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BOJ Steps-Up Efforts, U.S. 2-10 Curve Steepens, And The U.S. Dollar Softens

Published 03/30/2022, 06:24 AM
Updated 07/09/2023, 06:31 AM

A pullback in US yields yesterday and the Bank of Japan's stepped-up efforts to defend the Yield Curve Control policy helped extend the yen's recovery. This spurred profit-taking on Japan stocks, where the Nikkei had rallied around 11% over the past two weeks.

Hong Kong, China, and Taiwan led the regional advance. However, facing a surge in inflation (Spain and German states) and a jump in European natural gas prices (~9%) were snapping the Stoxx 600's three-day advance. US futures were trading with a heavier bias.

The US 10-year yield edged a little higher to 2.40%, while the two-year that briefly traded above the 10-year yield yesterday was off about four basis points. European benchmark yields were 3-6 bp higher.

The greenback was trading lower against all of the major currencies, led by the yen's recovery. After poking above JPY125 to start the week, the dollar fell to around JPY121.30 today before steadying. The Canadian and Australian dollars were the laggards with minor gains. Among emerging market currencies, the Turkish lira was the notable exception, and was posting a modest decline.

Gold appeared to post a bullish hammer pattern yesterday, but there was not much follow-through and the yellow metal was in around a $6 range on either side of $1922. May WTI was also in a narrow range--mostly $105-$107 today. Copper and iron ore were trading firmer. Wheat was still soft after losing around 8% over the past couple of sessions.

Asia Pacific

The Bank of Japan stepped-up its efforts to cap interest rates earlier today. It increased the amount of bonds it bought at its regular scheduled operation. It offered to buy JPY600 bln (instead of JPY450 bln) 35-year bond, and JPY725 bln (instead of JPY425 bln) of 5-10-year bonds, in addition to the pre-announced defense of the 0.25% cap on the 10-year bond. It did not increase the amount of longer-term bonds. Tomorrow, the BOJ is expected to announce next quarter's asset purchase plans. 

Although BOJ Governor Kuroda, who met with Prime Minister Kishida earlier today, did not seem concerned about the yen's weakness, Finance Minister Suzuki seemed more cautious. He suggested continuing to check if the yen's weakness was harming the economy. For example, the weaker yen was aggravating the surge in energy prices, of which Kishida was to cushion the blow for households and businesses.

If intervention is best understood as an escalation ladder, as we suggested, then this might be seen as a low rung. Separately, Japan reported that retail sales fell by 0.8% in February, which was more than twice the decline expected by the median forecast in Bloomberg's survey. It also drove the year-over-year rate below zero (-0.8%) for the first time since last September. 

Beijing offered some economic support for Shanghai, but the surge in COVID there, and lockdowns there and elsewhere, were seeing economists slash growth forecast and lift inflation projections. China's March PMI will be released tomorrow. A poor report was expected, and the risks were on the downside. Thus far, though, officials have used targeted measures and not provided the overall economy with new support.

The dollar did not trade for long above JPY125 on Monday, but it seemed to have completed something and the greenback traded down to JPY121.30 today. The (38.2%) retracement of this month's rally was around JPY121.10 and the next retracement (50%) was a little below JPY120. Month-end and fiscal-year end considerations may also be at work but is often used as a catch-all narrative. Note that reports suggested that Japanese retail accounts were beginning to buy yen toward the end of last week.

The Australian dollar bounced off four-day lows slightly below $0.7460 yesterday and settled above $0.7500. It was firm today but below this year's high set Monday near $0.7540. It still felt like it was consolidating.

The broad US dollar weakness was evident against the Chinese yuan today. It was trading nearly 0.25% lower, the most in about two weeks. The greenback was trading at a nine-day low near the 20-day moving average, slightly below CNY6.35. That was also around the middle of this month's range (~CNY6.3080-CNY6.3860). The PBOC set the dollar's reference rate at CNY6.3566. The median projection in Bloomberg's survey was CNY6.3560.


The common narrative now was that Putin initially anticipated a quick overwhelming victory over Ukraine and as it has stalled, he was falling back on Plan B. Plan B was to secure the territorial claims of the two separatist regions and later incorporate them into Russia.

Russia was curtailing the use of hryvnia in the occupied areas and introducing the ruble. This military objective had not been met. Turning Clausewitz on his head, the political negotiations were a continuation of the war by other means. Putin already achieved a key strategic goal; Ukraine will foreswear joining NATO. One cannot help but wonder that if Zelensky had accepted this more than a month ago, the course of events may have been different.

The date for the next round of negotiations have not been set. In a war, the losing side was more anxious for negotiations by definition. After consolidating its forces and enlarging the field of control of the separatist regions, Russia can then be in a position to negotiate. This seemed to be the key to the timeline that can lead to a sustainable cease-fire. The cost of rebuilding Ukraine, which had serious developmental challenges before the war, will fall to the EU, IMF, World Bank, and UN.

A surge in eurozone inflation was expected, but the Spanish and German state figures were over the top. The market (Bloomberg median forecast) was for a strong 1.3% monthly increase in Spain, instead the national figure jumped 3%. The harmonized measure surged 3.9% this month and lifted the year-over-year rate to 9.8% from 7.6% in February. Details were sparse in the initial estimate, but the Economic Minister suggested that three-quarters of the rise was due to food and energy. Still, the core rate rose by 0.4% on the month.

Most of the German states reporting CPI figures today showed a 2.6%-2.7% month-over-month increase in their CPI. The national and harmonized figures were due shortly. There seemed to be upside risk to the expectations that the year-over-year rate of the harmonized measures (HICP) would accelerate to 6.8% from 5.5% in February. The aggregate preliminary estimate for the euro area is due Friday. 

The euro rallied yesterday on the hopes that the Russian invasion of Ukraine may be near the endgame and was extending the gains today amid further positioning squaring. We noted that that the US premium over Germany on two-year money reversed sharply lower. It peaked on Monday above 245 bp and was testing 230 bp today. The German two-year yield was up around seven basis points today and was again trying to secure a foothold above zero for the first time since 2014. Yesterday's attempt was rebuffed.

The surging inflation will strengthen the hawks’ hands, many of whom see scope for two hikes this year that could bring the deposit rate to zero. The euro was trading at its best level since Mar. 1, which was the last time it traded above $1.12. Its gains have now retraced a little more than half of this month's decline (~$1.1150). The next technical target was the $1.1200-$1.1230.

Sterling was a laggard. It was trading inside yesterday's range (~$1.3050-$1.3160). There may be scope for additional gains, albeit marginal, as the intraday momentum indicators were stretched. We suspected the $1.3180-$1.3200 cap may suffice today.


The US 2-10 year yield curve briefly inverted yesterday before finishing around three basis points. It was drawing a great deal of attention, but like any statistic it needed to be placed in context. Few believe the US was recession-bound. The median forecast in Bloomberg's survey had the US economy growing 3.5% this year and 2.3% next year.

This was still above the Fed's estimates of the long-term growth trend (1.6%-2.2%.). The most pessimistic forecasts in Bloomberg's survey had growth less than 1% this year or next. That said, there were those who were warning of a recession, including ourselves, and the yield curve did not enter the picture. Interest rates were not waiting for the Fed's meetings to increase, as per the 93 bp increase in the 2-year yield this month. The halving of the deficit (as a percentage of GDP) this year still struck us as an under-appreciated drag. The rise in energy and food prices cut the purchasing power of households. 

US inflation expectations were not just a function of what the Fed was or was not doing. The correlation of the change in the 10-year breakeven (the difference between the yield of the inflation protected security and the conventional note) and oil (the front-month light sweet crude oil contact, WTI) over the past 30-days was nearly 0.65, the highest in seven months.

The 60-day correlation was almost 0.55, a five month-high. The price of May WTI has risen by almost 25% ($20 a barrel) net since the US warned that a Russian attack could happen at any moment on Feb. 11.

OPEC+ meets tomorrow and there still seemed too little chance that it will boost output. Most of OPEC's spare capacity was in Saudi Arabia (~1.6 mln barrels a day) and the UAE (~1.3 mln barrels a day).

Today's ADP private sector jobs estimate was the data highlight. We remind that it was not a particularly useful guide to the BLS estimate for the particular month, though it gets the larger trend fairly right. The median estimate for Friday's nonfarm payroll report crept up in recent days to stand at 490k. The US also reports another revision to Q4 21 GDP. It may be left at 7.0%. With Q1 22 nearly over, the market will not be sensitive to Q4 data. The economy was expected to have slowed to around 1.0%-1.5% this year from 7% last. The Fed's Barkin and George speak today. While George is a voting member of the FOMC this year, Barkin, like Harker and Bostic, who spoke yesterday, do not.

Mexico reports February unemployment today. It may have ticked up slightly. Canada's economic calendar was light, but there was much talk about Ontario's imposition of a 20% tax on foreign purchases as a real estimate in the province. The "speculation levy" was meant to slow the surge in house prices.

Lastly, late yesterday Chile hiked its overnight target rate 150 bp to 7.0%. This was a bit less than expected and the central bank indicated that it may not need to make such big moves going forward. Latam countries hiked rates early and many aggressively, and ideas that the tightening cycles may end later this year appeared to be encouraging flows into local bond markets. That said, the swaps market had about 300 bp of additional hikes over the next six months before a cut in rates toward the end of the year or early 2023. 

The US dollar was near the recent trough against the Canadian dollar (~CAD1.2465-CAD1.2475). Below there was the year's low around CAD1.2450. A break targeted the CAD1.2400 area. However, the intraday momentum indicators suggest the greenback may bounce first in early North American activity and a retest of CAD1.2500-CAD1.2515 would not be surprising.

Meanwhile, the greenback was slipping to new lows for the year against the Mexican peso (~MXN19.9120). The next notable chat support was closer to MXN19.85, a shelf from last September. Here, too, the intraday momentum indicators favored a US dollar bounce in the North American morning.

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