US TSYS: Cheaper Start
Cash tsys have opened dealing 0.5-2 bps cheaper across the major benchmarks, the curve has bear flattened. Fedspeak from Gov Waller this morning noted that he sees two more 25bp increases this year and that policy will need to remain restrictive for some time. Waller also said that September is a live meeting for rate policy.
- TYU3 deals at 112-29+, -0-04, a narrow 0-02 range has persisted thus far.
- A thin data docket in Asia today leaves participants on headline watch.
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NZD: Overnight Implied Volatility Elevated Ahead Of FOMC Meeting
NZD/USD overnight implied volatility sits at 17.3650% as option markets price in a $0.6095-$0.6225 range in the aftermath of today's RBNZ meeting.
- Implied volatility sits a touch below levels seen before May's RBNZ meeting and well within the yearly range.
- Overnight risk reversals are skewed to the downside, however the skew is only marginally and briefly turned positive last week.
- Bulls look to target a break of the $0.62 handle which opens the 200-Day EMA ($0.6233). On the downside bears immediate focus is on the 20-Day EMA ($0.6126).
- The MNI preview of the FOMC meeting is here.
Fig 1: NZD/USD Overnight Implied Volatility
Source: MNI/Bloomberg
JGBS: Futures Back Close To Week To Date Lows on Core Yield Surge
The surge in core yields saw JGB futures finished lower in post-Tokyo trade, JBU3 back to 148.12, -.14. This came after we got to fresh highs near 148.40 earlier in Tuesday's session. We haven't spent much time below 148.10 this week, which may be an early focus point in Wednesday trade.
- Core bonds were pressured by the sharp move higher in UK yields, which came post better than expected UK jobs/wages data. For the US, yield weakness post the CPI print proved to be short lived. The US 2yr yield is back to mid Mar levels (near 4.67%).
- The local data calendar is empty today. We get data tomorrow (May trade balance, core machine orders and weekly investment flows) ahead of Friday's BoJ decision.
- MNI also reported that there is no prospect that the Bank of Japan will scrap yield curve control this year, because even if policymakers become confident of a virtuous cycle between wage hikes and price rises they would still want to avoid any sharp rise in interest rates, MNI understands.
- Whilst it is possible that the BOJ could adjust the parameters of its yield curve policy, perhaps by modifying the zero percent target rate at the centre of its -0.5% to 0.5% tolerance band for the 10-year bond, this would only be to mitigate unwanted bond market distortions. See this link for more details.
AUD: AUD/JPY: Fresh YTD High, Resistance Seen Above ¥95
AUD/JPY printed its highest level since early November yesterday, and a fresh year to date high. The pair rose ~0.7%, and last prints at ¥94.85/95.
- Rising US Tsy Yields post CPI weighed on the yen and AUD/JPY extended gains through the New York session before marginally paring gains after facing resistance above ¥95.
- Bulls look to sustain a break of ¥95 handle which opens up ¥95.99 a fibonacci projection.
- On the downside, bears look to first break below ¥94. From here they can target the 20-Day EMA (¥92.71).
- Today's FOMC meeting provides the next risk event for the pair. The Fed is expected to hold rates, however attention will be on any forward guidance that the bank provides.
- Looking ahead; tomorrow's Australian May Labour Market Report, the unemployment rate is expected to hold steady at 3.70%, and Friday's BOJ monetary policy decision where no change is expected provide further event risks.
Fig 1: AUD/JPY Daily Spot, EMAs
Source: MNI/Bloomberg
