Credit Agricole

Asia overnight

Sentiment was firm in the Asian session, following the first face-to-face peace talks between Ukrainian and Russian officials as well as the retreat in oil prices. The peace talks are generating hopes among investors of a ceasefire, and China’s movement restrictions continue to weigh on oil prices. At the time of writing, most Asian bourses and S&P 500 futures were trading modestly higher. The JPY was the biggest gainer in G10 FX on the back of further verbal intervention by Finance Minister Shunichi Suzuki as well as flattening in the UST curve. Despite strong Australian retail sales data, the AUD was the underperformer during the Asian session as AUD/JPY long positions were squeezed by the stronger JPY.

USD/JPY: the Kuroda line becomes the Suzuki

line Back in 2015, USD/JPY reached 125 and BoJ Governor Haruhiko Kuroda said the JPY was unlikely to weaken further as it was already weak in real TWI terms. USD/JPY retreated and 125 became known as the “Kuroda line”. This line was crossed on Monday, and while the JPY is already weaker in real TWI terms than it was in back in 2015, Kuroda is not verbally intervening and is maintaining the stance that a weak JPY is good for the economy. Instead, Finance Minister Shunichi Suzuki is verbally intervening in the currency by saying he is scrutinising movements in FX and monitoring the negative economic effects of the JPY’s weakness. This division of labour will continue as FX policy is the domain of the Finance Ministry, which makes the decision on any physical FX intervention.

The BoJ will remain focused on inflation and capping the JGB 10Y yield at 0.25%. We continue to closely watch the UST 2-10Y spread for guidance on the top in USD/JPY – at just +7-8bp the spread is close to inverting and a becoming a more significant drag on the exchange rate. Suzuki also made another interesting comment recently: Japan’s law does not allow the BoJ to confiscate the reserves of foreign central banks. We do not think Russia’s liquidating of its JPY reserves and exchanging them for USD has contributed to USD/JPY’s rally, however: (1) as of June 2021, Russian reserves with the BoJ were 6% of its total or about USD27bn; according to the BIS’s triennial FX survey, the average daily turnover in USD/JPY in April 2019 was USD1.1trn, and any liquidation of Russia’s JPY reserves would have been a drop in the ocean of USD/JPY’s daily flows; (2) such a transaction would have been in breach of USD sanctions implemented by the US; and (3) confiscation – ie, taking possession of – is vastly different from simply not allowing Russia access to its JPY reserves.

Citi

European Open

Rates markets continued to be in focus post the European close, as flattening pressures resumed. UST 2y yields popped 8bps higher in Asia, with the rest of the curve up 2-3bps. Equity markets held onto their gains seen post European close, while oil markets held steady following yesterday's declines. DXY saw a slight decline after an initial spike in Asia, with G10 currencies mostly in the green against the dollar. JPY gained, paring some of yesterday’s losses, as BoJ bond purchase operations saw better takeup. In the EM markets, KRW rallied on the back of corporate unloading of USD, and broad downside pressure on USDKRW from lower oil prices.

Looking ahead, two days of talks with Russia in Istanbul are set to start today. USD will see Fedspeak from Harker, who is expected to be hawkish, after consumer confidence data. EUR also sees consumer confidence data.