TAIWAN: J.P Morgan Enters TWD NDRIS 2yr Receiver
J.P. Morgan: "There are very few members in the “higher yield” club this year, but TWD has found itself amongst them as the trend underperformance over the past year has continued, as the CBC has kept up its hawkish stance in direct contrast to all others in EM Asia.
Much of this has been due to the fact that Taiwan has found itself in a very different position to regional peers given growth has outperformed expectations (helped by a strong AI/tech cycle), while inflationary pressures have remained elevated which when combined with concerns over house prices has seen the central bank keep policy tight. However, we are starting to see signs that this is now turning (or at the very least stabilizing).
Building sales and transfers nationwide have seen negative growth rates in each of the last two months, which has seen house prices start to stabilize at the national level. On top of this consumer loan growth related to house purchases has not only started to fall, but now also accounts for a smaller share of overall loan growth.
The latest inflation data has also come in on the softer side of things, and although there remains some residual stickiness in food away from home and rental prices, overall the underlying components across the basket are showing signs of moderation.
While a potential electricity price increase remains a near term concern we see the starting point as very different from Mar-24 which saw the CBC surprise markets with an out-of-consensus rate hike.
Risks to the growth outlook this year are also firmly to the downside in our view, as Taiwan would be one of the most exposed regions globally to a universal tariff and/or slowing in the US tech cycle.
As such, we see the current market pricing for a further 20bp of tightening by the CBC over the next 12-24months as looking increasingly offside.
While it is likely too soon to realistically expect the CBC to join the rest of EM Asia and start formally delivering easier policy, we think as a first step the market should at least pair back its pricing for tighter policy in the months ahead.
As such, we now see front end TWD rates as not only appealing for removing the priced hikes, but also providing optionality for a lower growth world in coming quarters given how exposed Taiwan will be to this theme.
Enter receive TWD 2y NDIRS (entry: 1.78%, target: 1.55%, review: 1.90%, 1m carry/roll: +0.9bp).
The positive carry and roll profile also makes the trade appealing given uncertainties over timing of any potential tariff implementation."
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US TSYS: Yields Pull Back Again With Consumer Growth Story In Question
Treasuries outperformed global counterparts Friday, fully completing a reversal from a midweek selloff.
- A large miss in January retail sales (-0.9% M/M vs 0.7% prior, -0.2% consensus) represented the biggest sequential drop in 22 months, with a similarly weak "control group" figure leading to a 0.5pp downgrade to the Atlanta Fed's GDP nowcast (to 2.3% GDP growth in Q1, i.e. no acceleration from Q4).
- That was enough to see the 10Y Treasury yield drop 7bp in the subsequent half hour, continuing the downtrend seen beginning in the immediate aftermath of Wednesday's hot CPI release. 10Y yields dropped over 21bp from the Wednesday high to Thursday's low, ultimately ending a tumultuous week 1.5bp lower.
- Yields ticked a little higher in afternoon trade Friday but the curve leaned bull steeper on the day, with the belly outperforming: 2-Yr yield is down 4.6bps at 4.261%, 5-Yr is down 5.7bps at 4.3328%, 10-Yr is down 5.1bps at 4.4782%, and 30-Yr is down 3.9bps at 4.6982%.
- In futures: Mar 10-Yr futures (TY) up 9/32 at 109-08 (L: 108-26 / H: 109-15.5).
- Other data (industrial production mixed, import prices soft) had little lasting impact.
- The coming week’s data schedule is relatively light, due in part to Monday’s Presidents Day holiday (SIFMA recommends bond cash close, equities closed), with initial jobless claims, February prelim PMIs, and regional Fed manufacturing surveys among the highlights. Supply includes 20Y Bond and 30Y TIPS auctions.
- We also get plenty of Fed communications including the January meeting minutes, and speaking appearances by both doves (Gov Waller) and hawks (St Louis Pres Musalem).
USDCAD TECHS: Bear Cycle Extends
- RES 4: 1.4948 High Mar 2003
- RES 3: 1.4814 High Apr 2003
- RES 2: 1.4503/1.4793 High Fb 4 / 3 and key resistance
- RES 1: 1.4380 High Feb 10
- PRICE: 1.4175 @ 16:54 GMT Feb 14
- SUP 1: 1.4107 50.0% retracement of the Sep 25 ‘24 - Feb 3 bull cycle
- SUP 2: 1.4011 Low Dec 5 ‘24
- SUP 3: 1.3944 61.8% retracement of the Sep 25 ‘24 - Feb 3 bull cycle
- SUP 4: 1.3894 Low Nov 11 ‘24
USDCAD broke lower Thursday, breaking out of a tight trading range this week and remains soft. A key support at 1.4261, the Jan 20 low, has been cleared and this signals scope for an extension of the current bear cycle - a correction. Scope is seen for a move towards 1.4107, a Fibonacci retracement. Initial firm resistance to watch is 1.4380, the Feb 10 high. A break would highlight an early bullish reversal signal.
OPTIONS: Mixed SOFR Rates Trade To Cap Week
Friday's US rates/bond options flow included:
- SFRH5 95.62p, traded half in 2k.
- SFRH5 96.93c, traded 0.25 in 4k.
- SFRH5 95.75/95.62ps 1x2, Traded 3.75 in 3k.
- SFRK5 97.00c, traded for 0.75 and 1 in 3k.
- SFRU5 95.93/95.81/95.68p fly, traded 1 in 1.5k
- SFRU5 96.50c, traded for 6.5 in 1.5k.
- SFRU5 95.87^, traded for 36 in 5k.
- SFRJ5 95.87/95.75/95.68p fly 1x3x2 with SFRK5 95.81/95.68/95.62p ladder 1x3x2, bought for 10 in 2k.
- SFRM5 95.68p, sold at 2.5 in 10k.
- 0QH5 96.00c, bought for 13 in 3k.
- TYH5 107p, bought for 11 in 15k
- TYJ5 107p, bought for 11 in 17k total.
- TYJ5 107/106ps, bought for 7 in 15k total.
