The JPY, US Yield Curve, Asian FX and Global Bonds
The JPY is set to weaken further from here. Importantly, US Congressional leaders reached a tentative deal on government spending to end Sep, averting a shutdown, suggesting the US Treasury will increase its cash balance somewhat. The sharp decline of the Treasury’s cash level starting in February has unleashed additional cash, pushing US front end rates lower, and adding to the trend of the 3m USDJPY cross-currency basis tightening from -91bp in November to -22bp in March. Now the reverse should be expected with higher US bond yields and prospects of the upcoming US tax reform not only increasing US demand for capital, but also the potential repatriation of part of the USD 1.2-1.4trn of US corporates’ foreign earnings held in cash and marketable securities reducing the availability of offshore USDs. EURJPY has reached its highest level since 14th March.

US Treasury Secretary Mnuchin underlined the government’s 3% GDP target which he hopes could be reached through revamping the tax system, regulatory overhaul and improving trade agreements. Interestingly, he pointed out that the difference between 2% or 3% GDP growth could make up USD2trn of additional tax revenues, providing further indication of the US administration aiming for a tax reform which initially may be funded via higher deficits. His hint of using the very long end of the US yield curve for funding added to the steepening of US yield curve. Transportation Secretary Elaine Chao said the Trump administration’s sweeping infrastructure proposal will be unveiled ‘fairly shortly’. Wednesday’s vote on the Obamacare Repeal Act – if successful – could spark further optimism around the administration regaining its ability to push through reform. It may be this optimism pushing US share prices higher, volatility lower and yield differentials and the USD higher against low yielding currencies.

It seems the US administration’s future economic and fiscal plans overrule macroeconomics for now. US and global data have all been coming in weak with the Australian and the Indonesian PMI being the exception. Despite a string of mostly disappointing PMIs from Asia, the procyclical currencies in the region are the outperformers globally so far this week: TWD, NZD, MYR, KRW and AUD. The US equity market no longer takes the lead from the economic surprise indicator which has fallen to its lowest level since October 2016. It seems that declining global headwinds and prospects of an increasing pace of reform in the US have persuaded US investors to stay long risk.

Interestingly,global bond yields rallied overnight with better risk appetite and rebounding industrial raw material prices helping. Barely noticed has been the stabilisation of the CRB Rind index and copper futures challenging its three months downtrend. Apparently, commodity markets have looked beyond China using the stabilisation of its capital account to rebalance the domestic side of its economy away from its old commodity-intensive areas such as property. According to the Chinese Economic Daily, the sale of commercial property in Beijing slipped to 84 units compared to 807 units this time last year,. Sales volume in first- and second-tier cities fell to the lowest level