ASIA FX: USD Firms, USD/TWD To Fresh Highs Since 2016.

JGB futures are stronger, +20 compared to the settlement levels, but well off the session’s best levels.

• Cash US tsys are 2-3bps cheaper in today’s Asia-Pac session after yesterday’s solid gains. Earlier, the passage of the budget blueprint by the US House provided an upward backdrop for yields.
• "The House budget would pave the way for $4.5 trillion in tax cuts — about enough to pay for extending the expiring cuts but not enough to also cover Trump’s campaign promises for additional tax relief. The measure would add to the budget deficit despite calling for $2 trillion in overall spending cuts over ten years." (per BBG)
• "The Bank of Japan is likely to keep raising interest rates to 1% if the results of annual wage talks due mid-March come out as strong as last year, says Mizuho Securities economist Ryosuke Katagi." (per DJ via BBG)
• Cash JGBs are 1-3bps richer across benchmarks. The benchmark 10-year yield is 1.8bps lower at 1.355% versus the cycle high of 1.466% set last week.
• Swaps rates are ~1bp higher. Swap spreads are wider.
• Today, the local calendar will see Leading and Coincident Indices later.
• Tomorrow, the local calendar is empty apart from 2-year supply. Tokyo CPI is due on Friday alongside Retail Sales data. 

• Having hit new highs of US$2,956.19 overnight gold opened at $2,914.76 in Asia trading and rallied.
• The rally quickly ran out of steam as gold was unable to reach last night’s highs and peaked at $2,930.09.
• It subsequently fell back below where it opened to $2,913.76.
• In the US overnight, risk off sentiment prevailed as equities trended lower as data showed the US consumer confidence was weaker and the Dallas Fed Services lower giving a bid to US Treasuries with futures back at mid -December highs.
• Weak data suggesting rate cuts usually drives gold higher but as bullion continues to hit new highs (up over 10% year to date) it is not surprising that some profits are being booked.
• The key drivers for gold remain positive with a deteriorating geopolitical environment due to the threat of tariffs, potential rate cuts and Central Banks resuming gold purchases.

January CPI inflation held steady at 2.5% y/y but was again impacted by developments around electricity rebates. The underlying trimmed mean picked up 0.1pp to 2.8% y/y. Westpac notes that this data is “a modest upside risk” to its Q1 headline forecast of 0.5% q/q and trimmed mean at 0.5% q/q, but that it should still “print below the RBA’s June 2025 estimate of 2.4%yr for the CPI and 2.7%yr for the Trimmed Mean”. 

• Westpac points out the “surprise” easing in dwelling inflation. If this trend continues, “then core inflation can continue to drift lower”.
• “Westpac estimates that market services ex volatile items are still running at a sound 3.7%yr pace, but this is down from 3.8%yr in December and 5.4%yr just back in October 2024. Core market services ex volatile (we exclude holiday travel) is down to 2.7%yr and it has been holding this pace since September 2024.”
• January electricity prices increased more than Westpac expected and so it has revised up its Q1 electricity forecast.
• “Taken at face value, given the large number of price declines in the published quarterly estimates for the items above, you might think that the January Monthly CPI is pointing towards something that is broadly around trend. However, the quarterly CPI is not a simple average of the Monthly CPI Indicator. History has taught us that a simple ‘face value’ estimate can be misleading.”
• “In addition, some of the extra strength in the basket is in quite volatile items, particularly from food prices, which can quickly revert more than we have in our current monthly profile.”