HKD: USD/HKD Just Off Recent Highs, Focus On US-HK Yield Differentials
Spot USD/HKD sits just off recent highs (7.8112), the pair last close to 7.8090. It has virtually been a straight line for the pair since we touched the lower peg band level of 7.7500, back in early May. Current levels are fresh highs back to August past year.
- The surge in US-HK rate differentials looks to be the main driver of this turnaround. The 12month spread is just off recent highs, last +97bps, while the 3 month is at +226bps in the USD's favor.
- Arguably we may start to see the ascent in these spreads slow now that USD/HKD is comfortably up from the lower end of the peg band. In terms of levels, the pair spent much of May-July last year oscillating between the 7.80-7.82 region. April 2024 highs were close to 7.8400. On the downside the 200-day EMA is back near 7.7800.
- Risk reversals are up from recent lows, reflecting the spot rebound. In the option space, implied vols are off recent cycle highs, but still very elevated from an historical standpoint. The 1 month was last near 1.65%, with the 200-day MA on this metric sub 1%.
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US TSYS: Yields Drift Lower in Today's Asia-Pac Session
TYM5 has traded in a tight 110-19/110-27+ range so far in today's Asia-Pac session. Going into the London open, it is dealing near its highs around 110-26,+0.02 from its close.
- The US 10-year yield has continued to drift lower in a tight range of 4.3408 - 4.3856 in Asia. Going into the London open dealing around 4.3485%.
- The market is starting to realise the FED will not be stepping in to rescue it by cutting rates, as long as it expects inflation to track higher on the back of Trump’s policies.
- The Fed’s Waller said yesterday the impacts of the tariffs on inflation would be temporary. He also described the new policy as “ one of the biggest shocks” on the US economy in decades, the effects of which are highly uncertain.
- Bostic spoke after the US market close: ”Right now range of possible outcomes has multiplied. Inflation still much higher than target. Not in position to boldly move in any direction, need more clarity.”
- Bessent says the Treasury has a big toolkit if needed for Bonds.
- Dips in the 10-year yield back towards 4.25/30% should now find supply, any move back to 5% and above would become problematic for equities.
- Upcoming Data/Events: Retail Sales and Fedspeak from Powell on Wednesday.
JGBS AUCTION: Poor Demand Metrics For 20Y Auction
The 20-year JGB auction delivered poor results across key metrics. The low price underperformed dealer forecasts, which were set at 100.40 according to a Bloomberg poll. Moreover, the cover ratio decreased to 2.9639x from 3.4594x in the previous auction and the auction tail lengthened dramatically to 0.34 from 0.20.
- As noted in the auction preview, today’s offering featured an outright yield at a cycle high, 15bps higher than last month’s auction.
- Moreover, the 10/20 yield curve was at its steepest since 1999 and the 20-year JGB was at its cheapest valuation within the 10/20/30 butterfly since early 2023.
- As a consequence, this result is likely to be seen as significantly worse than the mixed performance observed in the 30-year JGB auction earlier this month.
- Post-auction, the 20-year JGB is little changed.
JGBS AUCTION: 20-Year JGB Auction Results
The Japanese Ministry of Finance (MOF) sells Y750.9bn 20-Year JGBs:
- Average Yield: 2.349% (prev. 2.278%)
- Average Price: 100.69 (prev. 96.20)
- High Yield: 2.374% (prev. 2.294%)
- Low price: 100.35 (prev. 96.00)
- % Allotted At High Yield: 40.8163% (prev. 44.1031%)
- Bid/Cover: 2.9639x (prev. 3.4594x)
