AUSSIE BONDS: Little Changed On A Data-Light Session

USD/JPY sits just off session highs in latest dealings, sitting close to 153.55/60. There is reasonable option expiries for NY cut later, 153.50-70($1.7bln), which may be influencing spot trends. A clean break higher could see 154.00 targeted, above which lies the 50-day EMA. 

• Yen is off around 0.70% versus the USD, comfortably the worst G10 FX performer against the USD, with the bias towards higher beta skewed slightly higher. 
• So far today, per DTCC, USD/JPY options volumes are just under $2bn, although this isn't beyond what we should normally expect. This is around 35% of total FX options volumes (per DTCC).
• The larger volume options transactions are skewed towards lower strikes levels compared with current spot and are mostly against the USD. 152.00, 152.50 have traded, with 19 Feb expiries. Longer dated expiries, with strikes at 150.05 and lower have also traded.
• USD/JPY risk reversals are mostly following spot direction. The 1 month is back to -1.22, against recent lows of -1.61. 1 month implied vol is a touch higher, but near 10% is well off 2024 cycle highs.
• JPY futures volumes sit off earlier highs, but again remain within recent norms. Open interest continues to climb though. 

The RBA decision is February 18 including updated staff forecasts and the AUD OIS market has around an 80% chance of a 25bp rate cut and as MNI discussed last week, the RBA rarely doesn’t ease if the market expects it to. In terms of the data, Q4 inflation was lower than the RBA’s November forecasts but they will be key as to whether it has gained more “confidence that inflation is moving sustainably towards target” and here the core services outcome may be a problem.

• The RBA noted in the December minutes that “underlying inflation was still too high, underpinned by persistently high services price inflation”. Core services rose 1.1% q/q and 4.2% y/y in Q4 following 1.3% & 4.1%, signalling that they remain sticky as has been the case in other countries. December monthly services rose 3.7% y/y but down from 4.2%.
• Thus the domestically-driven services will be an important input into the February RBA decision and may make the tone around any easing sound very cautious.
• The S&P Global services PMI report for January is consistent with ongoing stickiness concerns. It noted that input costs increased sharply due to wages, AUD and higher supplier prices and as a result selling prices rose at their fastest in 6 months. 

Australia services CPI y/y%

• January NAB business price/cost components were more neutral than the PMI but did signal a stalling in their moderation.
• Melbourne Institute inflation expectations and gauge for January are consistent with inflation returning to target.
• Our PCA CPI estimate, removes volatile components, eased 0.1pp to 2.7% in Q4, approaching the band mid-point.
• The AUD TWI is up 0.3% m/m in February to be down 1.6% y/y and with Q4 import prices rising only 0.2% q/q and still down 1.9% y/y, the currency is unlikely to be a concern. It is worth noting though that a 17.7% y/y drop in imported petrol prices has kept imported inflation subdued.

Australia monthly trimmed mean inflation y/y%