Credit Agricole

Asia overnight

The prospect of higher rates on the back of reductions in monetary policy accommodation by central banks weighed on sentiment in Asia. Technology stocks, reliant on low rates to justify their rich valuations, led to most Asian bourses trading lower at the time of writing. S&P 500 futures were trading flat. Investor sentiment was soft despite UST yields trading lower during the Asian session on the back of weaker oil prices. There are newswire reports of the US and China potentially releasing supply from their strategic oil reserves. Most G10 currencies traded in tight ranges in the Asian session, with the NZD the only significant mover and outperforming the rest of the G10 on the back of a spike in NZ inflation expectations data. Lower oil prices led to the NOK and CAD being slight underperformers during the Asian session. The JPY also underperformed on the back of fiscal stimulus news.

USD/JPY: more stimulus in Japan

It has been a volatile couple of trading days for USD/JPY with strong US retail sales launching the exchange rate higher, but then lower oil prices and UST yields quickly dragging it back lower. Asia added to the volatility today with reports from the Nikkei newspaper that the stimulus to be introduced by PM Fumio Kishida will be JPY55trn (about 10% of GDP) and much larger than the JPY30-40trn expected by the market. There is good news for USD/JPY. While such a large stimulus would require more JGB issuance, the BoJ’s YCC means this issuance would have little impact on JGBs, the JGB curve and therefore US[1]Japan rates spreads. So, there would be little impact on USD/JPY from this quarter. But more fiscal stimulus would be good for Japanese equities, which are positively correlated with USD/JPY; a higher Nikkei means foreign investors have to sell forward more JPY to cover the rising value of their Japanese equity portfolio holdings. We maintain an end-2021 target for USD/JPY at 115.

Citi

European Open

NZD ratcheted 0.37% higher after RBNZ 2y inflation expectations jumped 2.96% for Q4 sending OIS rates higher again. 2y swap traded higher by 9bps at one stage. Dollar rally takes a break, sitting a touch lower. Oil-tied currencies struggled with WTI sliding 0.83% vs Brent’s 0.37% slide, after Reuters reports China is preparing to release crude oil reserves. Lower oil gave a modest boost to large importers with INR and KRW edging higher. JPY was under pressure, with long-end yields higher after Nikkei reported a record fiscal spending package.

Looking ahead, we look to Initial jobless claims and continuing claims form the US at 13:30 GMT. We also see a flurry of Fedspeak between 13:00 GMT to 20:30 GMT although we do not expect market moving headlines from them. Notable today are the 4 Central bank rate decisions today. PHP (07:00 GMT) and IDR (07:20 GMT) are expected to hold rates today. Meanwhile, we expect a 50bps cut to 15.50% at 11:00 GMT for TRY, while ZAR is expected to see a 25bps hike to 3.75% (time unknown). CLP will see GDP and CA balance at 11:30 GMT.