Read on the Trading Floor - 27 Feb 2024
Today’s focus… Trading is a game of patience
Macro Themes At Play
Theme 1 - Is the RBNZ really considering a change in monetary policy strategy?
Theme 2 - April BoJ in play
Theme 3 - Crypto
Further reading and listening of note
Theme 1 - Is the RBNZ really considering a change in monetary policy strategy?
Scenario 1: Hike (20% chance priced)
Scenario 2: No Hike but hawkish tone and potentially a split vote (1 or 2 voting for a hike)
Scenario 3: No hike and done at 5.5% #higherforlonger...
Scenario 2 is the most likely, the hike in Scenario 1 will get the market excited that the RBNZ will be the most hawkish CB in G10 but Scenario 3 will be the biggest surprise as anticipation has been building of another hike being potentially back on the cards, if it was to be firmly removed, if Orr completely took it off the table and repeated their forward guidance was policy at 5.5% for longer then NZD will lose recent gains, especially against the AUD where it sits at the 6month range lows (chart below). However, a middle ground of no hike but hawkish guidance, potentially indicating rates may need to go higher will suck vol out of the market as it remains the status quo. Scenario 2 thus has something for everybody and will be the dullest to trade.
AUDNZD glued to bottom of 6month range…
As my colleague wrote in Monday's The Morning Hark ... "the RBNZ looks like being the most hawkish on hold central bank of the western economies. Expectations are for the short-term OCR forecasts to remain the same but potentially the longer-term ones revised slightly up. Moving forward the obvious key triggers for the RBNZ’s rate profile will be; inflation, housing, labour market and the end of May Budget which will all play a key part in policy moving forward and in particular if a further hike is needed. The backdrop of the economy is a mixed picture with the labour market slow to adjust to the rate hikes and non-tradable inflation printing higher than forecast however GDP is weak and the overall headline inflation measure is lower. "
Brent Donnelly am/FX - Ribbons
Westpac - What we are looking for in the Monetary Policy Statement this week
Theme 2 - April BoJ in play
It's a slow market when we're already looking past March and into April for the next main event! We remain in the intervention FX zone, with USDJPY stalling in line with US fixed incomes stability but domestically inflation in Japan is back at 2% and is expected to rise next month on the back of base effects due to energy subsidies. With inflation still around 2% and expectations of strong wage cycle round in March, anticipation is building that the BoJ could lift rates out of negative territory.
Bloomberg - Japan Two-Year Yield Rises to Highest Since 2011 on BOJ Bets
Reuters - Japan's inflation beats forecasts, end of negative rates in sight
Steno Research - There is no inflation problem in Japan
Man Group Views From the Floor - Japan Stock Market Record – Why it’s Not Bubble 2.0
ING FX Daily - Yen dodges a bullet
Theme 3 - Crypto
All one had to do for the last 2years was own crypto and chip manufacturers... sometimes we make this job harder than it actually is, overthinking the downside risks and underestimating the profitable opportunities that MOMO can bring. The inflows keep coming into crypto and the FOMO is palpable. Exante Data (Are Bitcoin ETFs cannibalising other assets?) report that "SINCE LAUNCH on January 11th, US Bitcoin ETFs have attracted a cumulated $5.2bn of inflows. This is smaller but comparable to the $9.4bn of inflows into the top three S&P 500 ETFs during the same time".
Outside of the ETF story, crypto is finding a use case in emerging markets, from dollarization in Argentina and Russia's cross border transaction needs, crypto and in particular stable coins offer USD asset liquidity and lower vol for households as well as regimes.
Reuters - Russian lawmakers approve use of digital assets in international transactions
WSJ - Bitcoin ETFs Are Off to a Roaring Start. Are Other Crypto Funds Next?
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..the longer the wait the sweeter the fruit 🍐
It seems to me that people are way out ahead of this BOJ story and are very likely to be disappointed. the one thing we know about the BOJ is they are very comfortable with rates where they are