OVERNIGHT NEWS
# Yen plumbs new low of 133.30/USD and 142.56/EUR on rate differentials, plunging current account surplus. CSI-300 returns above 4,200. Markets shrug off stagflation warning by World Bank.
# Day ahead: EU final 1Q GDP, Brazil CPI, US 10y note auction, Poland CB forecast to raise rates by 75bp to 6.0%.
# Germany industrial output +0.7% mom in April (-2.2% yoy), below forecast. Manufacturing +0.3%, construction -2.1%.
# India: RBI raises policy rate by 50bp to 4.90%, inflation to stay above 2%-6% range for three quarters. FY22 inflation forecast raised to 6.7% from 5.7%. USD/INR steady at 77.71, 10y IGB yield -4bp to 7.47%.
# Nikkei +1.0%, EUR 10y IRS +2bp to 2.02%, Brent crude +0.3% to $120.9/b, Gold -0.1% to $1,849/oz.
RBI joins 50s club, hikes benchmark rate to 4.90% but still behind the inflation curve.
How central banks are responding to macroeconomic challenges remains the top focus for markets. BoJ communication this week has only underlined the widening interest rate differentials and a lack of imminent FX intervention, allowing USDJPY to test 134 and set its sight on the 2002 highs around the 135 handle. European bonds are under pressure going into the ECB, which is lending to some EUR strength especially in the crosses. The ECB, alongside US CPI on Friday, remain the key catalysts for the macro narrative, with no scheduled events of note today. Therefore low conviction, pre-event positioning and choppy intraday markets may persist in today’s session.
Other central banks are also a key focus. The RBI hiked the repo rate by 50bps, PLN should see a 75bps rate hike today while THB saw no rate change as expected. CLP rate markets may be marginally disappointed by the 75bps rate hike from the BCCh but we look to broader USD dynamics and local CPI at 08:00 EDT as next immediate catalysts. CZK markets are anticipating the CNB board announcement later today. Here, Citi Economics thinks that if the nominations are in line with media reports, we would perceive these nominations as not being dovish as the market has been concerned.
Latin America:
Latam currencies ended the session weaker, despite a weaker USD and positive commodity price action. BRL was the region’s main laggard, depreciating 1.5% as the government’s proposal to cut fuel taxes (to reduce fuel prices) and to compensate states for revenue losses sparked new fiscal concerns among market participants. The same headlines also created some upside pressure for DI rates, particularly in the belly, as January 2025 DIs closed 19bp higher. CLP continued to underperform and depreciated 0.82% as markets remained focused on the BCCh rates decision and forward guidance. The CLPxCAM curve also steepened, as 1s5s closed 4bp higher. In Colombia, price action remained somewhat mixed, as the currency closed relatively flat while COPxIBR rates remained under selling pressure; the 10y tenor closed 21bp higher, at 8.79%. MXN depreciated ~0.1% while local rates closed 2-3bp lower across most tenors, broadly supported by US long-end rates.