Citi

European Open

Asian traders came to markets that were already jittery following an equity sell-off late in the NY session, causing risk off sentiment to permeate through the session. High beta currencies were down, led by AUD and NZD, while JPY and CHF fared better. USD was broadly flat. US Treasury yields were down as well - 1y -1bp, 5y -3bps, 10y -4bps and 30y -2bp. Later in the session however, the risk-off momentum seemed to stall a little. JPY CPI prints were a little under consensus although it did little to move the currency. THB was the poorest performer during the Asia session, although most of the move was due to a gap lower on open. Equity markets remain in focus as CETS urges that we watch whether the close below 4525 in ES1 is sustained.

Looking ahead, we will see a day light on data. GBP will see BoE's Catherine Mann at 13:00 GMT, who will be in focus given her dovish tilt before the December meeting. CAD will also see retail sales, but at 13:30 GMT, while EUR will see Consumer Confidence at 15:00 GMT.

CIBC

FX Flows

Ready, get set, sell! That was what happened and you can hear from the background Freddie Mercury singing “Don’t Stop Me Now”. $YEN was first to go, even before the Tokyo opened, early birds hit bids only to run into Japanese retail day traders adding to long USD. Professionals sold $YEN and certain YEN crosses which led the USD to 113.735. If this UST yield and stock markets doesn’t turn, think we may see 112-handle as the next stop.

AUD¥ had similar price action as the USD, AUD$ which was bought yesterday forced some longs to bail out below 0.7200. AUD$ started to reverse back up as equity market began to pare earlier losses. Intraday support should come in near 0.7170, resistance 0.7250. Chatter that large 0.7235 option strike rolls off Monday – for about A$1.3bn.

NZD¥ broke the long-term trend line and we could see this head below 76-handle and test 74.56. Interesting that 2 Death Cross developed, 50-day cutting the 100-day on January 10 and 50-day cutting the 200-day on January 19.

There is definitely someone defending 1.1300. In my note yesterday I reminded of option strikes rolling off about €2.9bn from 1.1315 to 1.1300. We got to 1.1301 and bounced. It could be just coincidental cos stock futures recovered. First test on topside will be 1.1370 then 1.1400.

$CAD is bid. In terms of $CAD flows, we have been witnessing a string of buying from various names over the past days. One US buyer said the CAD is overvalued versus a basket of G10 currencies. Our structurer Tushar noted that long USD against CAD is a free hedge to a traditional equity portfolio, reduces risk without reducing expected return.

It is less than a week from BoC rates decision, market participants are pricing in 70% chance of a hike. We are not. Our macro strategist Bipan published his piece earlier making his case for unchanged. First, reasons for rate hike, inflation is hot, latest release from Statscan has headline inflation running at a 4.8% Y/Y. Labour market looks tight, total level of employment is now back above where it was pre-pandemic.

Furthermore, low domestic rates in Canada have pushed leverage and debt higher over the course of the pandemic. The only real reason not to go next week is Omicron. Specifically, to assess the economic damage inflicted by containment measures due to the highly contagious variant. The other reason that we can come up with is something that BoC Governor Macklem said in early December when the mandate was renewed. Namely, that the focus now was on when to remove forward guidance, and that the time for doing so was getting closer. The takeaway is that there is an order of operations for the Bank, and the first step is removing the dovish guidance on rates.