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[MARKET ANALYSIS] USD dips on reports that China urges banks to curb UST exposure, JPY bid as Takaichi's victory win brings political stability

The USD is facing downward pressure as China urges banks to reduce their exposure to U.S.

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[MARKET ANALYSIS] European equities are trading in the green, with the FTSE MIB (+1.3%) outperforming on the back of gains in UniCredit (+6.2%)

[MARKET ANALYSIS] JGBs started the bearish action before reports around Chinese banks UST holdings added, Gilts gapped lower despite McSweeney's departure

[MARKET ANALYSIS] USD dips on reports that China urges banks to curb UST exposure, JPY bid as Takaichi's victory win brings political stability

[MARKET ANALYSIS] Crude eases heading into a week of oil forecasts by key agencies

EZ Sentix Investor Confidence Index (Feb) 4.2 vs exp. 0 (prev. -1.8)

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  • DXY is on the backfoot today and trades at the bottom end of a 97.33-97.76 range; further pressure could see a test of last week’s trough at 97.00. Much of the pressure this morning can be associated with JPY strength (post-election, discussed below) and following a Bloomberg report which noted that China is urging banks to curb US Treasuries exposure amid market risk – whilst this piece pertains to USTs, it renews fears of a “sell America” theme. US data is lacking for the remainder of the day, so focus will be on Fed speak via Waller, Miran and Bostic. Note: Waller is to discuss “digital assets”, markets know what they expect from arch-dove Miran, and Bostic is set to retire. The docket picks up later in the week, where markets will await US NFP (Wed) and then CPI (Fri); as a reminder, recent jobs metrics have been pointing towards a weakening of the labour market.
  • JPY is amongst the outperformers this morning. USD/JPY initially gapped higher at the open (157.47), edged lower a few moments later, before reversing back to highs of 157.65. Since, the JPY has been strengthening vs the USD, potentially on a) high expectations of an LDP victory, b) higher JGB yields, c) jaw-boning via Finance Minister Katayama, d) political stability, e) odds of a BoJ hike in April rising to circa. 60% (prev. 54%). For the latter, analysts at Barclays believe that LDP’s landslide victory may allow the BoJ to proceed with normalisation “somewhat” faster. As such, the bank brought forward its expectations of a 25bps hike to April (prev. saw July), and increased its terminal forecast to 1.5% (prev. 1.25%). This morning, PM Takaichi has provided commentary, has reiterated her vows of fiscal stability, noting that she “will not resort to debt to fund the suspension of food sales tax” – another factor which is likely helping the strength in the JPY this morning. [More details can be found on the Newsquawk headline feed at 07:40 GMT]
  • G10s are broadly stronger against the USD, with JPY, AUD, EUR, and CHF all firmer by around 0.5%. The GBP is the laggard this morning, as domestic political woes remain for the PM. On Sunday, Chief of Staff McSweeney resigned from his role following the Mandelson scandal. Irrespective of this, risks still remain, as Labour MPs are reportedly calling for the PM to resign, and if he doesn’t, they will step down themselves.
Context

Treasuries, reviving concerns about a potential 'sell America' sentiment. Meanwhile, the JPY is gaining strength following Takaichi's electoral victory, which suggests greater political stability and increased expectations for a Bank of Japan interest rate hike. Overall, these dynamics point to a shifting landscape where geopolitical factors are influencing currency valuations significantly.

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