Asia Breakfast Briefing - 22 Jan 2018 ASIAN PREVIEWBusy week ahead with a

ASIAN PREVIEW

Busy week ahead with a heavy data calendar

Asia sees JP trade balance, CPI, NZ CPI and KR Q4 adv GDP

Europe has DE ZEW/IFO surveys, consumer confidence, flash PMIs

UK to release Q4 GDP and employment report with claimant count, unemployment rate, earnings

Busy week for US as well with flash PMIs, home sales, Q4 GDP, durable goods

Canada to release Dec CPI

Australia and India have holidays on Friday

Global Focus: Plenty of central bank meetings with the BoJ, ECB, BNM scheduled

Asia FX Strat: Who are going to be the winners in Q1 ?

Asia FI Strat: BOK won"t hike this month on strong KRW and eased inflation

Viewpoint: Wages, Inflation Expectations and the BoJ

Viewpoint: Risk, Uncertainty and (Short) Volatility

The Context - newsletter from IFI Research

Viewpoint: Antipodes bulls, prepare for possible central bank "smackdown" ahead

BoJ Interest rate decision due Tuesday 23rd January 03:00am GMT

BoJ Quarterly Outlook Report due Tuesday 23rd January 05:00am GMT

The BOJ will next meet to set monetary policy on 22-23 Jan. No policy changes are expected at this stage, given core CPI remains less than halfway to their 2% target. Based on the recent Reuters poll of 40 economists, 40% see higher rates this year with 13/36 respondents stating that the JPY government could declare victory over deflation by end 2018.

Updated qtrly outlook report may not show any changes

The traditional attention would be on the BOJ"s qtrly outlook report. While we do not expect the BOJ to make any revisions to inflation f/cs, there could by revisions to the FY 2018 GDP to between 1.5%-1.9% from the current 1.4% estimate, as reported by Kyodo News. Reasons given for the upgrade were due to solid exports and capital spending, although we do not expect any changes.

Our base case is that the BOJ"s take on growth will likely to remain balanced with an upbeat external outlook offset by warnings of drag from a likely decline in public investments in 2018 and from the 2019 sales tax hike.

On inflation, the BOJ is likely to reiterate that it expects to hit the 2% target "around FY2019" although the risk remains skewed to the downside (subdued service/rental prices and increased competition by way of deregulations/tech disruptions aren"t transitory).

2018 focus on BOJ Gov and potential YCC tweaks

Will Kuroda be re-appointed?

BOJ Gov Kuroda"s term ends in Apr and whether he is re-appointed (or not) could have a big bearing on Japanese assets. At this stage, most signs point to him staying which means no radical policy shifts and a becalmed JGB market.

No YCC tweak for now but window will open starting from Q2

The BoJ caused quite a stir on the 9th of Jan when it bought Y190bn of 10-25y JGBs (prev Y200bn) and Y80bn 25+y (prev Y90bn) in its bond-purchase operation, prompting speculation of faster than expected tweaks to the YCC program and boosting the JPY.

However, we do not see the adjustments as signifying anything meaningful provided they occur in the 3-5yr and 5-10yr segments, while stealth tapering has in fact already been well underway and thus not a major surprise unless changes are formally announced.

We continue to expect no YCC tweaks with the window for such a move to open starting from Q2 as that would be the time when we get a clearer indication of whether Japan"s core CPI will start to trend up towards the 2% target (core CPI currently at 0.9% y/y).

As mentioned, thile stealth tapering has already been facilitated by YCC (2017"s monetary base expansion was well below the soft target of Yen80 trln annually), we think it"s inevitable that the BOJ will have to tweak it"s YCC parameters and more objectively discuss the notion of policy normalization towards 2019.

One reason for this is the lack of JGB supply with the large scale QQE having distorted the market by scooping up all the inherent supply in the secondary market.

As such, any YCC tweak would inherently boost the sustainability of QQE.

Another reason is that the QQE program has not had a sustained impact on Japan"s inflation/consumption dynamics or on the Yen.

This brings us to the scenario of decreasing benefits tied to 5yrs of QQE all whilst the negative effects (market distortion) build.

The above needs to be qualified to a degree.

While we think YCC tweaks could be made, the BOJ isn"t about to abruptly exit its stimulus program just yet and monetary policy as a whole will remain accommodative.

Much like what the ECB did with its taper move.

What"s clear though is that the days of stimulus expansion are over and that the bias ahead skews towards gentle normalization.

So when do we need to materially price in a YCC tweak? When the BOJ reduces purchases in the 3-5yr and 5-10yr segments at their regular bond purchase operations (last Nov"s moves were only symbolic reductions on the tails).

In so far as what tweaks could be seen, we suspect the initial move will come via lifting the 10yr JGB yield target to 0.10% from 0% (and subsequently to 0.15% and 0.20%) whilst keeping the s/t rate target around -0.10%. Why so and not BOJ Kataoka"s proposal of targeting the 15s below 0.20%? Because the BOJ will want to prevent a flattening of the yield curve.

OVERNIGHT SESSION WRAPS

US FX Close

EUR/USDUSD/JPYGBP/USDAUD/USDUSD/CADDOWDXYOPEN1.2263110.711.38750.80101.2422+53.9190.376HIGH1.2273110.801.38890.80151.2508CLOSED90.668LOW1.2217110.511.38390.79931.2421@90.341CLOSE1.2217110.801.38630.79951.250126071.7290.656

The USD Index was once again treading water into the close Friday, a recurring theme for the week as the risk of a Government shutdown at day"s end remained the primary focus. University of Michigan Consumer Sentiment came in less than expected at 94.4 vs. estimates of 97.0, though dollar bulls were able to maintain pressure near session highs following the release. Eur/Usd eased off earlier gains while continuing to range near Wednesday"s 1.2323 3-year high ahead of next Thursday"s ECB policy meeting. Additionally, Germany"s Social Democrats will vote this weekend to begin coalition talks with Angela Merkel"s Christian Democratic Union. The Yen outgained each of its G-10 peers after the WSJ reported the BoJ is considering revising their language to a less accommodative stance at next week"s policy meeting. Usd/Jpy moved lower for the 8th time in 9 days and Cad/Jpy fell the most in 1.5-weeks towards the key 7-month 80.73/86.76 rising trendline at 88.51. Chf/Jpy declined on a percentage basis 2 standard deviations below the average move over the prior 12 months. Gbp/Jpy probed under the 23.6% retracement of the recent 150.20/154.84 rise at 153.55. Aud/Jpy and Eur/Jpy each dropped for only the 2nd time in 7 sessions. Aud/Usd eased lower after earlier notching a 4-month high to sit virtually unchanged, capping off the best weekly winning streak (6) since late 2011 into early 2012 (7). Gbp/Usd fell from a fresh 19-month overnight high to decline for the first time in 7 days with UK Retail Sales falling more than forecast. Usd/Cad added nearly 0.5% despite better than expected CN Manufacturing sales. Monday"s calendar includes only Chicago Fed National Activity Index.

US Treasury Close

10-YEAR30YY10YY5YY2YY2/105/3010Y SwapHIGH96-28+

2.9282.6442.4362.06159.150.32.685LOW96-19+2.8902.6112.4072.04056.347.52.633LAST96-22

2.9112.6352.4322.05457.947.82.674CHANGE- 2+/32+.007+.010+.014+.011+0.1-0.6+.036

TREASURIES CLOSE 3:00PM – Late Thursday afternoon, Cleveland Fed"s Mester made headlines, commenting that she backs 3-4 hikes this year and next. Between those remarks and the increasing likelihood of a government shutdown, selling pressure emerged in the long-end of the curve. Losses were initially pared into the North American session, but strength on the equity open pushed the Treasuries lower once again. 10-year yields made a new 3-year 4-month high heading towards a key Fibonacci cluster consisting of 2.664 (50% of the 4.009/1.318 fall), 2.675 (0.500x 1.318/2.639 from 2.014) and the July 2014 2.687 range top which will likely be tested in the coming sessions. 7-year yields posted new 6-year 6-month highs, 5s new 7-year 8-month highs, 3s new 10-year 1-month highs and 2s new 9-year 4-month highs. Despite a disappointing University of Michigan Consumer Sentiment release, yields did not stray far from highs reached after the equity open. Overnight, the back-end led the sell-off, steepening the curve, but by the equity open, the front end had started to catch up, flattening 5/30s and 2/30s into the close. Intraday studies suggest more flattening near-term and perhaps a retest of the September 2007 narrows at 44 near a Fibonacci equality projection at 42 (288/184 from 146) for 5/30s, and Wednesday"s 2/30s trough at 77. Once again, 10, 5 and 2-year futures posted new contract lows with TYH8 heading towards Fibonacci projections at 121-18+/23+ (2.500/2.618x 125-25+/124-12 from 125-14+), FVH8 probing the lower bounds of a 1-month falling channel to threaten 115-03 (2.500x 117-11/116-17*7 from 117-03*2) and TUH8 dipping through 2-month bear channel support. Monday"s calendar is light with the Chicago Fed National Activity Index and 4-week, 3-month and 6-month auctions. MO

DAY AHEAD

Time (GMT)CtyEventPeriodSurveyPriorRevised18/1/18 - 22/01/18IDMotorcycle SalesDec--550303--18/1/18 - 22/01/18IDLocal Auto SalesDec--96148--18/1/18 - 25/01/18SLExports YoYNov--14.10%--18/1/18 - 25/01/18SLImports YoYNov--0.20%--21/1/18 21:00SKPPI YoYDec--3.10%--21/1/18 - 25/01/18SLSri Lanka NCPI YoYDec--8.40%--22/1/18 03:30THCustoms Exports YoYDec11.30%13.40%13.36%22/1/18 03:30THCustoms Imports YoYDec10.60%13.70%--22/1/18 03:30THCustoms Trade BalanceDec$1102m$1763m--22/1/18 04:00JNTokyo Condominium Sales YoYDec--24.60%--22/1/18 07:00JNConvenience Store Sales YoYDec---0.30%--22/1/18 07:00MAForeign ReservesJan-15--$102.4b--22/1/18 08:00TAExport Orders YoYDec12.20%11.60%--22/1/18 08:00TAUnemployment RateDec3.68%3.69%--22/1/18 13:30USChicago Fed Nat Activity IndexDec--0.15--22/1/18 21:30NZPerformance Services IndexDec--56.4--22/1/18 22:30AUANZ Roy Morgan Weekly Consumer Confidence IndexJan-21--123.5--22-01-18MUCPI Composite YoYDec--1.69%--22-01-18SKImports 20 Days YoYJan--19.50%--22-01-18SKExports 20 Days YoYJan--16.40%--

Central Bank Watch

Time (GMT)CtyEventPeriodPrior22/1/18 07:00FIBank of Finland Seminar on Sovereign Debt and Fin. Stability

22/1/18 09:00SZTotal Sight Deposits CHFJan-19573.8b22/1/18 09:00SZDomestic Sight Deposits CHFJan-19473.9b

Auctions

Time (GMT)CtyEventPrev Avg Yield01/1/18 - 31/1/18MAMalaysia to Sell 15Yr Bonds Due 2033 (Reopening)

22/1/18 02:30SKKorea to Sell KRW 1.75Tln 10-Year Bond2.50%22/1/18 08:00JNJapan Auction for Enhanced-Liquidity

Destinations: