None of the G10 Peers Did Worse than the JPY

Markets

The violence to which bonds sold off in Asian dealings yesterday eased a bit in European and US trading hours. The Japanese 10y yield stayed marginally above the 0% + 25 bps upper limit for most of the day still, even as the BoJ offered unlimited bond buying twice. Front end yields in the US jumped almost 14 bps at some point before paring gains as the session evolved to about 6 bps (2y, 3y). Bidding metrics of the dual ST bond auction eased. The $50bn 2y auction tailed while both the 2y and the $51bn 5y were awarded the biggest yield since early 2019. Yields further down the curve finished the day up to 4.5 bps lower. There was similar flattening in Germany with changes ranging from +1.8 bps (2y) to -1.9 bps (30y).

In FX space, commodity currencies including the NOK and kiwi dollar were under pressure as the broad commodity rally went in reverse for the day (eg Brent oil down 7%). None of the G10 peers did worse than the JPY though. USD/JPY surged to an intraday high of more than 125. The pair closed at 123.86 eventually, still the highest since end 2015. DXY (trade-weighted dollar) tested the YtD highs but was unable to force a break higher. The USD also ruled over the euro for a large part of the day. But the common currency straightened up and capped EUR/USD losses to just below 1.10. EUR/GBP jumped from 0.833 to near 0.84. BoE Governor Bailey explained the softened rates guidance against the backdrop of increased uncertainty. Hiking bets were marginally pared back. UK yields dropped as much as 10 bps at the long end.

A new round of ceasefire talks between Ukrainian and Russian negotiators starts today in Turkey. An FT report yesterday suggesting Russia is dropping some demands helped shape sentiment in late US dealings and may also explain the fairly optimistic equity mood this morning. Core bonds are being shed relentlessly. US short-term yields rise more than 6 bps. FX markets trade quiet. The Japanese yen strengthens slightly to USD/JPY 123.55. Japanese Minister of Finance Suzuki received orders from PM Kishida to come up with measures to cushion the impact of high energy prices which are being amplified by the slumping yen.

The economic calendar only gets moderately interesting today. US Conference Board consumer confidence is expected to fall to the lowest since February last year (107). The indicator is strongly influenced by the currently excellent shape of the labor market. However, war- and inflation-driven uncertainty will probably have affected the March reading more. We don’t expect it to materially affect reigning market trends though. Markets have fully embraced the idea of ​​the Fed frontloading policy action, supporting both yields and the USD. While they also expect the ECB to fall in line (four 25 bps hikes discounted by Q1 2023), uncertainty about the war is keeping the euro at bay. This may remain the case for the time being.

News Headlines

US president Biden yesterday proposed a $5.79 trillion budget plan to Congress for the fiscal year that will start on October 1. The final approval is with Congress lawmakers. The proposal seeks a record in military spending of $813 bln in 2023. At the same time, in an effort to rein in the budget deficit, the proposal aims to raise taxes for the wealthiest individuals and companies. According to the White House, the budget deficit would decline to 5.8% of GDP this year and remain below 5.0% the next decade. The budget sees the debt held by the public declining to 101.8% at the end of 2023. However, debt is still expected to rise further over the following years to reach 106.7% of GDP by 2032.

The ECB and the National Bank of Poland agreed to set up a new swap line that will stay in place till 15 January 2023. Under the new swap line, the NBP will be able to borrow up to €10 bln from the ECB in exchange for zloty. The ECB also extends existing temporary repo lines with non-euro central banks to the same date. Euro liquidity lines address possible liquidity needs in non-euro area countries given uncertainty from Russian invasion of Ukraine and regional spill-over risk. Those liquidity lines were scheduled to expire end of March 2022 as they were originally aimed at addressing possible euro liquidity caused by dysfunctions due to the coronavirus (COVID-19) pandemic.

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