SOUTH KOREA: Governor Rhee Injects Fresh Uncertainty Into BoK Outlook
- Despite the political turmoil in Korea of late, financial markets took comfort from a well regarded Central Bank and its ability to maintain markets.
- At the last BOK meeting (January 16) market expectations were for a cut in interest rates, and the BOK surprised most by remaining on hold.
- The BOK Governor Rhee in his subsequent press conference was at pains to point out that the BOK is in a rate cutting phase.
- Since that time there has not been a finalization of the political malaise gripping Korea, and economic data has surprised to the upside.
- Yet in an interview on Thursday on BBG TV, Governor Rhee pushed the emphasis onto the government saying, “ That is why I’m emphasizing more fiscal stimulus is necessary,” he said when asked by the BBG journalist about mounting speculation for a rate cut at the February 25 meeting.
- Governor Rhee added a further that a rate cut this month is by no means a done deal.
- A Central Bank Governor’s reputation is dependent on their ability to carefully and successfully guide the markets expectations as they navigate managing the economy.
- The market reaction has been for short term implied policy rates to tick up. The 3 month is back to 2.90%, up 4bps, while the 6 month is up to 2.66%, alos +4bps firmer. The 1yr outlook still implied around 50bps worth of further BoK cuts.
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AUD: A$ Weakens As Underlying Inflation Falls Towards Band
AUDUSD fell to 0.6212 following November CPI data showing a 0.3pp drop in trimmed mean inflation to 3.2% y/y, thus increasing rate cut expectations. The pair is currently down slightly today to 0.6228 after a high of 0.6242 before the data release. The USD index is range trading and little changed.
- While November headline inflation picked up 0.2pp to 2.3% y/y, the focus is on trimmed mean given current state & federal electricity rebates and this underlying measure eased to 3.2% y/y, where it was in September. Q4 vacancies rose 4.2% q/q, the first quarterly rise since Q2 2022.
- Aussie is also weaker against other major currencies with AUDJPY down 0.1% to 98.37 after a low of 98.16. AUDNZD is 0.1% lower at 1.1052. AUDEUR is down 0.2% to 0.6015 after falling to 0.6004 and AUDGBP -0.1% to 0.4987 following 0.4979.
- Equities are mixed with the ASX up 0.5% & S&P e-mini +0.2% but Hang Seng down 0.4%. Oil prices continue to rally with WTI +0.6% to $74.71/bbl. Copper is down 0.1% and iron ore is around $97.50/t.
- Later the Fed’s Waller speaks on the economic outlook and the December FOMC minutes are published. US jobless claims, December ADP employment and November consumer credit as well as November German orders & retail sales and December euro area European Commission survey print.
JGBS: Cash JGBs Heavy, Fresh Cyclical High For 10YY
Just ahead of the Tokyo lunch break, JGB futures are sharply weaker, -38 compared to the settlement levels, after extending overnight weakness sparked by US tsys.
- US tsys finished 2-7bps cheaper yesterday, with a steeper curve, following stronger-than-expected ISM services and JOLTS data. Currently, cash US tsys are ~1bp richer in today’s Asia-Pac session.
- Japanese yields are running at the highest since July 2011, which means Tuesday’s sale of 10-year debt is already underwater, so that may trigger knee-jerk selling from short-term traders.
- Cash JGBs are 1-3bps cheaper across benchmarks in today Tokyo session. The benchmark 10-year yield is 2.5bps higher at 1.61% after setting a fresh cycle high of 1.18%.
- Meanwhile, some investors aren’t giving up hope for a surprise BOJ interest-rate hike this month -- demand is picking up for downside JGB put options that expire just after this month’s meeting. (per BBG)
- Swaps are mostly cheaper, with rates flat to 4bps higher. Swap spreads are mixed.
China December FX Reserves Decrease Slightly
China’s foreign exchange reserves stood at USD3.2 trillion at the end of December, down USD63.5 billion from November, a decrease of 1.94%, Securities Daily reported citing data by State Administration of Foreign Exchange. The decline was mainly attributed to a stronger U.S. dollar which led to an overall fall in global asset prices. Export resilience, stable cross-border capital flows and the implementation of additional policies will help support the basic stability of fx reserves, the newspaper said citing analysts.
