Read on the Trading Floor - 14 Feb 2024
Today’s focus… quiet after the storm, JPY in play and much more
Macro Themes At Play
Theme 1 - A quiet valentines session
Theme 2 - JPY in play?
Theme 3 - BoE closer to a cut? ECB need more data? What are the Fed waiting for?
Further reading and listening of note
Theme 1 - A quiet valentines session
In a past life, I would have spent all of Tuesday's session buying USD calls and selling Eurodollars and / or Ty's... only to spend today slowly selling back some if not all of the options portfolio to harvest as much premium as possible. As soon as the week sparked into life with the hotter than expected CPI print from the US on the back of consecutive NFP beats, the follow through in Fixed Income and subsequently the dollar has been non-existent. There is more Fed speak and retail sales tomorrow but if you weren't long USD into yesterday's print, buying afterwards has not led to much of a return.
Taking a step back, I'm amazed that EURUSD is still trading north of 1.0725. ECB will cut before the Fed, Germany is in recession as the US economy looks set to re-accelerate from a world leading starting point and the US equity markets have AI supremacy / exposure over their European counterparts. Surely the contrasting economic, growth and inflation profiles is worth more than the 3 big figure decline we've seen over the past month and a half. Maybe we need confirmation of an ECB cut or USDCNH to reval higher before we get a "real" trend in EURUSD. Given its the anti USD, sometimes EUR is a terrible vehicle to express a bearish view on Europe.
The NY Times - Three Lessons From a Surprisingly Resilient Job Market
Saxo Markets - Higher CPI shows that rates volatility will remain elevated.
Capital Spectator - 10-Year US Treasury Yield ‘Fair Value’ Estimate: 14 February 2024
Theme 2 - JPY in play?
My colleague first published this list in today's The Morning Hark... but as we easily drift through 150 and both Suzuki and MOF's Kanda hit the wires overnight its worth repeating again the escalation path of FX intervention from the jawboning to the actual physical intervention. BoJ's Ueda has domestic support to hike rates (Bloomberg - Ueda Mulls Rate Hike in Rare Case of BOJ Facing Scant Opposition), but even if he raises 10/15/25bps in the coming months and takes their rate just about into positive territory, it won't do much to close the 5% spread with the US front end
Language such as “monitoring developments in currency markets”.
“Sudden/abrupt/rapid” movements in currency markets are “undesirable”. In addition markets are “not reflecting fundamentals”.
“Excessive” is introduced next to describe the price movements alongside “clearly” in addition to referring to FX moves as “speculative”.
Readying for action is normally reflected with the phrase “we are ready to take decisive action” which would suggest some action is imminent.
Price checking is the step prior to actual intervention whereby the BoJ will call round selected Japanese banks and ask for a level of USDJPY. Even though they do not deal the act of them asking normally makes the banks, who have been contacted, sell USDJPY in anticipation of intervention and they will also spread the news around the market to encourage more selling.
Same as 5 but this time the BoJ actually do sell USDJPY. This may happen in waves.
Finally co-ordinated intervention with other major central banks involved. This would generally happen early NY hours to include the US. This obviously has the most effect on the markets.
Further reading from our BoJ dedicated channel
Nikkei Asia - Japan will take appropriate actions on forex if needed, Kanda says
Brent Donnelly - MOF to a flame
Russell Clark - IS JAPAN THAT IMPORTANT? PART TWO
Theme 3 - BoE closer to a cut? ECB need more data? What are the Fed waiting for?
Mixed UK data on the week as wage gains (FT - Resilient wage growth gives BoE new grounds for caution on rate cuts) are offset with a softer inflation data set. However, Bailey is seeing green shoots of growth (FT - Bank of England’s Andrew Bailey sees signs of ‘somewhat stronger ’ UK growth), so there is no reason to expect the BoE to cut anytime soon. Like the ECB, they need more to data to be sure on inflation and given the aforementioned wage pressures, one wouldn't be surprised if the BoE are were the last to cut out of ECB, Fed then the old lady.
LiveSquawk - UK Inflation Rate Holds Steady At Start Of New Year
Notayesmanseconomics Blog - UK Inflation looks set to fall to its 2% target in the spring
Bloomberg - ECB Needs More Data to Be Sure on Inflation, Guindos Says
Econostream - ECB Insight: De Guindos Makes Clear That the ECB Remains Firmly in a Waiting Game
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