Market Implications
- Canada: We are neutral CORZ6 but are becoming more favourable to a bullish 5s stance on the 2s5s10s CGB fly.
- Japan FX: We turned neutral USD/JPY as the flow story has lost momentum. From here, a bullish JPY view can now be better expressed via bearish CHF/JPY.
- Japan Rates: We retain a bias for JOAM7 / 10y JGB steepening, now without the UST flattener.
- New Zealand: We turn neutral at 0.559 after roughly a 4% move. NZD/USD currently looks around 2% cheap on a simple rate-differential framework, and we do not see enough edge on the upcoming CPI to remain bearish.
Update on My Latest Views
Given I have been in and out of the office over recent weeks, many of my view updates have been made via Bloomberg chats. To ensure everyone is up to date, I wanted to provide a quick update on everything I have been running since September.
Bullish CORZ6 – Turned Neutral on 11 September Due to Sharp Rates Sell-Off.
Thesis:
We turned bullish CORZ6 after the market priced in slightly more than one rate hike by year-end following better domestic data and higher energy prices. Our view was that the bar for the first rate hike is high this year due to elevated excess capacity and uncertainty around the US-Canada trade relationship.
What Happened?
Canada ended up getting caught up in the rates sell-off after Gov Macklem emphasised the upside risks to inflation during the last BoC meeting, while also lowering the bar for the first hike due to the heightened chance that higher energy prices lead to second-round effects.
Our mistakes were twofold: 1) not respecting the robustness of recent data, which gave the BoC more confidence in the Canadian economy’s ability to handle rate hikes, and 2) not recognising the BoC’s likely discomfort with the overnight rate set at the lower end of neutral at 2.25%, meaning the bar to get to 2.75% is likely lower than I initially thought.
What Next?
We turned neutral at 97.32.
The market is now pricing the BoC to hike twice by March 2027 and hit the upper end of neutral at 3.25% by Q3. The 2s5s CGB curve has steepened, and Z7/Z8 CORRA is trading at 22 bps despite the quantity of hikes priced next year. Canadian economic surprises peaked in late August and now look to be rolling over. If this continues, both near- and medium-term hikes should be at risk. These put being bullish 5s on the 2s5s10s CGB fly at the top of our watchlist from here.
Bearish USD/JPY – Turned Neutral on 21 September Post-BoJ.
Thesis:
We saw a window for USD/JPY to reach 152 in August/September, driven by three catalysts: Bessent’s “asymmetric information” post joint intervention, the potential for the GPIF to shift its domestic allocation towards the top end of its range, and further FX intervention by MoFJ. Supporting, but not driving, that view was the prospect of September and December BoJ hikes as the bank looked to get ahead of upside inflation risks.
What Happened?
Despite USD/JPY temporarily hitting a 153 handle, the catalysts we expected never materialised. There were one or two days of substantial JPY buying that suggested something was happening, but there is no way to know whether that was the GPIF or another flow.
Meanwhile, the BoJ slightly fumbled the ball by allowing two dissents, both from Takaichi-appointed members. That calls into question how smoothly the remaining accelerated hikes can be delivered. We turned neutral at a disappointing 157.14 (turned bearish at 158.7).
What Next?
The story is now much messier. For JPY to strengthen materially against the dollar, we probably need either a large rally in the US front end or a meaningful improvement in JPY-specific flows. Neither looks especially likely now.
From here, we stay neutral. A bullish view on JPY could still work, but my bias would be to express this against CHF. It carries positively and preserves some optionality around renewed intervention or the broader JPY flow story eventually materialising. Moreover, XXX/JPY is now trading poorly across the board, perhaps for the first time since early 2025. This may be due to the front-end of the JPY curve holding firm, while risk-off offers a bid. On the downside, short JPY is no longer crowded, meaning the large move resulting from a positioning unwind is no longer a tailwind.
JOAM7 / 10y JGB Steepener vs. SFRM7 / 10y UST Flattener – Removed UST Leg on 1 October Ahead of Further UST Curve Steepening.
Thesis:
We liked the JOAM7 / 10y JGB steepener on the view that BoJ pricing sets a high bar for a cautious board. Rather than just turn bullish on JOAM7, we paired this with a bearish 10y JGB view for four reasons:
- A slower hiking pace should re-steepen a JGB curve that has joined the G10 flattening trend since July.
- Demand favours 5s over 10s, with the MoF’s June consultations showing a trend towards shorter maturities.
- There is a mild asymmetric fiscal risk into the FY2027 budget, which should be felt more in 10s.
- Cash JGBs have not cheapened dramatically versus swaps, so the bearish view is better expressed outright rather than through swaps.
What Happened?
The JOAM7 / 10y JGB spread has steepened by 4 bps since initiation, but this has been totally offset by the US side (SFRM7 / 10y UST), which has steepened further.
The US steepening caught me off-guard somewhat and is complicating the Japan view. Adding the UST leg was a bad call. It added complexity and risk and diluted the key view in Japan.
What Next?
I removed the UST leg on 1st October and will now stick with the JOAM7 / 10y JGB steepener to 135 bps.
Bearish NZD/USD – Turning Neutral at 0.559 Following a 4% Move
Thesis:
We turned bearish NZD/USD to gain exposure to a scenario where the dollar strengthens on stronger US data and a more hawkish Fed. It was not our base case at the time, but it is now playing out. We chose NZD specifically because of its sensitivity to risk assets and the aggressiveness of market pricing relative to RBNZ speak.
What Happened?
The view largely worked out, and NZD/USD is back trading below 0.56 despite 1y1y NZD still trading above 4.1%. On the RBNZ, Governor Breman recently suggested that the energy price path puts the risks more in line with the bank’s adverse scenario, which could warrant further action. This means October could be in play, though not currently our base case.
What Next?
It is possible NZD/USD continues lower still from here, but larger moves will likely require a repricing of the NZD front-end driven by weaker CPI data on the 21st. Given we do not have an edge on this data, while a simple rate differential model of NZD/USD suggests the pair are trading 2% too cheap, we take this opportunity to turn neutral (turned bearish at 0.584).
Ben is currently maintaining a broader bullish USD view against the EUR and thinks it can hit 1.10.
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