MNI EUROPEAN MARKETS ANALYSIS: USD Dips Before Recovering

Feb-12 05:46By: Gavin Stacey

Europe

EXECUTIVE SUMMARY

After reaching a record steepness in mid-January, the 2/40 yield curve is now testing the lower bound of the well-defined range.
Australia’s central bank stands ready to raise interest rates further if inflation proves persistent, Governor Michele Bullock said.
The USD has drifted lower for most of our session as the market tries to interpret its inability to react to the better Payrolls data, although losses have been pared as we approach the London cross over. USD/CNH has tested under 6.9000, while USD/JPY got to 152.27, before rebounding.
Looking ahead, we have UK GDP, while in the US we have initial jobless claims, before the focus turns to Friday’s release of US CPI.

MARKETS

US TSYS: Yields Range Bound, US CPI Friday Next Focus

A quiet day post NPF with US futures barely moving and yields range bound. TYH6 has traded in a 112-07 to 112-11 range today, but remains unchanged at 112-09.

Cash was marginally better in the front end with yields modest lower, though volumes were extremely light.

The 2-yr is down -0.6bps to 3.508%
The 5-Yr is down -0.5bps to 3.739%
The 10-Yr is down -0.2bps to 4.172%
The 30-Yr is up +0.3bps to 4.811%

There is more jobs data out tonight with Initial Jobless Claims (est. 223k, prior 231k), continuing claims (est. 1850k, est 1844k prior) and existing home sales. Friday's CPI will be the next major release for bond markets with January CPI forecast to moderate to 2.5% from 2.7% in December. Yields are highly reactive to data at present given very little priced in in terms of rate moves and a miss either way could see decent swings in yields.

The auction schedule tonight sees US$95bn 8-week, US$105bn 4-week and US$25bn 30-Yr.

JGBS: Yield Curve Breaking Flatter As Fiscal Concerns Fade

JGB futures are stronger, +20 compared to settlement levels, but at session lows.

The Japan Jan PPI was in line with market forecasts.
Cash US tsys are slightly richer in today's Asia-Pac session after yesterday's post-payrolls sell-off.
Cash JGBs have bull-flattened, with yields 1-9bps lower across benchmarks.
After reaching a record steepness in mid-January, the 2/40 yield curve is now testing the lower bound of the well-defined range that has contained price action since mid-year.
Since late last year, steepening has been most pronounced in the 2/5 segment, leaving the 5-year sector relatively unattractive on the curve. Into the recent election, expectations of fiscal expansion under a Takaichi administration implied heavier debt supply, reinforcing pressure on intermediates.
In recent days, however, those fiscal concerns appear to have moderated following Prime Minister Sanae Takaichi's historic election victory.
Notably, while the 2/5 segment has flattened, it is the 5/40 curve which has broken through the bottom of the range it has traded in since June last year.
Swap rates are flat to 5bps lower, with a flatter curve.
Tomorrow, the local calendar will see Weekly International Investment Flow data alongside an Auction for Enhanced-Liquidity 5-15.5 YR and BOJ Board Member Tamura Speech in Kanagawa.

Source: Bloomberg Finance LP

JGBS: Yield Curve Under Flattening Pressure

After reaching a record steepness in mid-January, the 2/40 yield curve is now testing the lower bound of the well-defined range that has contained price action since mid-year.

Since late last year, steepening has been most pronounced in the 2/5 segment, leaving the 5-year sector relatively unattractive on the curve. Into the recent election, expectations of fiscal expansion under a Takaichi administration implied heavier debt supply, reinforcing pressure on intermediates.
In recent days, however, those fiscal concerns appear to have moderated following Prime Minister Sanae Takaichi’s historic election victory.
Notably, while the 2/5 segment has flattened, it is the 5/40 curve which has broken through the bottom of the range it has traded in since June last year.
This likely reflects two dynamics. First, renewed yen weakness could bring forward expectations of additional BOJ rate hikes, placing upward pressure on 5-year yields relative to the long end. Second, the 5-year sector has emerged — and is likely to remain — a preferred short among more tactical accounts. In particular, positioning in 5s30s flatteners appears to have scope to extend as the BOJ edges closer to another tightening step.

Bloomberg Finance LP

STIR: BOJ Dated-OIS Firmer Than Pre-Jan MPM Levels

Currently, BOJ-dated OIS is 1-8bps firmer than pre-January MPM levels.

Current pricing assigns a 26% (22% pre-BOJ) probability of a 25bp hike in March, rising to 108% (92% pre-BOJ) by June, 200% (170% Pre-BOJ) by October, signalling expectations for two hikes by late 2026.
This pricing is consistent with a MNI Policy note earlier in the week: Japanese Prime Minister Sanae Takaichi has been taking market concerns over inflation and fiscal sustainability seriously and will not interfere with the Bank of Japan’s gradual policy tightening from the current 0.75%, MNI understands.
Despite her preference for low interest rates, she is likely to support further BOJ rate hikes not only to fight inflation but also to achieve the 2% target, as households continue to suffer from high living costs.

Figure 1: BoJ-Dated OIS – Today Vs. Pre-Jan MPM

Source: Bloomberg Finance LP / MNI

JAPAN DATA: Yen Rise Could Curb Rising Import Prices, But Y/Y May Stay Positive

Japan import prices rose, in m/m terms, for the seventh straight month in Jan. The chart below plots USD/JPY m/m changes against import prices m/m. USD/JPY fell m/m in Jan and if current levels hold to the end of Feb, we will also see a m/m decline for this month. This may help curb upside momentum in monthly import price rises, or at least bring us back closer to flat. Such trends are likely to remain a key BoJ focus point through 2026, as it decides around the timing of its next hike.

In y/y terms import prices are +0.5%, well up from the July 2025 low of -10.6%. Given the negative y/y base effects through the first half of 2025 it will likely require sharp m/m falls in coming months to not see y/y import price momentum rise. For a given level of global commodity prices, this is likely to require further strong gains in yen versus the USD.

Fig 1: USD/JPY M/M & Japan Import Prices M/M

Source: Bloomberg Finance L.P./MNI

AUSSIE BONDS: Cheaper, RBA: Ready To Raise Rates Further, Infl Expns Up

ACGBs (YM -4.0 & XM -4.0) are weaker after dealing in relatively narrow ranges in today’s session.

(Bloomberg) “Australia’s central bank stands ready to raise interest rates further if inflation proves persistent, Governor Michele Bullock said, stressing that the board remains cautious and is yet to decide whether further tightening is warranted. The Reserve Bank chief told a panel of senators on Thursday at Parliament House in Canberra that inflation running “with a three in front of it” is unacceptable."
RBA Hunter is due to give a speech at a CEDA event in Perth (15:45 AEST).
MI’s inflation expectations rose to 5% in February from 4.6% in January.
Cash US tsys are slightly richer in today's Asia-Pac session after yesterday's post-payrolls sell-off.
Cash ACGBs are 4bps cheaper with the AU-US 10-year yield differential at +63bps, just below its recent high.
The bills strip has bear-steepened, with pricing -1 to -5.
RBA-dated OIS pricing shows tightening across all meetings, with the probability of a 25bp hike rising from 15% for March to 95% by June and 154% by December 2026.
Tomorrow, the local calendar will be empty.
The AOFM plans to sell A$1000mn of the 2.50% 21 May 2030 bond tomorrow.

Bloomberg Finance LP

RBA - Labour Mkt Expected To Remain Tight - Jan Jobs Data Feb 19

RBA Hunter's speech today focuses on defining full employment. See the full speech at this link. Hunter stated: “ The recent acceleration of demand growth beyond our estimate of trend, at a time when the economy is already showing signs of being capacity constrained, means we expect the labour market will remain tight and inflation will remain above target for some time, as outlined in our recent Statement. Moving forward, we’ll be closely assessing capacity pressures in the economy and conditions in the labour market, and this will help us assess the extent to which the recent rise in inflation is temporary; and, in turn, inform our advice to the Monetary Policy Board about the outlook in inflation.”

Earlier today, RBA Governor Bullock stated: "Our models' estimate of NAIRU have risen a bit, but we don't take a model approach only, we also use a bit of judgment," she said, noting the most recent set of forecasts showed how the Bank considered full employment." and "...has lifted its NAIRU estimate by around 10 basis points to 4.6%, Governor Michele Bullock told a Senate estimates hearing Thursday.
The current unemployment rate is 4.1%. The next jobs print is due on Feb 19 (next Thursday).
The labour market data will be important to gauge capacity constraints, but inflation will be the deciding factor around further RBA tightening. Governor Bullock is not committing to a pre-determined outlook, but given the starting point for headline/trimmed mean inflation, we are likely to need to see meaningful downside surprises to prevent further hikes.

BONDS: Modestly Cheaper Ahead Of Heavy Local Calendar Tomorrow

NZGBs closed showing a modest bear-steepener, with benchmark yields 2-3bps higher.

NZ-US and NZ-AU 10-year yield differentials closed little changed.
Cash US tsys are slightly richer in today's Asia-Pac session after yesterday’s post-payrolls sell-off. US jobless claims highlight a lighter calendar on Thursday, before the focus turns to Friday’s release of US CPI.
Nevertheless, today’s weekly supply auction exhibited solid demand characteristics, with cover ratios ranging from 3.77x (May-35) to 4.12x (May-31).
Swap rates closed 3-4bps higher, with wider implied swap spreads.
RBNZ-dated OIS pricing closed little changed across meetings. No tightening is priced for February, while December 2026 assigns 44bps.
The local calendar has been light this week ahead of tomorrow’s release of BusinessNZ Manufacturing PMI, Net Migration and RBNZ Inflation Expectation data.

Bloomberg Finance LP

FOREX: USD - Trades Heavy Even After A Strong Payrolls

The BBDXY has had a range today of 1180.12 - 1182.72 in the Asia-Pac session; it is currently trading around 1181. The USD has drifted lower for most of our session as the market tries to interpret its inability to react to the better Payrolls data. The market is very bearish the USD and it does not take a lot for the sellers to come back to market as nobody wants to miss out on this trade. Even the significant bounce in US yields as cuts were priced out did little to aid it. On the day, the first resistance is toward the 1185-1187 area and then 1195 where I suspect we could see buyers return. A sustained break below 1175-1180 could potentially signal the start of another leg lower targeting 1150 first and then potentially 1115, see graph below.

EUR/USD - Asian range 1.1864-1.1885, Asia is currently trading 1.1865. The pair found buyers back toward 1.1800 as the USD initially got bought, but unlike other currencies the EUR has not quite got back to its highs from yesterday. Price action remains constructive, can it now build some momentum from that base to push on? On the day, the first support is back toward 1.1820-1.1850 and then the 1.1750 area. A sustained move back above 1.1925-1.1940 could give it the thrust it needs to have another look toward the 1.2000 area.
GBP/USD - Asian range 1.3616-1.3642, Asia is currently dealing around 1.3625. The pair is trading pretty poorly considering how weak the USD is. GBP continues to look like 1.3580-1.3730 to me for now as we wait to see if the big USD could potentially break lower, could CPI Friday give it the nudge it needs ?
Cross asset : SPX +0.30%, Gold $5055, US 10-Year 4.175%, BBDXY 1181, Crude Oil $65.01
Data/Events : Germany Current Account Balance

Fig 1: BBDXY Spot Weekly Chart