Japanese Yen Outperforms This Morning

Markets

Yesterday’s slightly disappointing US ADP job report reverberated through the long end of the yield curve in particular. Maturities from 10 year to 30 year shed between 6.1 and 8.9 bps. The 10-y tenor dropped below support at 4.13% (50% retracement on the 2023 rise) but held above the next reference that pops up shortly after at 4.09%. Declines in the 5-7y bucket amounted to 3.1 and 5 bps while the front even managed to eke out a marginal 1.6 bps gain. It could mean that current pricing for Fed rate cuts (66% chance for a start in March with a cumulative 125 bps discounted by end 2024) went far enough. We don’t want to draw that conclusion just yet with Friday’s official payrolls report still due. German yields trailed US peers in a similar shift of the curve. Moves varied between +1 bp up front and -7.5 bps at the long end. Gilts outperformed. As bets for a quick and sharp Fed/ECB pivot rise, markets find it increasingly harder to assume the Bank of England to buck the trend. Money markets are currently pricing in a first full rate cut in June compared to August last week with a 60% chance for a move in May. We immediately shift towards Asian dealings this morning to dive into the Japanese bond market. JGB’s hugely underperform, with extensions to US Treasuries, following a triple whammy. Japanese yields rally 6.2 (2-y) to 12.6 (10-y) bps. It started with BoJ deputy governor Himino yesterday portraying the different scenarios in case the era of negative interest rates would be over. He indicated that the first rate hike since 2007 wouldn’t be as harmful as some fear. Governor Ueda in an appearance before parliament this morning flagged several options about which policy rate to target upon ending the sub zero rate experiment. Simply talking about hikes fuels market speculation about actually doing so, turning the December meeting into a live one. The third blow was directly related to bets for a BoJ policy twist with a 30-year bond auction completely flopping. Bid-to-cover dropped to the lowest since 2015 with the tail the biggest on record. The Japanese yen outperforms this morning, pushing USD/JPY to the lowest (146.32) since early September. EUR/JPY extends a losing streak to nine days with the pair currently trading at 157.45. Moves in other currency pairs are muted. EUR/USD is trading stable after a late-session hit yesterday pushed the pair sub 1.08 towards 1.076. Sterling’s momentum eased. EUR/GBP bounced off support at 0.8557 to finish at 0.857. Today’s uninspiring economic calendar paves the way for technical trading going into tomorrow’s payrolls as the final input for the Fed’s policy meeting next week.

News & Views

The National bank of Poland (NBP) yesterday left its policy rate as expected unchanged at 5.75%. Activity remains low, despite increasing again in Q3. The labour market remains strong but employment growth slows. Inflation slowed to 6.5% in November, which the NBP mainly attributes to a decline in core inflation. In underpinning the decision, the NBP stated that ‘the adjustment in the NBP interest rates introduced in previous months, together with uncertainty about a future course of fiscal and regulatory policies and their impact on inflation, the Council decided to keep the NBP interest rates unchanged’. As the political situation (formation of a new government is in the early stages) apparently is an important factor the NBP, the policy rate might stay stable through early 2024. The prospect of a guarded easing cycle and a new EU-friendly government keeps the zloty near the strongest levels since the corona crisis (currently EUR/PLN 4.32). NBP governor Glapinski holds a press conference this afternoon.

The Bank of Canada also kept the policy rate steady at 5.0% yesterday. The BoC indicated that it is still concerned about the risks to the inflation outlook and that it remains prepared to raise to policy rate further if needed. However, in its economic assessment, the BoC acknowledges that higher interest rates are clearly restraining spending while the labour market continues to ease as job creation has been slower than labour force growth. The BoC assumes that this quarter, the economy is no longer in excess demand. Inflation eased to 3.1% Y/Y in October. As is the case for most other central banks of developed countries, including the US, markets ‘are sure’ that the BoC has finished its hiking cycle and even see a >50% chance of the BoC starting its easing cycle in March of next year. The BoC decision had no noticeable impact on the Canadian dollar. USD/CAD followed the broader USD rebound closing near 1.36. In a broader perspective the loonie is holding op rather well considering the decline in the oil price.