MNI ASIA MARKETS ANALYSIS - 7y Sale Adds to String of Weak Auctions

US TSYS: Poorly Received 7y Auction Clears Way for Further Steepening

• The 7y note auction extended a string of weak sales this week, as the 7y tailed by 1.3bps (awarded at 4.650% vs. WI of 4.637%). The bid-to-cover of 2.43 was also soft, and marked the lowest outright demand in a year. In response to the soft sale, the 7y yield extended pre-auction deadline gains, touching 4.6537%, dragging the 10y higher with it to 4.6357% - the highest level since early May.
• Treasuries traded heavy after the poorly received auction, extending the pullback from 109-31+, the May 16 high and a key short-term resistance. Note that support at 108-15, the May 14 low, has been cleared. The break undermines the recent bullish theme and instead signals scope for a deeper retracement.
• Fed rate pricing was little changed across the session, with the bulk of the price action taking place in the longer-end of the curve. ~13bps for September and a cumulative 32bps of cuts priced into year-end.
• Fed's Beige Book detailed 'modest' price growth across the survey period, but markets proved unresponsive ahead of key PCE data due Thursday and Friday, which markets expect to be a key input for June Fed decision.

Low Congressional Approval May Dull Incumbency Advantage In November

A new survey from Gallup has found that President Biden’s approval rating and the approval rating of Congress are on a similar downtrend.

• Gallup: “Americans’ approval ratings of President Joe Biden and Congress remain well below average. Biden’s current 39% job rating is on the low end of the 37% to 44% readings he has received since September 2021, and it falls short of his 43% term average. Congress’ latest 13% approval marks its 16th consecutive rating under 21%, the average since January 2021.”
• Gallup notes the political significance of the data: “As he tries to win a second presidential term, Biden’s low approval rating makes him vulnerable. Americans’ poor opinion of Congress may also affect their willingness to vote for incumbents this year.”
• NPR notes on the power of the incumbecy: "Ninety-seven percent of incumbents get reelected. Last election cycle, 100% of Senate incumbents on the ballot got reelected. Not a single sitting U.S. senator was defeated last cycle."

Figure 1: Americans' Job Approval Ratings of President Joe Biden and Congress

Source: Gallup

FOREX: Greenback Strength Extending Amid Higher Yields & Softer Equities

• The continued upward pressure on US treasury yields and weakness for major equity indices continue to underpin the greenback bid on Wednesday. With risk sentiment notably dented, emerging market currencies notably first felt the pinch, with greenback strength steadily filtering through to the G10 complex.
•  The Euro and the Yen have weakened in line with the DXY adjustment, with USDJPY notably pushing to fresh post-intervention highs. Pressure here is keeping the spot JPY trade-weighted index on course for a test of the YTD lows - just ~1% below the current price. This leaves 158.21 as the next resistance, marking the 76.4% retracement for the intervention leg off the 160.17 multi-year high.
• In similar vein, EURUSD trades on the heavy side although continues to respect the 1.08-1.09 range that has been well established across the second half of May.
• AUD, NZD and CAD are also weakening in G10. Underperformance for the AUD comes following the stronger-than-expected CPI data overnight and short-term positioning dynamics may be modestly exacerbating the move to the lowest levels of the week. Price action is narrowing the gap to support which lies at 0.6584, the 50-day EMA.
• The Swedish Krona is the weakest in G10, dipping near 1% against the dollar and fully erasing the prior day’s strong gains.
• Swiss GDP and Spanish CPI will highlight Thursday’s European session before the second reading of US Q1 GDP crosses. Additionally, weekly jobless claims and April pending home sales for the US will be monitored.

OPTIONS: CNY, INR, HKD Among Hotspots of Quieter Options Trade

• Currency hedging volumes are recovering after an expectedly quiet start to the week (UK and US market holidays Monday), but still remain broadly subdued. There are hotspots of activity early Wednesday, namely CNY, HKD and INR, which see volumes ahead of average for this time of day.
• USD/CNY trade has been dominated by topside exposure, mirroring the recovery in spot and USD/CNH's break to the monthly highs. The lower PBOC CNY fix again helped open the door to further USD/CNY demand, evident in particular demand for 7.3000 call strikes, although 7.25, 7.28 and even 7.69 calls also saw decent interest. Close to $3 in calls have traded for every $2 in puts so far today.
• Underlying USD/INR flow has also favoured upside exposure. Accompanying the strength in spot USD/INR, 82.70 and 83.50 calls make up the most notable options trade, although a series of 85.00 call strikes rolling off late June and late August add to the theme.

FX OPTIONS: Expiries for May30 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0735-50(E2.6bln), $1.0775(E843mln), $1.0800(E524mln), $1.0825-35(E2.0bln), $1.0850($1.5bln), $1.0900-01(E1.2bln)
• USD/JPY: Y155.00($2.2bln), Y155.90-10($5.6bln), Y157.00($706mln), Y158.00($624mln), Y158.50($1.5bln), Y159.35($808mln), Y160.00($834mln)
• GBP/USD: $1.2540-50(Gbp797mln), $1.2655-60(Gbp631mln)
• EUR/JPY: Y169.70(E616mln), Y170.00(E630mln), Y170.85-00(E615mln)
• AUD/USD: $0.6525(A$709mln), $0.6700(A$932mln)
• USD/CAD: C$1.3695-00($824mln)

EQUITIES: Futures in Consolidation Mode, As Bullish Trends Correct

Eurostoxx 50 futures are in consolidation mode. The recent trend condition  remains bullish and the recent pullback appears to be a correction. The contract has recently cleared a key hurdle at 5079.00, the Apr 2 high, to confirm a resumption of the uptrend. The uptrend in S&P E-Minis remains intact and the most recent pullback appears to be a correction. The contract also traded to a fresh cycle high on May 23, reinforcing a bullish theme. Recent gains have also resulted in a break of 5333.50, Apr 1 high.

• Japan's NIKKEI closed lower by 298.5 pts or -0.77% at 38556.87 and the TOPIX ended 26.88 pts lower or -0.97% at 2741.62.
• Elsewhere, in China the SHANGHAI closed higher by 1.446 pts or +0.05% at 3111.018 and the HANG SENG ended 344.15 pts lower or -1.83% at 18477.01.
• Across Europe, Germany's DAX trades lower by 204.58 pts or -1.1% at 18473.29, FTSE 100 lower by 71.11 pts or -0.86% at 8183.07, CAC 40 down 122.77 pts or -1.52% at 7935.03 and Euro Stoxx 50 down 67.15 pts or -1.33% at 4963.2.
• Dow Jones mini down 367 pts or -0.94% at 38580, S&P 500 mini down 29 pts or -0.54% at 5295.75, NASDAQ mini down 89.75 pts or -0.47% at 18851.5.
   

WTI Crude Falls On Dollar Strength

• WTI is headed for the US close trading lower and having erased most of yesterday's gains. Downward pressure comes from a stronger USD driven by higher treasury yields and fears of ‘higher-for-longer’ US interest rates.
• WTI Jul 24 is down 0.7% at $79.3/bbl.
• Henry Hub is on track for its lowest close since May 15, with expectations of slightly cooler weather, higher production, and healthy US storage levels adding downside pressure.
• US Natgas Jun 24 is down 5.1% at $2.46/mmbtu.
• Meanwhile, spot gold is down by 0.9% to $2,341/oz, as the precious metal consolidates after hitting an all-time high of $2,450 last week.
• The medium-term trend structure remains bullish and a resumption of gains would open $2452.5 next, a Fibonacci projection. The 50-day EMA, at $2305.8, represents a key support.
• In contrast, silver has edged up by 0.1% today to $32.1/oz, within sight of last week’s 11-year high at $32.5.
• As noted, a break of this level would open $33.887 next, a Fibonacci projection.
• Copper is down by 1.3% at $479/lb.
• Following recent swings in the copper price, analysts note that with physical markets still tight, further squeezes are possible.