EU-BILL AUCTION RESULTS: 3/6/12-month EU-bills

• EUR/USD: Aug19 $1.1620-25(E2.3bln), $1.1700(E1.3bln); Aug20 $1.1660-75(E1.2bln); Aug21 $1.1600(E1.3bln), $1.1700(E1.4bln), $1.1750(E1.9bln), $1.1800(E2.9bln)
• USD/JPY: Aug20 Y148.00-10($1.2bln); Aug21 Y145.95-00($1.2bln), Y146.70-80($1.7bln)
• AUD/USD: Aug21 $0.659-00(A$1.8bln)

• Ahead of Jackson Hole, Canadian CPI is scheduled Tuesday, which is expected to show steady core inflationary pressures on a Y/Y basis (trim/median average 3.05%, unch from June). This is the first of two CPI reports before the BOC's next decision release on Sep 17 (for which a rate cut is around 25% priced).
• A pullback in employment in July has helped keep further BOC easing on the table since July's hold, and has helped USDCAD broadly consolidate around the 1.38 mark.
• However, the CPI data will be very closely eyed given stronger-than-expected core price momentum in Q2 and an upside surprise would place the technical focus on both the 20- and 50-day exponential moving average supports, located around 1.3760. A clear break would resume the correction off the early August high at 1.3879, signalling scope for a move back to 1.3576, the Jul 23 low.

BMO note “versus the stock of longs, due to the UK’s large overhang of long bonds, UK 10s30s still looks relatively too flat: but versus the flow of longs - thanks to the DMO’s cuts to planned long supply - UK 10s30s looks somewhere between about right to perhaps even slightly too steep. To put it another way, the DMO’s decision to cut back long supply has done a lot to prevent UK 10s30s steepening even further.”

• Still, they note that “UK 10s30s remains more than 20bps flatter than implied by a model based on the long bond overhangs and issuance plans of international peers. We believe this is due to some specific factors, which may unwind over time”.
• BMO highlight three levers authorities could pull to keep the UK 10s30s curve flatter:
• “The DMO could again reduce the number of Long gilts it sells”.
• “The BoE could alter its QT programme to end or reduce its sales of Long gilts”.
• “The government could alter the regulatory environment for insurance companies providing pension annuities, which presently incentivises them to replace their gilts with other assets”.
• They conclude by noting that if “both the BoE and the Treasury acted, our international model would lead us to expect UK 10s30s to flatten towards 70bp: still steeper than the US; but flatter than Italy, Spain and France. This would help the UK to reduce its ongoing cost of debt service; and ease its future funding pressures, by maintaining a longer weighted average maturity. Otherwise we would be concerned that UK 10s30s would continue to steepen towards the level currently implied by our international model".