Equities in Asia extended their recovery and Europe's Stoxx 600 was up for the fourth consecutive session. US futures, were, however, trading lower ahead of the January CPI figure.
Benchmark 10-year bond yields were mostly firmer, with the US 10-year hovering around 1.95%. European yields were 2-4 bp higher, and peripheral-core spreads were widening a little. The dovish hold by Sweden's Riksbank had the krona joining the yen as the laggards today, which saw most major and emerging market currencies edge higher. The JP Morgan Emerging Market Currency Index was posting small gains for the fourth consecutive session.
Gold made a new marginal high for the month, but met sellers around $1836, pushing it back toward $1830. The unexpectedly large draw down in US oil stocks (4.75 mln barrels, the biggest decline since last September) helped March WTI regain the $90 handle after a brief bout of profit-taking. US natural gas prices were steadiest, while Europe's benchmark was a little softer. Copper was up for a second day, while iron ore jumped by more than 5% after yesterday's 1.75% loss snapped a six-day advance.
Asia Pacific
The BOJ moved to defend its Yield Curve Control policy. The yield on the 10-year JGB crept closer to the 0.25% cap as the market tested the central bank's resolve. The BOJ announced it would buy an unlimited amount of 10-year bonds on Monday at a fixed rate of 0.25%. Japanese markets will be closed for a national holiday tomorrow. It was the first such operation in 3.5 years.
With today's purchases, the Reserve Bank of Australia completed its QE. It holds about 40% of the government's debt or around A$650 bln. Last year, the RBA bought about three-times more bonds than the government issued. Sequentially, the next issue was what to do with the maturing proceeds, and Governor Lowe said a decision will be made in May. The Bloomberg survey finds most economists expected a hike in August, while the swaps market saw the hike a little earlier.
China's aggregate lending soared to record levels last month of CNY6.17 trillion. Lending in January typically rises in January as new quotas are tapped. However, the increase was well more than expected. Bank lending was strong (CNY3.98 trillion), but so was shadow banking activity (the difference between bank lending and aggregate financing). Still, it seemed to simply confirm what was already signaled, namely that officials had shifted their stance to support the economy.
The US dollar drew the closest to JPY116.00 in a month. The high was made in the brief overlap of last Asia with early European activity. There was an option for $750 mln that expires tomorrow at JPY115.75. Support was seen a little lower, near JPY115.50.
The Australian dollar pushed toward the $0.7200, a level it had not been above since Jan. 21. Above there, we had been looking for $0.7230. The Aussie seemed well supported, with over A$1 bln in options expiring today between $0.7150 and $0.7155, though the intraday momentum indicators were stretched.
The PBOC set the dollar's reference rate spot on the median forecast in the Bloomberg survey at CNY6.3599. The dollar eased to a marginal new low for the week (slightly below CNY6.3540). Note that India and Indonesia held policy rates steady.
Europe
The European Commission published its new economic forecast today. While it raised its CPI forecast this year and next, it still had the rate below 2% next year. This year's projection was raised to 3.5% from the 2.2% forecast made last November. Inflation next year now looked to be 1.7% rather than 1.4%.
Price pressures were anticipated to peak just shy of 5% this quarter (4.8%) and stay above 3% until Q4, when they fall to 2.1%. The EC shaved its growth forecast for this year to 4.0% from 4.3% but sifts it into 2023 by raising its forecast by 0.3% to 2.7%. The real interest is with the ECB forecasts in March, and some saw the EC forecasts as a hint of what the central bank update may look like.
Sweden's Riksbank left policy steady as widely expected. It now sees the H2 24 rather than in Q4 24. The swaps market was less sanguine and had about 70 bp of tightening priced in over the next 12 months. There were three dissents over its bond purchases and advocated a more pronounced tapering.
Governor Olsen cast the deciding vote to continue its QE. With upward revisions in the Riksbank CPI forecasts, the decision appeared to be a dovish hold. This year's CPI forecast was raised to 2.9% from 2.3%. Next year's CPI projection was tweaked to 2.0% from 1.9% and 2024 to 2.4% from 2.2%. The Swedish krona was the weakest of the major currencies today, off about 0.65% against the dollar and 0.75% against the euro.
The euro remained in Tuesday's range, roughly $1.1395 to $1.1450. It was near the upper end of the range in the European morning. It was unlikely to make much more headway ahead of the US CPI figures. The $1.1500 level was the important cap, and it appeared to be protected in by two large option expirations there, with a 1.76 bln euro option today and a 1.9 bln euro option tomorrow. Initial support was seen in the $1.1420-$1.1430 area.
For its part, sterling continued to chop between $1.35 and $1.36. It reached the session high near $1.3580 in early European turnover and met a wall of sellers. Nearby support was seen at $1.3540, and then $1.3520. The UK reports Q4 GDP and details for December tomorrow.
America
Today's US January CPI may be a bit anti-climactic. Nearly everyone expects a small acceleration to 7.2%-7.3% from 7.0% at the end of last year. The market had fully discounted a 25 bp hike next month and had about a 30% chance of a 50 bp move. Still, it may be near a peak, and at least one Fed official (Bostic) had said as much. Remember, last year the CPI surged from March through August. As they drop out of the 12-month comparison, the year-over-year rate will likely ease.
Mexico reported slightly higher than expected January CPI yesterday and it reinforced expectations of a 50 bp hike today that would lift the overnight target rate to 6.0%. It will be the first meeting with the new governor, Victoria Rodrigues Ceja, at the helm. Some observers expressed concerns that she was untested and likely dovish. A 50 bp hike at her first meeting, especially given the fact that the economy contracted in Q3 21 and Q4 21 (a simply rule of thumb for a recession), would underscore central bank's anti-inflation credentials.
Bank of Canada Governor Macklem sounded a hawkish note yesterday, warning that the policy rate may have to go over neutral (2.25%) in order to address the price pressures. The swaps market had stopped just shy of this (almost 2% in 12 months and 2.25% in 24 months). Canada reports January CPI next week. It stood at 4.8% in December.
The US dollar continued to hold important support in the CAD1.2650-CAD1.2660 area. There were options for $700 mln that expire today at CAD1.2670. Tomorrow, the optionality was stronger. Options for almost $4.5 bln struck between CAD1.2650-CAD1.2660 expire. Tomorrow, there was also another option for CAD1.22 bln at CAD1.2685.
Ahead of the Banxico meeting, the peso was bid. The greenback was near three-week lows against the peso about MXN20.42-MXN20.43. A break sets up a test on the 200-day moving average near MXN20.33. Last month's low was near MXN20.28. Still, the North American session may be more cautious. A bounce could lift the dollar toward MXN20.50.