Citi
European Open
FOMC hikes rates by 75bps, in line with market expectations. The immediate aftermath saw dollar decline, and the UST curve bull steepen aggressively. The Asia session saw DXY and UST yields reverse the prior move slightly. The Asia session remained fairly quiet, with only GBP and JPY posting noticeable moves in G10 – losses of 0.3% and 0.4% respectively. In EM, CNH pared gains post FOMC yesterday in a move lower, while BCB hiked rates by 50bps early in the Asian morning.
Ahead, the US observes the release of housing starts and building permits, as well as the Philadelphia Fed Business Outlook. Focus will, however, be on the 3 central bank decisions today. The BoE decision should result in an expected 25bps hike according to Citi Economics. SNB awaits a rate decision as well, where Citi Economics has a non-consensus call for a 25bp hike. Taiwan’s CBC will also await a rate decision, where Citi Economics calls for a a 12.5bps hike to 1.50%. Meanwhile, ECB speak will pepper the day.
What happened in markets?
FX: Dollar lost ground post the FOMC decision, although Asia session saw dollar climb slightly. Notably moves in FX came from GBP and JPY, which were down 0.3% and 0.4% respectively.
Stocks continued ticking higher, although the Asia session saw US equities only modestly higher. KOSPI and Nikkei performed well at +1.20% and +1.08% respectively.
Rates: UST curve bull steepened aggressively in the wake of the Fed says CitiFX’s Stephen Spratt, with Citi US rates desk strategist Ed Acton seeing the move as profit taking flow.
–RPM's David Bieber RPM’s had highlighted before the meeting that' short positioning / short profits was again beginning to look extended across all horizons.
–Treasuries struggled from the open in Asia, as cash sellers emerged in intermediates pressuring the market lower. The curve bear steepened as post-FOMC squeeze began to unwind. Our NY rate sales has been not expected the dovish reaction to last either, expecting 2y weakness to follow.
–We note there has been another series of 5y vs 10y block curve flatteners in futures (comb. FVU2 15,000 vs TYU2 10,000). This looks very similar to the eyebrow raising block flattener flow during Asia hours from earlier this month and if linked, points to one very large curve positions being added to.
CIBC
FX Flows
How wrong can it be? New Zealand first quarter GDP fell 0.2% against estimates of +0.6%, annually up 1.2% versus +2.4% estimates. NZ$ got booted from 0.6285 to 0.6265. The pair reversed as US equity futures climbed. That also encouraged NZ$¥ buyers. NZ$ topped out at 0.6310, some talk of sellers linked to 0.6300 strikes worth about total NZ$1.54bn. There is also a put strike at 0.6200 for NZ%1.5bn. The move lower in AU$ following the FT article also reversed the NZ$.
AU$ was bid initially, bit of AU$¥ bought as well, until Financial Times posted the story that an initiative by China Iron and Steel Association that China to consolidate the iron ore imports through a centralised controlled group this year. China is the world’s largest consumer of iron ore and most of it comes from Australia. The headline put some pressure on AU$. Labour report for May exceeded expectations, up 60.6k, mostly in full time jobs. Unemployment rate was unchanged at 3.9% as supposed to consensus of 3.8%. June consumer inflation expectation rose to 6.7%, highest since 2008 but both data failed to stir AU$.
No surprise that higher UST yields also sent $YEN higher. I was told that Japanese retail day traders also bought the $YEN. Trade deficit widened in May, imports rose 48.9%, highest in more than 40 years. Bloomberg said the jump was led by far costlier crude oil and coal imports. Move back in US yields led $YEN back to 134.0s. Support comes in at 133.47, the 23.6% retracement. Expect to run into offers ahead of 134.90.
There are plenty of ECB speakers today, hawks Knot, Villeroy, doves Visco, Panetta, Guindos Centeno and Makhlouf at the Young Factor Conference. EUR$ came under pressure amid higher US yields. Note there is a large option strike at 1.0500 maturing tomorrow for total of €1.26bn.
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