Daily Kickstart (Japan Battles Bond Markets, Mexico/Turkey Battle FX Traders, May Meets W/Trump)

As is rapidly becoming custom, we start with FX markets, where the USDJPY rose again, recapturing a 115 handle following the BoJ’s 10th bond buying operation of the month.

If we hit 116, the dollar rally could gather some momentum “as the market seems to be short vol above that level,” one European trader told Bloomberg.

Remember, the BoJ has pledged to keep JGB 10s anchored at 0%. The target amount for 5-to-10 year debt was raised to JPY450 billion at Friday’s operation from JPY410 billion earlier this week. Investors were lukewarm when it came to parting with their collateral – the bid-to-cover was 3.66 versus 3.97 previously. “The BOJ’s control is for shorter maturities and the 10 year. Super- long yields are not its target, so it is allowing a curve steepening. If the BOJ can contain the rise in 10-year yields, the increase in super-long yields can also be restrained,” one strategist said on Friday.

Whether or not the long-end can be kept anchored remains to be seen. “What’s become clear is that the BOJ doesn’t want to boost purchases in the super-long maturities,” Barclays said, adding that “it is increasingly likely that super-long maturities won’t be getting support from the BOJ and their yield levels could be elevated depending on external factors. The 10-year sector will likely firm up.”

For the time being, the curve is steepening.

JAPAN’S 30-YEAR YIELD RISES TO 0.85%, HIGHEST SINCE MAR.1
JAPAN’S 20-YEAR YIELD RISES TO 0.665%, HIGHEST SINCE FEB.24
JAPAN’S 40-YEAR YIELD RISES TO 0.97%, HIGHEST SINCE MAR.1

At least one strategist doesn’t see Friday’s op as particularly important for the currency. “This is not very significant for USD/JPY though – the QE increase is relatively small, and the BOJ was already running a little behind schedule with its operations this month, so there is an element of catch-up here,” Macquarie’s Gareth Berry told Bloomberg. 

Maybe not, but it certainly had an impact on Friday:

jpy

“Spot desks bought USD/JPY after the BOJ move, triggering stop-loss orders above Thursday’s high of 114.86,” one Asia-based trader said, adding that this could “potentially lead to further momentum buying above 115.60.”

Meanwhile, the peso is struggling to cope with Trump and his wall. The currency extended Thursday’s losses before recovering a bit overnight:

mxn

The Turkish lira was back in the spotlight Friday, falling to its lowest level in weeks ahead of a Fitch sovereign ratings review (that’s their last investment grade rating) and amid liquidity ops from CBT, which is forced to deal with ridiculous comments like the following from rates strategist, dictator, President Recep Tayyip Erdoğan:

ERDOGAN: HIKING RATES WOULD NEGATIVELY IMPACT EXC. RATE: SABAH
ERDOGAN: HIKING RATES WOULD NEGATIVELY IMPACT INFLATION: SABAH

lira

Moving on, Asian equities were mixed to end the week with the Nikkei rising on the back of a weaker yen and inflation data that wasn’t horrible (which is the same as a win when it comes to Japan):

Japan Dec. Consumer Prices Rise 0.1% Y/y; Est. +0.1%
Core CPI, which excludes only fresh food, fell 0.2% y/y; est. -0.3%

This was the quote of the night (from Japanese PM Shinzo Abe):

  • MSCI Asia Pacific down less than 0.1% to 142
  • Nikkei 225 up 0.3% to 19467
  • Hang Seng down less than 0.1% to 23361
  • Shanghai Composite closed
  • S&P/ASX 200 up 0.7% to 5714

In Europe, markets are mixed ahead of a meeting between UK PM Theresa May and Donald Trump. Trump will reportedly speak with Angela Merkel by phone on Saturday about Russia (would love to listen in on that call). Putin and Trump are also expected to speak over the weekend.

  • Stoxx 600 down 0.5% to 366
  • FTSE 100 down 0.1% to 7152
  • DAX down 0.3% to 11816
  • German 10Yr yield down less than 1bp to 0.48%
  • Italian 10Yr yield up 2bps to 2.26%
  • Spanish 10Yr yield up less than 1bp to 1.58%
  • S&P GSCI Index down 0.4% to 399.2

US futs are flat, crude’s down and so are shiny yellow doorstops.

  • S&P 500 futures down 0.1% to 2292
  • Stoxx 600 down 0.5% to 366
  • US 10-yr yield up less than 1bp to 2.51%
  • Dollar Index up 0.24% to 100.62
  • WTI Crude futures down 0.7% to $53.41
  • Brent Futures down 0.9% to $55.71
  • Gold spot down 0.3% to $1,184
  • Silver spot down 0.3% to $16.76

Happy trading.

 

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