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Longer- Term Yields Soared as BOJ Trimmed Purchases Print E-mail
ONG Focus | Insights | Written by Oil N' Gold | Wed Jan 10 18 00:55 ET

Japanese yen jumped after the BOJ decided to trim its purchase of very long-term (10-25years and over 25 years) JGBs. The surprising move was interpreted by many as the central bank's policy to reduce stimulus. USDJPY slipped -0.42% while EURJPY was down -0.65% on Tuesday. Japanese longer- dated 20- and 40-year bond yields rose to their highest in a month. Longer- term US Treasuries were also affected by BOJ's move with 10-year yields gaining +6 points to 2.546%. Meanwhile, US Treasury sold US$24B in three-year notes on Tuesday, to be followed by an auction of US$20B of 10-year notes on Wednesday and US$12B of 30-year bonds on Thursday. 2-year yields steadied at around 1.968%. In the commodity sector, oil prices strengthened further with the front-month WTI and Brent crude contracts soaring +1.99% and +1.53% respectively as US inventory fell sharply last week. For precious metals, gold and silver prices continued to drop on USD's strength against major currencies (except for JPY).

BOJ's move is effectively trimming the purchase of JGBs maturing in 10-to-25 years and for those in more than 25 years, by 5%. This is indeed the continuation of last year's behavior that the central bank's total JGB purchases fell below the target of 80 trillion yen. Since the announcement of Yield Curve Control measure in September 2016, BOJ has been treating this as the major policy tool, i.e. the shape of the curve (BOJ desires steeper curve) is something the BOJ is focused on rather than the annual target of 80 trillion yen.

Staying in Asia, PBOC made a technical change to its daily renminbi fixing methodology. The central bank announced that banks submitting fixings would no longer need to apply a "counter-cyclical factor" which was just introduced in May last year in order to curb volatility. Over the past decades, the Chinese government has adopted numerous reforms on renminibi. Notwithstanding the pledge to promote renminbi internationalization, the moves have been manipulated by the government to maintain currency within a desired range in accordance to the market situation. What the government is concerned the most is capital flight.

On oil inventory, the industry-sponsored API estimated that US crude oil inventory slumped -11.2 mmb in the week ended January 5. For refined oil products, gasoline and distillate stockpile rose +4.34 mmb and +4.69 mmb respectively. The EIA report today probably shows a -3.89 mmv decline in crude oil inventory. Gasoline and distillate stockpiles might have increased +2.63 mmb and +1.46 mmb last week.

On the dataflow, China's headline PPI slowed to +4.9% y/y in December from +5.8% a month ago. The market had anticipated a bigger drop to +4.8%. Headline CPI improved to +1.8% y/y from +1.7% in November. The market had anticipated a stronger improvement to +1.9%. For the day ahead, UK's IP growth probably eased to +1.8% in November, probably halving that of October. Manufacturing production might have expanded +2.8% y/y in November, following a +3.9% growth a month ago.


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