Credit Agricole

Asia overnight

The threat of further sanctions against Russia that could include oil after leaders from the US and EU meet later this week is pushing oil prices higher. Even doves on the FOMC have turned hawkish causing UST 10Y yields to reach levels last seen in mid-2019. Despite higher UST yields and the threat of further rises in oil prices, sentiment remained firm during the Asian session. Most Asian bourses and S&P500 futures were trading higher at the time of writing. The JPY was once again the underperformer in the G10 space in the Asian session and the GBP and SEK were the outperformers.

JPY: the Kuroda line? Back in 2015, and when the JPY was last this weak, BoJ Governor Haruhiko Kuroda said that the currency was unlikely to weaken further as it was already weak on a real effective exchange rate (REER) basis. Back then, the market read Kuroda’s comments as being supportive of the JPY and the level USD/JPY had reached, 125, became known as the “Kuroda line”. While similar circumstances are driving the rise in USD/JPY currently – the divergence in US and Japan’s monetary policies.

There are several important differences that make us think the Kuroda line is not present in the current episode: (1) Japan’s REER is already significantly below the lows it reached back in 2015; (2) Kuroda last week reaffirmed that a weak JPY was good for the economy and that the BoJ was not going to change YCC due to inflation from higher import prices; and (3) the BoJ remains steadfastly dovish and will remain so until April 2023 and when five members of the Board (including Governor Kuroda and his two Deputy Governors) retire from the Board. We also think that it will be the government that steps in to shore up the domestic economy against rising living costs, Covid restrictions and electricity supply issues via policy redistribution efforts and wages rises. The government has to address soft growth and rising living costs ahead of summer elections. Indeed, we expect growth to contract in Q1 due to Covid restrictions with the recent earthquake and electricity supply issues adding to this contraction at the margin.

BNZ

Markets

In currency markets, given the positive risk appetite backdrop, the NZD has been the best performing of the majors overnight, up 1% to 0.6955. The AUD is up 0.7% to 0.7450. GBP has also notably outperformed, up 0.7% to 1.3255, ahead of tonight’s Budget update and CPI release. At the other end of the leader-board, JPY continues to struggle against the backdrop of higher global rates. USD/JPY surged above 120 for the first time since 2016, up over 1% to 120.75. NZD/JPY rose 2%, touching a multi-year high of 84 overnight. Other NZD crosses are all higher. Oil prices are slightly lower after yesterday’s 7% gain, with reports that EU members can’t agree on a Russian oil embargo, with Germany and Hungary holding out on such an agreement.

Following the chunky sell-off in global bond markets yesterday, there has been another dose of that, with rates climbing to fresh cycle highs. US Treasuries are currently up 5-8bps across the curve, with the 10-year the worst performing, trading as high as 2.39%. European rates are also higher, with the UK 10-rate up 7bps to 1.70% and French and German 10-year rates up in the order of 3- 4bps.