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BoJ Meeting Remains Talk of the Town

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The core bond yield slide finally halted on Friday, with some help of the technical charts. The US 10y yield (+6.1 bps) for example touched and then rebounded off 3.42% which marks both the December lows and the 50% retracement of the August-October yield rally. Other yields moved 7.5-8.9 bps higher in the 2y-5y bucket and 3.4 bps at the longest maturity. German yields only rose between 0.9 and 3.4 bps but that’s hiding intraday moves of more than 7 bps. Despite the (US) yield advance, Wall Street erased a 1% opening drop to go into the long weekend 0.3-0.71% higher. This was supported by the U. of Michigan consumer confidence. The series improved more than expected, both in terms of the current assessment and future expectations. In addition, inflation expectations for the year ahead fell from 4.4% to 4%. The upbeat sentiment also weighed on the dollar. The greenback was looking for a bottom in European dealings but eventually closed mixed, at best. EUR/USD stabilized near a nine-month high above 1.08. The trade-weighted index lost another support level at 102.34 (62% retracement of the 2022 rally). The Japanese yen continued to outperform all major peers on speculation the BoJ will deliver more policy tweaks at its meeting this Wednesday. USD/JPY tumbled from 129.25 to 127.87. Sterling recovered a tad. Production figures were a mixed bag but perhaps the currency finally took comfort from the EU and UK planning to settle the NI protocol dispute this week once and for all. EUR/GBP ended the week at 0.8857.

Asian stocks this morning trade mostly in the green, with the exception of Japan. The BoJ meeting remains talk of the town. Japan’s 10y yield again climbs beyond the 0.5% cap, renewing pressure on the central bank to intervene. The Japanese yen takes a breather today though. China’s PBOC has injected less cash via policy loans than expected this morning while keeping the rate unchanged. The country celebrates the Lunar New Year holidays next week and funding demand typically rises going into this period. US financial markets (bonds and equities) are closed for Martin Luther King Jr. Day today. This means a slow start of the week, especially with no important economic data scheduled for release in Europe. The US dollar currently trades in the defensive. We have no reasons to assume a sudden comeback of the greenback today. Next resistance in EUR/USD is located at 1.0942. Support for DXY kicks in at 101.297 (May 2022 correction low). Worth mentioning is the start of the World Economic Forum in Davos today. The gathering of world’s political and business elite runs through January 20.

News Headlines

Rating agency Fitch on Friday affirmed the Polish A credit rating with a stable outlook. It reflects the country’s diversified economy, its fairly sound macroeconomic framework supported by its EU membership and its slightly lower public debt levels in comparison with rated peers. This is balanced against lower governance indicators and income levels than the ‘A’ medians. Fitch expects Polish growth to slow from 5.7% last year to 1.1% this year, before rebounding to 2.6% in 2024. Inflation is set to average 15.5% over 2023, up from 14.3% in 2022. It is only forecasted to return to 7.7% in 2024, leaving no scope for the NBP to engage on an easing cycle. The Polish budget deficit is expected to widen to 5% of GDP this year, up from 3% in 2022 and before returning to that level in 2024. Debt metrics should put the debt ratio back on a modest downward trajectory in 2023-2024 after reaching 50.4% in 2022. The Polish zloty for almost three months now, is holding an extremely narrow range between 4.65 and 4.70.

US Treasury Secretary Yellen in a letter to Republican House majority speaker McCarthy informed him that from January 19 onwards, will begin taking special accounting measures to avoid breaching the US debt limit. Currently, US debt subject to the limit sits around $78bn below it ($31.4tn). Yellen said that it is unlikely that cash and extraordinary measures will be exhausted before early June with analysts guesstimating that the Treasury will run out of cash around August without boost to the debt ceiling. This could trigger a lengthy stalemate in split Congress with Republicans demanding spending cuts as a quid pro quo for raising the ceiling with Democrats rejecting such hostile-taking maneuvers and demanding a straight-forward increase to be able to honor previous political commitments.

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