NATO: Rutte Speaks On Iran Situation & France's Nuclear Doctrine
Reuters is reporting wide-ranging comments from NATO Secretary General Mark Rutte. Regarding the NATO interception of a ballistic missile fired from Iran towards Turkey, Rutte calls it a 'serious' incident, but Article 5 (NATO's collective defence response) is not in order here. He says the NATO air and missile defence systems that were able to down the missile over the eastern Mediterranean showed that the alliance is vigilant.
- Iran has denied it fired the missile. Middle East Eye reports it could have been fired by 'isolated' Iranian forces, noting the "system known as the “Mosaic” doctrine to respond to challenges in cases of a breakdown in command and control."
- On the conflict in general, Rutte says Iran "was close to becoming a threat to Europe as well", and that "We support [US President Donald] Trump for taking out Iran's nuclear and missile capabilities." He acknowledges that it is "difficult to assess how the situation in Iran will end", but that it must be ensured that Tehran no longer poses a threat. Adds that "My sense is the US knows what it is doing."
- He welcomes French President Emmanuel Macron's speech on nuclear deterrence. Earlier in the week, Macron outlined a new doctrine of 'forward deterrence' that would see France increase its stockpile of nuclear warheads, and facilitate the deployment of its airborne nuclear fleet to bases across Europe. Rutte said this shift was not related to any worry about the US' commitment as an ally, claiming there is 'total commitment' to NATO in Washington, D.C.
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JAPAN: Polling Surge Sees Bettors Backing LDP Majority
Strong opinion polling for PM Sanae Takaichi's conservative Liberal Democratic Party (LDP) has seen political predictions markets shift in favour of the governing party securing a majority in the House of Representatives in the upcoming 8 Feb general election. Data from Polymarket gives the LDP a 95% implied probability of securing an outright majority in the House, up from a low of 41% on 26 January, a day before the official campaign got underway.
- The latest poll from Sankei/FNN shows the coalition between the LDP and the regionalist libertarian Japan Innovation Party (JIP, Ishin) on course to clear the two-thirds supermajority threshold that would allow the gov't to pass constitutional amendments.
- There had been some speculation that the formation of the Centrist Reform Alliance could pose a threat to the LDP in single-member constituencies. The alliance between the main opposition Constitutional Democratic Party and the LDP's erstwhile coalition allies, Komeito, was seen to have a potential advantage in on-the-ground campaigning in the 289 single-member districts. However, this appears not to have materialised, and the poor name-recognition for the CRA, formed just weeks ago, could see them lose half their combined seats according to the Sankei/FNN poll.
Chart 1. Predictions Market Implied Probability of LDP Securing a Majority in House of Representatives, %
Source: Polymarket
CHINA: Fix Behaviour Endorses CNY Appreciation - But Only At Acceptable Pace
USDCNH's 6.9309 print overnight was the lowest since May 2023, with offshore losses matching the pressure seen onshore as the December trend extends well into this year to set up for currency strength into the Lunar New Year holidays.
- The fixing strategy should be watched carefully here - China's Lunar New Year is not set to start until February 17th, but the authorities commonly manage liquidity and market rates well ahead of the extended break - with fix management a key tool to manage conditions.
- Markets had clearly anticipated a slower decline in the USDCNY fix given the USD bounce, but that hasn't been the case. The fix error term (confirmed fix minus expected fix) averaged ~240 pips across December and January, but is now close to zero. This suggests markets are becoming more settled with the view that USDCNY can continue to depreciate, but only at a pace of their choosing.
- On the FX rate, TD Securities write that their year-end forecast of 6.70 in USDCNY could be hit by the end of H1, and as such the PBOC are expected to adjust their "structural FX parameters" should CNY undergo sudden appreciation. They conclude that these tweaks to slow gains may come after the new year.
- In rates markets, pre-issuance liquidity support is already evident in today's announcement of CNY800bln in 3m outright reverse repo - effectively ensuring steady and "ample" banking system liquidity ahead of this week's CNY282bln in bond sales.
AUD: EURAUD Extends 2026 Selloff, Support Scant Until 2025 Lows
- As noted, AUD is the main outperformer of the day, currently up 0.8% against the dollar after the hawkish hike from the RBA overnight. AUDUSD is also supported by risk sentiment following yesterday's blockbuster ISM Manufacturing. Short-term technical parameters of 0.7094 (cycle highs) and 0.6846 (20-day EMA) appear well defined.
- With the dollar consolidating its most recent recovery, AUD outperformance has been very notable in the crosses, leading AUDJPY to pierce key resistance of the 2024 highs, placing the cross at its highest level since 1990.
- Elsewhere, the likes of EURAUD and GBPAUD have extended their most recent selloffs, significant considering the upcoming ECB and BOE decisions on Thursday. For EURAUD (shown below), spot has made a more convincing break of 1.7050 support, and continues to erode the sharp upswing from Q1 last year. Targets for the move appear scant until 1.6358, the 2025 low.
- Supply and demand are slightly out of balance and monetary policy is likely a bit loose, driving inflation over the past two quarters, RBA Governor Bullock said on Tuesday after a unanimous decision to raise the cash rate by 25bp to 3.85%.
- Most of the big 4 Australian Banks look for a May hike from the RBA. ANZ are the dovish exception, looking for the cash rate to remain on hold through '26.
