual policymakers verbalised in their recent communications, persistent koruna weakness, and concerns about lingering risks to the inflation outlook limit the probability of faster monetary easing.

MNI CBRT PREVIEW- MARCH 2024: Hold Likely But Hawkish Surprise Possible

The Central Bank of Turkey are broadly expected to keep the one-week repo rate on hold at 45%, having communicated previously that its hiking cycle is complete, though the recent acceleration in TRY depreciation and increasing pressure on Turkish FX reserves may prompt a hawkish surprise. But given the proximity to the local elections on March 31, the central bank may decide to postpone any rate decision while it awaits more clarity on the inflation outlook.

US TSYS: OI Points To Mix Of Net Long Setting & Short Cover On Tuesday

Yesterday's uptick in Tsy futures and preliminary OI data points to a mix of net long setting (TU, FV & WN futures) and net short cover (TY, UXY & US futures).

• The rounds of net long setting were slightly more pronounced, although individual contract OI swings were relatively limited.
• This came as 2- & 5-Year yields moved away from fresh '24 highs.
• The J.P.Morgan client survey pointed to an uptick in short positioning amongst active clients last week.

SOFR: OI Suggests Long Setting Dominated On SOFR Strip On Tuesday

The combination of yesterday's rally in most SOFR futures and preliminary OI data suggests that net long setting was the dominant factor in all packs through the blues.

• Closer inspection points to some pockets of net short cover, most notably in the whites.
• End of '24 FOMC-dated OIS moved back towards the current median Fed dot (75bp of cuts).
• The dot plot & SEP will be updated aongside today's FOMC decision.

EUROPE ISSUANCE UPDATE:

Greek GGB auction results:

• E250mln of the 3.875% Jun-28 GGB. Avg yield 2.85% (bid-to-cover 3.72x)

• E1bln (E812mln allotted) of the 2.50% Jul-44 Bund. Avg yield 2.61% (bid-to-offer 2.49x; bid-to-cover 3.06x)
• E1bln (E814mln allotted) of the 0% Aug-52 Bund. Avg yield 2.52% (bid-to-offer 2.76x; bid-to-cover 3.39x).

FOREX: Further JPY Weakness Keeps USD/JPY Within Range of Multi-Decade Highs

• UK CPI came in to the soft side of expectations, however close enough to the Bank of England and sell-side view to mean little for current rates pricing. An August hike is fully priced, however the June meeting remains live, with 15bps of rate cuts currently priced in. GBP/USD saw brief weakness on the data release before the move reversed, however renewed USD buying as the pair within range of yesterday's lows 1.2668 ahead of the crossover.
• JPY is the weakest performing currency for a second session, with USD/JPY again keeping pressure on the cycle high and November 2023 best at 151.91. This level marks the bull trigger and strength through here puts the pair at multi-decade highs. An erratic move lower could raise market concern over Japanese intervention - however the authorities have, so far, remained quiet on FX moves.
• USD is the firmest performer in G10 so far, with JPY and SEK among the weakest.
• The Fed rate decision understandably takes focus going forward, and while markets expect little in terms of policy changes, the fresh dot plot and Summary of Economic Projections release will be carefully eyed. ECB speak remains thick and fast, with appearances from ECB's Lane, de Cos, Schnabel, Nagel and Villeroy all scheduled.
• Comments will follow on from Lagarde's appearance at the ECB Watchers conference - at which she coalesced around the recent central bank theme of waiting for more data by June for making a key rate decision.

Topside USD/JPY Interest Clear to See in Post-BoJ Hedging Behaviour

• Stellar session Tuesday for FX options volumes, with the BoJ and RBA decisions helping underpin activity. Over $110bln notional crossed via the DTCC – making for the busiest session for FX derivatives since February 2^nd.
• Unsurprisingly, USD/JPY hedges were front and centre. Clear demand for OTM calls and ITM puts above yesterday’s highs of 150.96 provide clear evidence of topside interest after the post-BoJ rally on Tuesday (see chart below) – a pattern that’s persisted into Wednesday trade, with some of the largest trades comprised of Y153 calls and Y151.50, Y153.50 puts rolling off at the end of April.
• The decline in G10 FX implied vols has steadied – at least in the short-end – with most 1m implied vol contracts edging higher – a pattern that’s consistent out to six month tenors – which capture likely policy pivots from the ECB, Fed and BoE, as well as pre-election political risk across the US and UK.
• More sizeable strikes rolling off today include a series of expiries that could keep EUR/USD rangebound: $1.0800(E1.1bln), $1.0810-25(E2.1bln), $1.0875-80(E1.2bln), $1.0900-10(E2.2bln), while options interest in AUD/USD could come into play on further spot weakness: AUD/USD: $0.6500(A$1.1bln).

Figure 1: Topside interest north of Tuesday high clear in JPY hedging post-BoJ

Expiries for Mar20 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0800(E1.1bln), $1.0810-25(E2.1bln), $1.0875-80(E1.2bln), $1.0900-10(E2.2bln), $1.0940-50(E924mln), $1.1000(E1.2bln)
• USD/JPY: Y147.00-20($1.3bln), Y149.00($915mln), Y150.00($1.3bln), Y150.50($1.2bln), Y151.00-10($500mln)
• GBP/USD: $1.2660-70(Gbp541mln), $1.2700-05(Gbp530mln)
• AUD/USD: $0.6500(A$1.1bln), $0.6700(A$1.2bln)
• AUD/NZD: N$1.0750(A$744mln)
• USD/CNY: Cny7.2000($2.9bln)

EQUITIES: Eurostoxx 50 Futures Continue to Trade Close to Recent Cycle Highs

• A bullish trend condition in Eurostoxx 50 futures remains intact and the contract is trading at its recent highs. Moving average studies are in a bull-mode position and this continues to reflect positive market sentiment. Sights are on the psychological 5000.00 handle. Clearance of this level would strengthen the bullish condition. On the downside, initial firm support lies at 4876.40, the 20-day EMA.
• The trend condition in S&P E-Minis remains bullish. Recent fresh cycle highs, reinforce current conditions and note that price action continues to highlight the fact that corrections remain shallow. This is an important bullish signal, reflecting positive market sentiment. Support to watch is 5175.27 the 20-day EMA. A clear break of this EMA would open 5065.11, the 50-day EMA. Sights are on 5300.00 next.

COMMODITIES: WTI Futures Record Fresh Multi-Month High Tuesday

• WTI futures traded higher Tuesday and a bull theme remains intact. Last week’s gains resulted in a break of $79.87, 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 On the downside, support to watch is $78.44, the 20-day EMA.
• The trend condition in Gold is bullish and the latest pullback is considered corrective and appears to be a bull flag - a continuation pattern. The yellow metal recently cleared $2135.4, the Dec 4 high, to deliver a fresh all-time cycle high. The break reinforces bullish conditions and opens $2206.6, a Fibonacci projection. S/T conditions are overbought, a deeper retracement would allow this set-up to unwind. Firm support is $2121.3, the 20-day EMA.