Credit Agricole
Asia overnight
Risk sentiment remains very subdued so far this week as concerns about the global growth outlook are aggravated by persistent geopolitical tensions between Russia and the West. In addition, central bank comments at the ECB central bank forum in Sintra have further highlighted the officials’ commitment to contain the latest inflation overshoot potentially at the expense of an economic downturn later this year and early next year. The Chinese PMIs released earlier today have signalled that the worst of the slowdown in the world’s second largest economy may be behind us and this has helped the AUD regain some ground. That said, we think it will take further positive surprises from global economic data to see a more sustained improvement in risk. In the meantime, the JPY has not been further undermined by the massive slump in Japan IP (-7.2% MoM in May, vs -0.3% consensus), while the high-yielding, safe-haven King USD can continue to reign supreme against the backdrop of pervasive risk aversion. On the day, month-end rebalancing flows could also support the USD across the board.
Citi
European Open
The worst quarter in at least 30y for the combined performance of stocks and bonds is ending with a whimper so far. Half year-end session so far has been characterized by very low cross-asset volumes and subdued price action. China stocks was the bright spot, powering higher after a strong PMI print. PBoC injects more funds to keep quarter-end funding smooth. G10 FX trades close to home with volumes ~15% below normal. THB gave up some of the recent rally, KRW struggling after early stock selling pressure, though the move pared as fresh demand emerged in FWDs.
Ahead, we look for rate decisions for SEK and COP, where Citi Economics expect rate hikes of 50bps and 100bps respectively. The US will see Initial Jobless & continuing claims data, as well as PCE core deflator figures, CHF looks to retail sales, while EUR will eye France CPI and eurozone unemployment prints. CAD receives GDP data as well as the CFIB Business Barometer. Over in EM, TRY looks to trade balance, HKD to retail sales and BRL to an inflation report.
What happened in markets?
G10 FX: Overnight, dollar held onto gains prior to the NY close. G10 FX stuck to a tight range against the dollar in Asia, with volumes across the board down around 15% compared to 30d averages. USD was down a touch, with NOK leading at 0.21%.
Rates: Our treasuries trader Hideyuki Liu writes that flows today have been muted, though early FM interest in 30y was seen only to be countered by modest long-end selling by RM in the afternoon. Intermediates have led the drift lower, but rather than being a move of conviction, feels more like a retracement after the sharp rally seen during NY yesterday. Both tips of the yield curve have outperformed, with month-end buying expected later today.
Oil prices continued to decline in NY and traded flat in Asia. The decline was a result of DoE confirmation of rising distillate and gasoline inventories on weak demand, which tipped the market to the downside.
Month End Rebalancing:
The final estimate of month-end FX hedge rebalancing flows continues to point to USD buying.
Asset markets have performed poorly in June with bond and equity indices in all advanced economies down. Although the US markets are not the worst performers, the dominance of US assets in global portfolio allocation and our assumption that foreigners tend to hedge their FX exposures more leads to a net USD buy-signal.
The average USD buy-signal is around 1.8 standard deviations. The signal to sell EURUSD is weaker at 1.2 standard deviations because poor performance of Euro Area bonds may create some offsetting EUR buying flows.
The signal to sell JPY vs USD is strongest at around 2 standard deviations, driven by relatively good performance of Japanese assets. This reduces foreign JPY buying needs and allows domestic JPY selling to reduce foreign fixed income hedges to dominate.
With the exceptions of GBP, NOK and SEK, we haven’t seen significant real money selling of G10 currencies in recent days, suggesting little or no early rebalancing this month.
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