Tuesday, January 31, 2023

Yen Gains On Yields Drop, U.S. GDP Up Next

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by Adam Button

The made some headway on Tuesday and economic data pointed at more to come. Bond yields fell sharply across the curve, lifted the across the board, while and were the weakest. Real bond yields fell further to -1.10%, highlighting that inflation expectations remained ahead of nominal yields. 

The first look at US will be released on Thursday and it’s likely to be a dud, but the market is now focused on the strength of the rebound in Q4 and beyond. Data on Tuesday was encouraging with US rising to 113.8 from 108.3. The climbed to +12 from +3 expected. Housing is also growing into a tailwind once again with at 800K versus 760K expected.

The mood in markets overall continues to improve and we’re headed toward the risk-positive seasonal period through year end. Commodities continued to attract a solid bid despite mixed messages from China.

Looking ahead, the tone for central banks in the coming months might have been set by the yesterday. Recent Canadian data has been strong and the BOC is undoubtedly tuned into the global inflation debate along with the Canadian tailwind from commodities and the potential risks around housing.

The OIS market is pricing in nearly four rate hikes in 2022 and the BOC will have to either acknowledge it or push back. Given the inflationary winds, it will be tough to push back and that could boost the loonie. Alternatively, the 1.2420 trendline resistance from the September high has capped despite multiple attempts to break it. 

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