Asian equities are trading mostly higher helped by the positive lead from the Stoxx600 which closed near the day’s highs of +0.33% yesterday. Gains on Asian bourses are being led by the Nikkei (+1.2%), as Japan’s economy minister Amari reassured the market that stocks are in an “adjustment phase after recent sharp gains”. We also had weekend comments from Kuroda who warned of the risks from a rise in bond yields if not accompanied by an improvement in the underlying economy. In the JGB market, 10yr yields are up another 5bp in Asian trading after a lacklustre 20yr JGB auction, although USDJPY and the Nikkei are managing to hold in well.
JGB price action remains in focus and George continues to think this should not be of medium term concern as most of move is in short end and not the long end. Kuroda is speaking tomorrow at a BoJ Conference in Tokyo, on the same day that the BoJ has scheduled a meeting with JGB-market participants to discuss the recent rise in bond yields. According to a BoJ official, the central bank will be using this meeting to help it decide its schedule for JGB purchases starting from June. We think that fixed income is going to be the big driver this week, given where UST?s are with the 10 yr through the 2% level. The question is can the price action of yields higher and equities higher continue? If it can then this will be very positive for equities and risk. Even if we see risk struggling then as long as US real yields are moving higher then this will be positive for the USD. USDJPY has rallied to a high of 102.06 overnight, with importers and macros buying, triggering stops on the move. Despite the push higher, still seeing interest in downside RKOs as cheap protection with front-end vols still elevated and RR heavily favouring $ puts. The move in USDJPY initially dragged the USD higher across the board, although AUD stems its decline near the 2012 low touching 0.9597, bouncing from a similar level which held last week. EUR prints a low of 1.2884 on the USD rally overnight but has bounced 65 bps in early London trading.
Elsewhere, markets settled down a bit after the long weekend with recent sell off in USDJPY & Nikkei reversing a bit today, with USDAsia moving higher in sympathy in light trading volumes. KRW, SGD and TWD have particularly been acting as risk off currencies and JPY weakness didn’t go well with these currencies in particular. Elsewhere PHP continues to look very shaky as NDF points continue to move north and there is very little USD supply from any side. Client flows still remain light in asia with players still keen to reduce their outright risk at this stage.
In our FX Daily, We looks at three elements to the USD bullish trade which are building our confidence in the view.
Click here to read the full report: FX Daily
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