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The session is off to a sluggish start, with major currencies and risk tones appearing uninterested. 

This comes after a strong performance by risk yesterday, although it was aided by Pfizer’s news. This is encouraging, but it also confirms that omicron is far more transmissible than delta. 

Looking ahead to the rest of the week, it’s difficult to collect any strong conviction moving into the final two days.

The AUD/USD remains buoyant, though, following yesterday’s breakthrough over the 23.6 retracement line at 0.7125. The next target is 0.7200 (38.2 retracement level @ 0.7208). 

There’s also a case to be made for staying long in oil as sentiment improves. Buyers are keeping an eye on the 100-day moving average for WTI, which is slightly over $74.

Kaisa and Evergrande

After a missing payment, Fitch downgrades Kaisa to limited default. 

Kaisa is China’s second-largest offshore debt holder behind Evergrande. Similar to Evergrande’s instance earlier this week, this would result in a cross-default on the firm’s offshore bond holdings totalling over $12 billion.” 

The downgrading is due to the lack of a grace period for the $400 million repayment of senior notes on December 7th. 

“Failure to make the principal payment is consistent with Fitch’s definition of an RD rating. As the company has experienced an uncured payment default on a material financial obligation. It has not yet entered into bankruptcy filing, administration, receivership, liquidation, or other formal winding-up procedures, and has not otherwise ceased operating,” the ratings agency adds.

Kaisa has begun work on restructuring a $12 billion debt after failing to make a bond payment. 

This follows the Chinese property developer’s failure to make a $400 million repayment on Tuesday. It resulted in a cross-default on all of its offshore obligations. Kaisa’s entire offshore debt is worth around $12 billion, placing it second only to Evergrande in that regard.

Given the scale of Kaisa’s debt, it goes without saying that this restructuring will be among the largest in China. Despite Fitch’s previous downgrading, Kaisa has not yet declared a formal default. 

Evegrande and its subsidiaries, Hengda and Tianji, will be downgraded to limited default by Fitch. The delayed payment above, like Kaisa’s, has resulted in a default on Evergrande’s obligations. As a result, Tianji and Evergrande’s other US dollar notes will become instantly due and payable if the bond trustee or holders of at least 25% of the offshore notes proclaim so.

USD/JPY

USD/JPY retreats slightly, runs into test of key near-term levels

• USD/JPY falls slightly as bond yields decline slightly to begin the session. 
• The pair has fallen from 113.60 to 113.36 in the last hour, aided by a little draw in Treasury rates. 
• Bond yields have fallen somewhat. The 10-year Treasury yield has fallen from 1.51% to 1.49 %. As a result, the yen is gaining traction as the day begins. 

• The 100 and 200-hour moving averages are resting at 113.34-43, which is helping to restrict the decrease for the time being. That is a critical line in the sand in deciding the near-term bias, which it has done this week.
• Maintain the above, and buyers will regain some control in their pursuit of testing 114.00 once more. However, a move below offers up the possibility of retesting critical support around 112.60-72. That corresponds with the earlier-mentioned storyline, according to which price action is still relatively limited.

ECB

ECB moving toward a temporary increase in regular bond purchases.

ECB nearing an agreement on temporary, limited bond purchases ECB hawks arguing for no APP purchases look willing to compromise.

They are concerned that doing nothing may cause market volatility When PEPP expires next year, the ECB aims to increase APP purchases; but, there will be size and time constraints. It is quite improbable that APP purchases would continue to rise indefinitely. Instead, the ECB will convey exceptionally strong flexibility and optionality. 

It is a foregone conclusion that PEPP purchases will not be extended beyond March of next year. However, the ECB’s debate is now focused on what comes next. As previously stated herein September, an increase in APP purchases is in the works, and officials are now leaning in that direction.

However, given the inflation issue, authorities do not want to convey any false impressions. Not only that, but the hawks are clearly battling for their own agenda as well.