It now seems that yesterday’s story
‘Bout China was just transitory
Bond bears are frustrated
As fears have abated
Though any replay could be gory

This morning has seen a far less interesting array of stories with which to drive markets than we had been reading and hearing about earlier this week. Despite all the initial angst about China changing their tune on US Treasuries, the reality is that they have no choice but to remain invested, as there is no other market available where they can maintain their reserves safely. In addition, the fact is with the stability of the yuan lately, they are just not as likely to accumulate new reserves, and therefore not likely to increase their appetite. Remember, too, there is no possibility that they would discuss the idea of selling part of their holdings before they actually did so as it would work to their own disadvantage. It has been mooted that this was some type of signal from the Chinese to the Trump administration, although I doubt it had much impact. From the time I wrote yesterday morning, 10-year yields are lower by 5bps. However, this doesn’t change my view that we are going to continue to see those yields rise, but that is based on my view that measured inflation is going to return to the US.

Similar to the reversal in the Treasury market, the FX market has also returned to levels prevailing before that story made the rounds. While the dollar was under clear pressure yesterday morning, it too rebounded alongside the bond market and this morning sits little changed from Tuesday’s levels. In fact, the story today is there is no story. When looking at the FX markets broadly, compared to yesterday’s closing levels, in the G10 space, only AUD and NZD have moved more than 20bps, both rallying about 0.35% on the back of the continued strength in commodity prices. Meanwhile, in EMG world, though the movements have been slightly larger, there has been no discernible pattern. The biggest movement came from MYR, which rallied just 0.4% overnight on the back of the ongoing rise in oil prices (WTI is up to $64/BBL, its highest level since June 2015). Interestingly, the worst EMG performer overnight, though it fell just 0.25%, was MXN, despite the rise in oil prices. It seems there were some comments by the central bank governor regarding future peso weakness if NAFTA comes undone. That is a situation that I believe is entirely possible, and one about which I would be very cognizant if I had hedging activity in MXN.


Moments ago the ECB released the Minutes from the December meeting and the upshot is that the hawkish commentary we have been hearing from some members seemed to be confirmed by the Minutes. The key statement was:

“The view was widely shared among members that the Governing Council’s
communication would need to evolve gradually, without a change in sequencing, if the economy continued to expand and inflation converged further toward the Governing Council’s aim. The language pertaining to various dimensions of the
monetary-policy stance and forward guidance could be revisited early [in 2018][my emphasis].”

It was the “revisited early” part that got the market going and the euro, although it had been virtually unchanged ahead of the release, jumped 50 pips and is now back near 1.20. The thought process seems to be that they are hinting at acting more quickly with regard to reduction in QE than previously stated, which if true is certainly bullish for the euro. However, I want to hear from Signor Draghi before I change my tune there. He has been consistently dovish and until that changes, I feel the euro will have difficulty.

While the Minutes added some excitement just now, overall it was a dull session. This morning brings US PPI data (exp 0.2% for both headline and core) although unless those numbers are significantly different, PPI generally has a limited impact on markets. Tomorrow’s CPI is a different story however. We also see Initial Claims (exp 245K) but that, too, doesn’t feel like it will matter much to markets. We hear from Bill Dudley this afternoon, and perhaps he will have something new to discuss, although I wouldn’t count on that either.

At this point, the euro is going to be the story for the day, and I wouldn’t be surprised to see it extend gains as the day progresses. But other currencies don’t appear to be all that interesting.

Good luck