JGBS: Futures Lower Amid Softer US Tsys/Higher Oil, Recent Ranges Holding

Hong Kong Exchanges and Clearing Limited (HKEX) announced Monday the addition of the one-year Loan Prime Rate into the floating reference rate options under Northbound Swap Connect, the latest in a series of initiatives to expand the scheme, Securities Daily reported. A total of 31 onshore and offshore institutions conducted 53 transactions of one-year LPR referenced interest rate swaps, with an aggregate nominal value of CNY6.46 billion. This will provide more tools for international investors to manage the interest rate risk of their yuan-denominated portfolio, the newspaper said.

There remains room for a policy interest rate cut and a lower Loan Prime Rate this year, given the need to boost domestic demand and support the property sector, said Wang Qing, analyst at Golden Credit Rating, after September’s LPR was left unchanged on Monday. The People’s Bank of China could guide the five-year LPR lower in Q4 to drive down mortgage rates, Wang estimated. However, Dong Ximiao, chief researcher at Merchants Union Consumer Finance, argued that cutting the reserve requirement ratio would be preferable to interest rate reductions, noting that a sharp fall in the LPR would pressure banks’ net interest margins at a time when scope to reduce deposit rates is limited. (Source: Shanghai Securities News)

The BBDXY range overnight was 1195.85 - 1199.48, Asia is currently trading around 1196, -0.01%. The USD stalled just above 1200 for the second time and drifted lower in the overnight session. Price action stood out in that we had some clearly hawkish Fed speak relative to market expectations which the USD completely ignored. Was that the extent of the bounce ? If so, it's a pretty poor effort. Should the market stay below 1200 then the focus will again turn back to the pivotal support back towards the 1180 area.

• Bloomberg - “Musalem, Bostic, and Hammack were leaning on the more hawkish side,” said Macquarie’s Thierry Wizman. “I am surprised that the USD is weakening and stocks are rising. It seems as if no one really believes the Fed or Powell when they admonish the market for thinking that there are 4-5 more rate cuts on the way.”
• Robin Brooks on X: “The last big catalyst for Dollar downside was Jackson Hole and Powell's very dovish speech. But that bullet has now been fired, so now it's up to the economy and whether we really go into recession. If we do, the Dollar falls further, but if there's no recession the Dollar rises.”
• “Aroop Chatterjee, a strategist at Wells Fargo, while warning that “further deterioration in fundamentals or Fed institutional credibility could renew downward pressure” next year. “If the Fed retains operational independence, the USD may remain resilient,” he said. “However, if the administration succeeds in reshaping the FOMC’s voting balance, markets could increasingly price in a compromised Fed in 2026” - BBG

Fig 1: BBDXY 2H Chart

Source: MNI - Market News/Bloomberg Finance L.P