FED: Secured Rate Jump In Focus Headed Into Year-End
The NY Fed's data confirms secured rates jumped sharply on Dec 24, with a 4.40% SOFR print, up from 4.31% on Dec 23 (Wrightson ICAP had estimated 4.38% and even that lower estimate would have meant "overnight GC rates tightened even more than we expected").
- It is of course coming up on month/year/quarter-end so while rates may subside slightly in today's session, upside pressures are expected to re-emerge as soon as Friday. The September end-quarter episode, in which secured rates jumped ~20bp, is on the Fed's mind - but overall they seem calm about any potential pressures - NY Fed President Williams said on Dec 20:
- "I think there's ample liquidity to see the financial system... I think we will see a little bit more pressure in the repo markets, as we were referring to at the end of the third quarter. We'll probably see that year end. What I'm seeing right now is more of the pattern we saw before. We had just super abundant reserves, little bit more short term volatility in repo markets. One is not spilling into the Fed funds rate. It's not in any way affecting the interest rate that we're targeting at the FOMC. And the second is, these are very short lived. So I feel that we will probably see some pressures, but probably the kind that we saw, say, at the end of the third quarter, or maybe a little bit more. One sign that things are, you know, gives me some reassurances, clearly, market participants in anticipating some pressures there have been preparing for that. We're seeing, you know, taking term repo, other things to make sure they're well positioned for the year end and not caught off guard, but we'll watch and see. But again, I feel like we're well positioned in terms of the liquidity and the tools that we have."
- The Fed has seemed confident reserves remain abundant and it can continue QT until it sees particular warning signs of reserve scarcity - year-end issues present signs of strain but aren't considered to be signs of reserve scarcity in their own right. Note that the NY Fed is upping the ante for this year-end period: In addition to its daily standing repo operation at 1330-1345ET, it will offer another one between 0815-0830ET daily from Dec 30 through Jan 3, while "the aggregate operation limit of $500 billion will apply to the combined daily operations." That came after the September episode when standing repo facility takeup soared.
For its part, Wrightson ICAP notes "in many ways, the market seems reasonably well prepared for the year-end statement date. However, the artificial statement-date incentives created by current regulatory and financing reporting practices will inevitably lead to significant upside distortions in repo rates."
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USDJPY TECHS: Trades Through Support At The 20-Day EMA
- RES 4: 158.68 2.50 proj of the Sep 16 - 27 - 30 price swing
- RES 3: 157.86 High Jul 19
- RES 2: 156.88 2.236 proj of the Sep 16 - 27 - 30 price swing
- RES 1: 155.89/156.75 High Nov 20 / 15 and the bull trigger
- PRICE: 153.13 @ 13:16 GMT Nov 26
- SUP 1: 152.99 Intraday low
- SUP 2: 151.50 50-day EMA
- SUP 3: 149.09 Low Oct 21
- SUP 4: 147.35 Low Oct 8
The USDJPY trend condition is unchanged, it remains bullish and the latest short-term pullback is considered corrective. However, support at the 20-day EMA, at 153.70, has been pierced. A clear break of it would signal scope for a deeper short-term corrective pullback and this would open 151.50, the 50-day EMA. Moving average studies are in a bull-mode position highlighting a dominant uptrend. The bull trigger is at 156.75, the Nov 15 high.
CANADA: Canadian Trade Particularly Dependent On US As Tariff Talk Starts
- The Canadian dollar touched four-year lows against the US dollar overnight as President-elect Trump wasted no time proposing 25% tariffs on all imports from Canada and Mexico plus an additional 10% tariff on China.
- The snap higher for USDCAD easily more than reversed a small decline seen after Bessent’s pick as Treasury Secretary with hope of a more gradual approach to tariffs.
- Trump’s logic was that he would hit Canada & Mexico with a 25% tariff on "ALL products," until such time as they stop drugs in particular "fentanyl" and "all Illegal Aliens" from entering the US.
- As noted above, USDCAD then moved off highs after NYT sources reported Trudeau reaching out to Trump directly to address border security and US-Canada trade. This has scope for some success, especially on immigration, considering far lower levels of US border encounters with Canada than Mexico: US northern land border encounters summed to 200k in the twelve months to October vs 2.0m for southern land border encounters.
- Adjustments in trade are likely more painful however, considering we’re entering the second Trump presidency with a Canadian goods trade surplus to the US worth about twice it was at the start of the first Trump presidency (3.6% GDP in the twelve months to September vs 1.7% GDP in 2015).
- The first Trump presidency saw the Canada-US trade surplus fall to its lowest in many years, at ~1.5% GDP in 2H16 when the overall Canadian trade balance was tracking a deficit of circa 1.5% GDP.
- The historically large recent trade surpluses with the US (compared to the post-GFC period) masks a heavy merchandise trade deficit with the rest of the world to the tune of 3.7% GDP.
PRECIOUS METALS: Gold Gains on Russia Retaliation Headlines
Spot gold gains on the back of that Russia headline, with markets gearing for a likely further escalation in tensions between Moscow and Kyiv - which may imply that the suspected use of an intermediate-range ballistic missile last week was not the direct response to the ATACMS use, which is still to come.
- Gold gains ~$10/oz on the move, touching a new daily high in the process. Weekly highs still someway off at $2721.4, but is clearly benefiting from the ratchet higher in geopolitical tensions.
- Silver still outperforming on the day, however, with gold/silver ratio remaining at the daily lows, despite the recent move.
