Making Sense

With my view over the last week on reversal in USD index, it was frustrating to see the moves not playing out on the Dollar Index. Geopolitical Risks were underpriced and Chinese Stimulus (both monetary and fiscal) ahead of the Golden week kept pushing asset prices higher and AUD was the clear beneficiary. Japan Election results also jolted the USDJPY due to PM Ishiba hawkish leanings. For most of the currencies and bond yields, we went no where and closed the week in the middle of the week's range. I could not complete the post yesterday so writing today.  Let's do a quick snapshot of the Economic Data releases this past week. Atlanta Fed GDP is now trending at 3.10% for Q3 and Fed Funds Pricing show an 82% probability of 200 bps of rate cuts i.e. 2.75% - 3.00% by Oct 2025. As of Friday's close, Markets are pricing in a 92% probability of 75 bps cuts by Dec 2024 but are largely seen divided b/w a 25 bps or a 50 bps cut in the next policy. An important thing to note is t...

"What we hope ever to do with ease, we must learn first to do with diligence" Asian markets are trading higher as China resumes after week long Lunar Holidays. China re-opening alongside lower quantum of rate hikes from the US Fed has lifted the sentiment around EM currencies.  USDCNH (6.75) is now back in the consolidation range of 6.65 - 6.78 in which the currency was trapped from May until mid August 2022.  USDKRW (1228) is trading below the May 2022 lows and now finds support at 1206-1207 levels. USDTHB (32.73) is also fast approaching the Feb 2022 lows at 32.07. While KRW and THB have appreciated over 15% against the USD followed by CNH, IDR has been a relative underperformer, appreciating only 5.50% from peak to trough.  USDJPY has been facing resistance at 130.60 - 131.00 levels since 23rd Jan 2023 with market consensus leaning towards further widening of the YCC band. Today, a report by a panel of academics and business executives urged the BOJ to make its 2% infl...

 The big news today morning was the release of the Tokyo CPI Inflation. The core CPI for the area of Tokyo in Japan jumped 4.3% in January 2023, accelerating at the fastest pace since 1981 and exceeding forecasts for a 4.2% rise amid broadening inflationary pressure. Tokyo’s core inflation rate, a leading indicator for nationwide price trends, also followed a revised 3.9% gain in December and surpassed the Bank of Japan’s 2% target for the eighth straight month, signaling that upward price trends in the country have not reached its peak yet. **trading economics The BoJ announced the  Funds-Supplying Operations to Support Financing for Climate Change Responses for a notional of $ 21.73 bn as yields inched closer to the upper bound of the YCC band at 0.50%. The CPI data sparked a sell off in yields in the Asian session with US 2YT at 4.19% and US 10YT at 3.53% and the 2x10 inversion at 66 bps. Domestic yields also opened higher with 10Y treasury trading at 7.39% from Wednesday's...

Bank of Japan made no changes to the Yield curve control policy. It kept the band at +/-  0.50% and amended the rules for a fund supply market operation. Under the amended rules, BoJ can offer funds upto 10 years against collateral to financial institutions for both fixed and variable rate loans.  Post the announcement, JGBs yields quickly fell to lows of 0.36%. I anticipated JPY to depreciate after a pull back on the sharp fall in yields but nah nah nah.. JPY completely reversed course.  The price development only goes to show that the market anticipates YCC to likely end in march which is the last policy announcement by Governor Kuroda before the end of his term. The inflation data released today further emboldens the expectation. Japan's core consumer prices in December rose 4.0% from a year earlier, double the central bank's 2% target, hitting a fresh 41-year high. Dates ( according to Reuters) 10th Feb - Present nomineed to Parliament 16-17th Feb - hea...

The BoJ amended the rules for a fund supply market operation to use it as a new tool to prevent long term interest rates from rising too much. Under the amended rules, BoJ can offer funds upto 10 years against collateral to financial institutions for both fixed and variable rate loans .  What is Fund supply operations against pooled collateral?  Also known as open market operations, are a monetary policy tool used by central banks to control the money supply in an economy. In these operations, the central bank provides funds to commercial banks in exchange for a collateral, such as government bonds. The central bank can use these operations to increase or decrease the money supply in the economy, depending on its monetary policy goals.  Financial institutions can therefore buy say 10Y JGBs at 0.50% and use it as a collateral to borrow funds from BoJ. This would keep the yield on JGBs. The BoJ simultaneously announced that it will offer 5 years loans under the fund supply...

 Goodmorning!! “A man is but a product of his thoughts. What he thinks he becomes.” - Mahatma Gandhi A quick wrap up of yesterday developments -  BoJ will apply a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial institutions at the Bank. BoJ expanded the band around the 10Y yield target to +/- 0.50% from +/- 0.25% and increased the monthly bond buying under the new quarterly bond buying plan to yen 9 trn from earlier yen 7.3 trn. The move was attributed to improve the market functioning and formation of the yield curve. The JGB curve steepened with the 1x10 curve at 0.5350% from the earlier 0.34%. BoJ emphasized the current move as not a rate hike or policy accommodation removal. He also mentioned that he will be closely watching the next Spring's wage negotiations and the Trade Unions have announced a nominal wage growth target of 5%. However, the market does not believe the BoJ narrative and interprets the re...

Expect the unexpected !! The Big news today morning is the Bank of Japan (BoJ) monetary policy decision. BoJ Governor Kuroda who is nearing an end to his term did not fail to shock and awe the markets.  BoJ decided to modify the conduct of YCC (Yield curve control) in order to improve market functioning and encourage a smoother formation of the entire yield curve while maintaining accommodative financial conditions. Please note the modification was not attributed to higher inflation. So BoJ tightened and eased at the same time. BoJ expanded the band around the 10Y yield target to +/- 0.50% from +/- 0.25% . It will offer to purchase 10Y JGBs at 0.50% every business day through fixed rate purchase operations. It will also make nimble responses for each maturity by increasing the amount of JGBs even more and conducting fixed rate operations. BoJ increased the monthly bond buying under the new quarterly bond buying plan to yen 9 trn from earlier yen 7.3 trn.  BoJ's monetary polic...