JPY: USD/JPY Supported On Dips Amid Higher Core Yields, Q4 Tankan Today

Oil prices are little changed after falling sharply on Monday with the strengthening US dollar weighing. The USD BBDXY index is now up 2.1% since November 5 increasing another 0.5% on Tuesday driven by higher yields. The market is focussed on supply/demand fundamentals and remains concerned about an expected surplus in 2025. 

• WTI has broken below $68 and is 0.1% lower at $67.97/bbl after a high of $69.09. It is now down 1.8% this month. The bearish theme persists and the soft start to this week has reinforced it. Initial support is at $66.72 with the bear trigger at $64.16. Initial resistance is at $72.88.
• Brent is down 0.1% to $71.75/bbl after rising to $72.77 and then falling to $71.64. The benchmark is 1.4% lower in November. Initial resistance is at $76.24, November 5 high, while support is $70.28, October 29 low.
• OPEC released its monthly report which showed a downward revision to its 2024 demand forecast for the fourth straight month, a cumulative 18% reduction. 2024 demand will grow by 1.8mbd, almost 2%, down 107kbd from October due to China, India and Africa. 2025 is forecast to rise 1.5mbd, revised 103kbd lower.
• The market is worried that delayed OPEC plans to increase output will still be implemented at a time of weaker demand, especially from China. Its strategy will be revisited at the OPEC meeting on December 1. There could also be higher US production under the Trump administration. The possibility of deteriorating geopolitical tensions in the Middle East is always present with Iran threatening Israel with another attack.

NY Fed SOMA chief Perli  (speech link here) provides an update on his desk's view of funding market developments. The main takeaway from a Fed policy perspective is that "I want to make clear that there is considerable evidence that reserve supply remains abundant - quarter-end pressures do not appear to be induced by a scarcity of reserves". In other words, there is no signal from recent funding market pressures that the Federal Reserve should be considering an imminent end to QT.  However, the NY Fed is taking note of increased repo rate volatility at quarter-end.

• One measure Perli cites as evidence of relatively well-behaved funding markets is the elasticity of fed funds/IORB vs reserve supply, a data series now available on a monthly basis (Perli: "The EFFR has remained very stable relative to administered rates with no sign of upward pressure, even as Treasury repo rates have moved higher.").
• But "I, like many market participants, have observed the greater levels of volatility in overnight repo around financial reporting dates like quarter-end",  "a regular feature of money markets for a long time" - and "pricing returned to normal quite quickly after the end of September."
• He notes that there is some evidence of "intermediation frictions" and "tighter liquidity conditions" are impacting repo markets more these days, comprising "a range of factors, including regulatory costs, counterparty credit limits, and other operational limits...combined with declining liquidity and increasing collateral supply".
• Perli highlights the Standing Repo Facility as an important backstop to rates should quarter-end factors flare up more actutely: "If more acute pressures were to emerge, the SRF is available to provide funding to market participants at an administered rate. The SRF is intended to provide a ceiling for EFFR, not for repo rates. I would therefore expect there to be sizeable fraction of repo trades occurring above the SRF rate, even if the facility works as intended. That remains very much the case today, and indeed it is what happened this past quarter-end. In the meantime, I expect policy rates to remain well-controlled."

USD/JPY is tracking up nearly 0.60% for Tuesday's session. The pair was firmer for most of the post Asia close, getting to 154.92 (fresh highs back to late July) in US trade, but we track slightly lower in early Wednesday dealings, near 154.60. Broad based USD gains continued with the BBDXY index up over 1280, fresh highs since 2022. GBP was the worst G10 performer down 0.90%, despite firmer wages data, which printed late Asia Pac time yesterday. 

• For USD/JPY technicals, trend bullish conditions are unchanged. The pair got through the post US election highs from last week. Upside is on projection levels at 155.27 and 156.67. The 20-day EMA is back at 151.76.
• The USD/JPY RSI (14) is elevated at 63.37, but not yet in overbought territory.
• USD sentiment was aided by a surge in US yields, around 8-13bps higher across the benchmarks, led by the belly of the curve, with Trump related trades rolling on. The 10yr is at 4.42%, the 2yr to 4.34%, fresh highs back to late July. Rate cut expectations eased modestly, ahead of key CPI data due later in The US on Wed.  
• Locally in Japan today we have the Oct PPI print. The market expects a flat m/m outcome, but +2.9% y/y (prior was 2.8%).
• In the option expiry space, note the following for NY cut later: Y153.00($740mln), Y155.40-50($703mln).