JGBS: A Little Firmer, No Surprises From BoJ
JGBs futures extended on a modest morning uptick after the BoJ provided no surprises, leaving its monetary policy settings unchanged, alongside a mark higher in its inflation expectations, mark lower in immediate GDP forecast and changes to language that reflected those dynamics e.g. inflation expectations have risen. Note that the central mantra of the Bank’s monetary policy outlook remains unchanged, as it reiterated its forward guidance (including the dovish bias within), while it flagged the risks that commodity prices and swings in FX movements pose to inflation.
- Elsewhere, local press reports pointed to PM Kishida reshuffling his cabinet in September, which isn’t a new idea.
- JGB futures have nudged away from best levels ahead of the close, aided by the resumption of gas flows through the Nord stream 1 pipeline that runs between Russia & Europe. The contract is +!0 last, while cash JGBs run little changed to 2bp richer on the day, bull flattening.
- National CPI data and a liquidity enhancement auction for off-the-run 5- to 15.5-Year JGBs.
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AUD: A$ Drifts Lower
AUD/USD has drifted lower through the afternoon session, currently at 0.6955/60, down from earlier session highs of +0.6980. Note the pair couldn't breach the 0.7000 level yesterday.
- A sharp move lower in front end yields (2yr off by 12bps) has weighed noticeably on the AU-US yield spread. We started the day at +10bps but look set to finish it around -8bps.
- RBA Governor Lowe stated the central bank is considering hikes in the 25 or 50bps magnitudes (and not larger). This, coupled with his doubts around year RBA market pricing, has been a clear driver of today's trends in the rates space.
- Offsets have come from higher equities, with US futures pointing to solid open when trading resumes this evening. Regional equities are also higher.
- Commodities have also recovered some ground, with iron ore back above $115 at one stage, but we are back at $113 now. Oil is also firmer, while copper has been steady.
- Tomorrow's data calendar has the Westpac Leading Index, while Thursday sees the preliminary PMI prints for June.
JGBS: Curve Twist Steepens
JGB futures chipped away at their overnight losses during the Tokyo session and now sit 6 ticks below yesterday’s settlement level, over 30 ticks off their overnight low, although trading conditions remain impaired.
- There wasn’t much in the way of local news to digest after the re-open (PM Kishida & Finance Minister Suzuki offered little in the way of meaningful rhetoric), with cross-market impetus helping futures to pare some of its overnight losses during the morning
- Cash JGBs out to 20s are generally within 0.5bp of yesterday’s closing levels, trading on the richer side, although the broader cheapening observed in the global fixed income space on Monday has seemingly facilitated ~1.5bp of cheapening for 30s and 40s, with some twist steepening in play on the curve as a result.
- The exception to rule for paper out to 20s is 5s, with outperformance there (equating to 1.5bp of richening) aided by 5-Year JGB supply, which was absorbed smoothly enough. The low price of the auction matched broader estimates (as proxied by the BBG dealer poll), while the price tail saw a very modest widening, although remained tight in the grander scheme of things. Things were a little softer on the cover ratio side, with the bid/cover moving to the lowest level observed at a 5-Year JGB auction since the COVID-induced vol. of early ’20 (likely on the well-documented market functioning issues).
- Wednesday’s local docket will be headline by the latest round of BoJ Rinban operations.
EURGBP TECHS: Bullish Focus
- RES 4: 0.8852 50.0% retracement of the Mar ‘20 - Mar ‘22 bear leg
- RES 3: 0.8762 1.00 proj of the Apr 14 - May 12 - 17 price swing
- RES 2: 0.8721 High May 26 2021 and Jun 15
- RES 1: 0.8634 High Jun 16 and the bull trigger
- PRICE: 0.8577 @ 06:28 BST Jun 21
- SUP 1: 0.8512 Low Jun 16
- SUP 2: 0.8495 50-day EMA
- SUP 3: 0.8433 Low May 23
- SUP 4: 0.8393 Low May 17 and a key support
EURGBP is unchanged. The recent pullback is considered corrective and the outlook remains bullish. The breach last week of resistance at 0.8619, May 12 high, confirmed a resumption of the current uptrend. The break reinforces bullish conditions and moving average studies continue to point north. The focus is on a retest of 0.8721, the Jun 15 high and bull trigger. A break would resume the uptrend. Firm support is seen at 0.8495, the 50-day EMA.
