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Last Thursday marked the conclusion of February, closing with a surge in equities. The market attributed these movements to the in-line Personal Consumption Expenditures (PCE) print, which alleviated concerns of another spike in inflation. However, since most components were known before the release, the outcome was not entirely surprising. Deciphering what was month-end related cross-asset and what was not proves challenging.
E-mini SP500 Futures
In the FX, there was a mix of performances. The Chilean Peso (CLP) outperformed, seemingly driven by positioning as the pair reached exhaustion above 990 earlier in the week. The Japanese Yen (JPY) experienced sharp gains into 4 pm, likely tied to month-end dynamics, while the Swiss Franc (CHF) underperformed. The latter's decline intensified following the announcement of SNB President Jordan's upcoming departure in September. EURCHF broke through its 200-day Moving Average, shifting focus to 0.9680/0.9700. CHF shorts have been popular in 2024, particularly in the macro community, with the Swiss Consumer Price Index (CPI) print on Monday serving as a crucial test for this positioning.
Shifting focus to inflation, this morning's attention is on the European inflation figures. Following last Wednesday prints from France, Germany, and Spain, economists expect Euro area headline inflation at 2.58% YoY and core inflation at 2.99% YoY. Earlier in the week, there were hopes in the market that this print might revive differentiation trades and prompt a decline in EURUSD. However, with inflation close to 3%, such a scenario seems unlikely. EURUSD did dip towards 1.0800 last Friday, driven more by month-end supply than fundamental factors. In the short term, 1.0780/1.0800 remains a downside level to watch, with 1.0860/80 on the upside.
In the broader market, the rangebound nature has kept short-dated volatility exceptionally compressed. An additional point of focus is the low FX convexity, with 1-year 10-delta flies near 20-year lows for many G10 pairs, providing an attractive hedge in a market increasingly tilted towards risk.
In other developments, a notable month-end JPY buying spree last Friday morning led to USDJPY squeezing back higher. Ueda's remarks at the G20, expressing uncertainty about achieving a sustainable inflation target, contributed to the move. China's PMI data was generally in line with expectations, with optimism surrounding future output expectations. Sun Lu highlights the People's Bank of China's (CB) efforts to cap onshore USDCNY around 7.20, coupled with a steady fixing just above 7.10 since the start of the year. The recent uptick in Northbound equity inflow (US$8bn this month) raises the likelihood of a flush out of CNH short positioning, although the medium-term bias remains towards owning long-dated USCNH topside.
USDJPY H4
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