JPY: Greenback Gains Prompt USD/JPY To Recoup Losses
USD/JPY unwound its initial sell-off on Thursday, eking out some gains at the end of the day, extending its winning streak to five consecutive days. Post-ECB greenback strength facilitated recovery, with Eurozone policymakers deemed not hawkish enough.
- Note that the pair's RSI remains above 70, pointing to overbought technical conditions, although the spot rate returned below its upper Bollinger band on Thursday. Should the RSI pull back under the 70 threshold, bears be on alert for any further signs of the rate topping out.
- In the options space, USD/JPY 1-month risk reversal snapped a four-day streak of gains Thursday. But calls remain favoured over puts and the risk reversal still operates near its one-month highs.
- The yen was the second best G10 performer Thursday amid weak performance from global equity markets and a rebound in the VIX index, yet relative interest-rate dynamics prevented it from beating the U.S. dollar.
- Spot USD/JPY has added 10 pips this morning and last deals at Y134.46. Bullish focus falls on the psychologically significant number of Y135.00 and a break here would bring Jan 31, 2002 high of Y135.15 into play. Bears look for a retreat past Jun 7 low of Y131.87.
- Monthly PPI data is the only point of note on the local economic docket today. Worth adding that PM Kishida will make comments on the "Free and Open Indo-Pacific" at a regional security conference in Singapore.
- Next week's highlights include BSI survey (Monday), industrial output (Tuesday), core machine orders (Wednesday), trade balance (Thursday) & BoJ monetary policy decision (Friday).
Want to read more?
Find more articles and bullets on these widgets:
Historical bullets
RBA: CBA On The Actual RBA Cash Rate
CBA note that “there’s now four days of data to assess where the actual RBA cash rate will trade now that the RBA target rate is 0.35%. The answer appears to be, quite emphatically, 0.31%. All days since the RBA rate change have had an actual cash rate of 0.31%. The first of those was set by RBA expert judgement on the basis of no trades, but since then the market has been trading -infrequently though it is - at 0.31%. The cash market is no longer at the lower bound, but the 6bp spread above the ES rate is holding. There is some trading at this level - but not a great deal. The volumes are often between A$500mn and A$1bn, with between 5 and 10 trades in a day. Before the pandemic this was routinely A$3-5bn with more like 30 to 40 trades a day. For the moment, the RBA does not seem to want to actively drain liquidity from the system. This suggests that the ES rate will be the main driver of the actual cash rate for the next little while. However, as the TFF maturities start rolling off in the middle of next year, this will need to be revisited.”
AUSSIE BONDS: Curve Flatter, Supply & Westpac Consumer Confidence Due
Futures bull flattened overnight, with the flattening impetus observed on the U.S. Tsy curve making its presence felt in Aussie bonds. That leaves YM +5.0 & XM +8.0 shortly after the re-open, little changed vs. late overnight levels.
- Once again, there hasn’t been much in the way of notable domestic news flow to digest since the Sydney close, with continued focus on the political backdrop ahead of the Federal election, in addition to the sizable wage rise demands made by unions over recent days.
- Westpac consumer confidence data and A$400mn of ACGB Jun-51 supply are set to headline domestic matters on Wednesday.
AUD: CBA On The Drivers Of AUD Fair Value
CBA note that their “fair value equation for AUD/USD includes the Reserve Bank of Australia’s commodity price index and the Australia/U.S. 2-Year interest rate differential. Our fair value equations may not pick up all the important influences on AUD and NZD. We modified our fair value equation to include a popular measure of risk, the VIX. AUD and NZD typically fall while USD and JPY typically lift when perceptions of risk are high. The VIX has lifted sharply from around 20 in early April to around 33 currently. Including the VIX in our fair value equation improves its statistical ‘fit’. However, the estimate of fair value for AUD/USD is only 2 US cents lower at $0.87. We conclude the increase in risk perception is only a minor reason for the fall in AUD recently. Instead, we think the main reason for the large fall in AUD is China’s unexpected and stringent lockdowns to control the spread of omicron.”
