SOFR: Net Long Setting In The Reds Dominated In Futures On Wednesday

• In FX, EURUSD is holding on to its recent gains. The latest recovery is - for now - considered corrective and has allowed a recent oversold condition to unwind. Resistance to watch remains the 20-day EMA, at 1.1584. It has been pierced, a clear break of it would signal scope for an extension towards the 50-day EMA, at 1.1624. A reversal would refocus attention on the bear trigger at 1.1469, the Nov 5 low. Clearance of this level would resume the downtrend.
• A bear trend in GBPUSD remains intact and recent gains still appear corrective. The move higher is allowing an oversold trend condition to unwind. Firm short-term resistance to watch is at the 20-day EMA, at 1.3231. A break of this hurdle would signal scope for an extension towards the 50-day EMA, at 1.3334. For bears, a resumption of the downtrend would open 1.2971, a 1.382 projection of the Sep 17 - 25 - Oct 1 price swing. The bear trigger is 1.3010, Nov 4 and 5 low.
• The trend structure in USDJPY remains bullish and today’s marginal fresh cycle high reinforces bullish conditions. Moving average studies are in a bull-mode position, highlighting a dominant medium-term uptrend. A clear break of the bull trigger at 154.48, the Nov 4 high, would confirm a resumption of the uptrend and open 154.80, the Feb 12 high. First important support to watch lies at 152.70, the 20-day EMA.

Further to the above, not that both 10-Year Italian & French yields provide a modest 10-15bp pickup vs. 10-Year JGBs, when accounting for 3-month FX hedging costs from the perspective of a Japanese investor.

• This helps explain some of the demand, particularly given ongoing fiscal uncertainty in Japan.
• Those same FX hedging cost-adjusted yields are still some way below 20-, 30- & 40-Year JGBs, as seen in the chart below.

Fig. 1: JGB Yields Vs. 10-Year Italian & French Yields FX-Hedged From The Perspective Of A Japanese Investor (%)

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

Japanese investors net bought JPY361bln of Italian debt in September, according to domestic balance of payments data released overnight. This was the third largest single month net inflow since the start of 2021, after JPY423bln in February ’25 and JPY375bln in July ’21. 

• After being subject to modest widening pressure in late-August/early-September, the 10-year BTP/Bund spread has resumed this year’s narrowing trend. BTP outperformance has been supported by relatively political stability in Italy versus the likes of France, improved domestic fiscal metrics and lower EUR rates vol. This combination of factors looks to have tempted Japanese investors back into BTPs in September, after a few months of net outflows in late Q2/early Q3.
• Japanese investors net bought JPY188bln of French debt in September, despite ongoing political uncertainty through the month amid the resignation of ex-PM Bayrou. It will be interesting to see aggregate net flows in October, with new PM Lecornu's budget negotiations dominating headline flow.
• There were JPY180bln of net sales in German bonds in September, while Gilts saw familiar net inflows.
• Meanwhile, Japanese investors net purchased JPY1,126bln of US Treasuries, bringing the year-to-date net inflow to JPY6,451bln.
• Our Asia-Pac team highlighted overnight that the larger-than-expected Japanese current account surplus was a combination of both the trade balance component and a surge in the primary income balance.