Credit Agricole

Asia Overnight

Higher UST yields are back on the worry radar for investors. The rise in UST 5Y and 10Y above 3% on the back of strong US non-farm payrolls data, higher oil prices and further signs of China’s economy opening back up weighed on investor sentiment in Asia. At the time of writing, S&P 500 futures and a majority of Asian bourses were trading lower. Higher UST yields and weaker sentiment led to the USD outperforming the rest of the G10 during the Asian session. The JPY was the largest underperformer against the stronger USD, closely followed by the NZD; the latter being weighed down by AUD/NZD buying post the RBA meeting. Despite a larger-than-expected RBA rate hike, the AUD is struggling against the USD as the market is concerned about the RBA’s front loading of its rate hikes.

Citi

European Open

The RBA’s hawkish decision to raise its key rate by 50bps to 0.85% took AUD sharply higher, before it equally sharply pared its gains to trade in the red once again. Dollar continued its trend higher, while JPY lagged on rate differentials. USTs, which saw much higher yields over the NY session, saw some minor bear flattening in Asia. The higher rates weighed on risk assets in general, with US equity futures down slightly and high-beta currencies generally deeper in the red. UK saw Prime Minister Boris Johnson win his confidence vote overnight, although we flag economic factors may be more relevant for the Sterling.

Looking ahead, EUR will eye German factory orders and Eurozone Sentix investor confidence, while SEK sees Ingves present a Monetary Policy Review. TWD will look to CPI while ZAR eyes GDP data. CLP will see a rate decision late in the day, where Citi Economics eyes a 75bps hike to 9.00%.

What happened in markets?

A UST sell-off in the NY session yesterday sent DXY soaring. The Asia session saw USTs mildly bear flatten, led by 2y yields at +2bps.

USD continued soaring into the Asian open, the only currency in the G10 in the green with BBDXY at +0.30%.

–JPY was down sharply as yield differentials came into play, and remained at over 132.62 (-0.74%).

–Meanwhile AUD rose sharply on a hawkish RBA, although subsequent moves saw it trade back down to settle in at -0.30% on the day

–NZD and GBP were also affected by the moves, trading lower 0.74% and 0.42% respectively, as risk assets were taken lower by higher yields

Oil markets were a tad in the green, while equities were slightly in the red. Notably, however, Chinese stock markets were up, with CSI 300 up 0.65% and SHCOMP up 0.48%.

Australia’s surprise rate decision

AUD has shifted back to 0.3% in the red after a sharp rise due to a hawkish RBA decision, which we detail below.

RBA hikes rates by 50bps to 0.85%, more hawkish than expected and driving a kneejerk move higher in AUD (+0.5%) while 3y bond yields surge with the curve flattening aggressively .AUD OIS rates jump as much as 30bps, led by the very short-end.

ACGB 3y yields are settling around 17bps higher on the day, with 3s10s 10bps flatter, the largest move since January. AUD OIS has ratcheted higher in a parallel move. Market is now pricing an additional 200bps of hikes in by the end of 2022, taking the overnight case rate to over 2.75%. This is far above even Citi Economics latest upgrade which sees year-end cash rate target to 1.6% in 2022.