US TSY FUTURES: TY Given

We would suggest that the Bank will have a preference towards holding policy settings steady and lean into this as our baseline pre-meeting assumption.

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USD/JPY could be volatile post the BoJ outcome, with very elevated implied vol levels hinting as much. This could spill over to USD/Asia pairs, albeit to varying degrees, if current correlations/betas hold.

• The chart below plots the correlations and betas between daily changes in USD/JPY and major USD/Asia pairs for the past month. this is based off daily changes in FX rates. Outside of USD/THB, correlations and betas are positive across the board.
• USD/IDR has the highest correlation at present, just under 70%. The caveat is that correlations tend to bump around, for instance this time last week we were under 30% for this metric. Still, correlations between USD/IDR and USD/JPY averaged 37.50% for the past year, one of the higher results for the region.
• Elsewhere correlations are generally higher for NEA currencies and SGD. They sit lower for SEA currencies, except for IDR. This broadly fits with trade competitiveness trends being stronger between NEA and Japan.
• Betas are generally around the 0.20-0.30 region for most pairs.
• THB bucks these broader trends, which may owe to greater emphasis on the China re-opening theme in recent months, which has driven strong baht outperformance and left the currency potentially less susceptible to spill over effects.

Fig 1: USD/Asia Correlations & Betas With USD/JPY (Past Month)

Source: MNI - Market News/Bloomberg

JGBs held onto the bulk of the moves flagged in our earlier bullets, as what seemed to be pre-BoJ positioning unwinds dominated price action. That left JGB futures +19 at the break, just under 10 ticks shy of their morning high, while cash JGBs were 2bp richer to 3bp cheaper across the curve (10s have crossed back above the upper limit of the BoJ’s YCC parameters for a fourth consecutive day in recent dealing). 20+-Year paper was on the backfoot all morning, potentially facilitated by the unwind of some popular flattener positions into the BoJ decision (note that the 10-/30-Year yield spread hit the flattest level observed since September on Tuesday).

• In terms of a loose playbook for a BoJ YCC band widening, such an instance would seemingly favour outright shorts in futures/5+-Year paper, along with flattener positions using 10s as the short leg vs. longer duration longs, and potentially 5-/10- & 7-/10-Year steepeners.