Credit Agricole

Asia overnight

St Louis Fed President, James Bullard, said that inflation risks may warrant higher interest rates next year, which upped the Fed’s hawkish rhetoric from its shift in dot plots, which showed two 25bp rate hikes in 2023. Oil prices continued to move higher as talks on Iranian sanction in Vienna failed to a result. Asian bourses and S&P500 futures were trading lower at the time of writing. Bullard’s hawkish rhetoric led to further flattening in the UST curve and mixed reactions in G10 FX. The JPY, AUD and NZD were the strongest performers and the NOK and CHF the worst performers in the Asian session.


FX Flows

Commodity currencies led the way as energy prices continued to climb. WTI Crude March futures got to $84.62 and the February contract up to $85.19. Everything changed towards the late morning.

Australia 3-year bond yield rose more than 1.5 bps to 1.283%, highest since May 2019. The weekly consumer confidence was a surprise, fell 7.6% to 97.9 from 106.0. AUD$ move was delayed and calm. Market didn’t seem convinced, looking at the global positioning, both IMM and leveraged names are clinging on to short Aussie. The interesting thing is we have been seeing a consistent buyer of AUD$ over the past week. He could be the one holding up and frustrating the shorts. Also, about A$1bn worth of 0.7200 strikes will roll off today. The sharp move in UST yields sent AUD$ lower to 0.7180.

$CAD dipped to 1.2488, like the AUD$, bit disappointing price action. Where is the threshold for those positioned longs? Our macro strategist Bipan said the story of tight supply amidst geopolitics and bad weather pose a serious risk to our $CAD view in the near-term, but we expect that any forays to the 1.2285-1.2300 area will be met with buying. That view is incorrect if the 1.2250 level is taken out by markets. This is a very busy week for data in Canada ahead of the BoC next week. $CAD turned and this caught market by surprise, jumped very swiftly to 1.2533.


European Open

The start of the Asia session saw USD tilting slightly lower, and risk assets in the green. Higher oil prices had brought NOK higher as well. Cash yields opened higher following MLK day. However, the UST sell-off gathered momentum midway through the Asia session and impacted other markets, with the yield curve bear flattening, and front end yields up 8bps. Tech equities fared poorly and USD found a leg to stand on, with DXY rising sharply. High beta currencies lagged subsequently with AUD and NZD losing ground, and funders being less affected. JPY saw a rate decision today which left policy rates unchanged. However, following a buildup of hawkish expectations, markets were disappointed by a BoJ monetary policy statement that was little changed save for some revision upwards in CPI forecasts. JPY slipped a little on the release of the statement.