MNI ASIA MARKETS ANALYSIS - AUD on Top as Markets Anticipate Hike

EURODOLLARS FUTURES: Chipping Away At Friday’s Rally

• An unsurprisingly quiet session with the US holiday, with only 41k of EDZ2 traded at the time of writing.
• Yields firmed through the white and red packs through European hours (led by EDH3 +4.5bps), with the mood set by a sharp reversal of Friday’s rally in European sovereign bonds despite few headline drivers aside late on ECB’s De Guindos leaning heavily on a 25bp hike in July.
• Front contract yields are back higher than just prior to the ISM manufacturing miss whilst the curve remains heavily inverted thereafter, peaking at 3.70% in EDZ2 before 11bps of cuts through EDZ2/EDH3 and 75bps of cuts through EDZ2/EDZ3
• Tomorrow sees a slow start to the US week with factory orders before picking up with the service PMI and FOMC minutes plus NY Fed’s Williams speaking on Wednesday.

EGBs-GILTS CASH CLOSE: Reversing Previous Gains

EGBs and Gilts sold off sharply to start the week, reversing much of Friday's rally.

• The UK and German curves sold off basically in parallel, with bellies selling off most and a degree of Gilt underperformance. Yields finished slightly off session highs.
• Equity futures rose and the EUR and GBP gained vs USD but despite the general risk-on tone, periphery spreads mostly widened.
• Monday's session was on the light side volume-wide and in terms of headline market movers, with the US on holiday.
• Data showed a rare German trade deficit and a slight weakening in Eurozone producer price inflation in May, though nothing market-moving.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany:

• Germany: The 2-Yr yield is up 10.2bps at 0.618%, 5-Yr is up 11.6bps at 1.044%, 10-Yr is up 10.1bps at 1.333%, and 30-Yr is up 7.2bps at 1.636%.
• UK: The 2-Yr yield is up 12.3bps at 1.805%, 5-Yr is up 12.2bps at 1.854%, 10-Yr is up 11bps at 2.196%, and 30-Yr is up 11.3bps at 2.567%.
• Italian BTP spread up 5.3bps at 191.2bps / Spanish up 3.3bps at 107.5bps

MNI RBA Preview - July 2022: Everything Points To 50

EXECUTIVE SUMMARY

• The analytical community is unanimously behind the idea that the RBA will deliver further tightening at its July meeting, with 25 of the 26 surveyed by BBG looking for a 50bp hike and just one looking a 75bp step. The STIR space currently prices in ~43bp of tightening come the end of the Bank’s July meeting, which equates to just under a 75% chance of a 50bp hike.
• Domestic data flow & recent comments from Governor Lowe indicate that a 50bp hike will be implemented.
• Market pricing surrounding RBA tightening continues to look aggressive.
• Expect the Board to reiterate its guidance that it “expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead.” Q2 CPI data (due 27 July) is set to provide the next major yardstick when it comes to assessing the velocity of any future RBA tightening,
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FOREX: AUD Stages Minor Bounce Pre-RBA

• The late rally last week in the JPY has slowed, putting USD/JPY back above the Y135.50 level. Last week's highs at 137.00 remain the key upside target, but a more solid recovery in equity markets will likely be needed to put the pair on more stable footing.
• The greenback traded similarly softer, although recent ranges are being largely respected thus far. The EUR fared better, seeing some support following comments from ECB's Vasle, who sees more hikes as likely in Q4 after the September decision.
• AUD was a notable outperformer ahead of this week's RBA decision, at which the bank are seen raising rates by 50bps to 1.35%. The Australian STIR space currently prices in ~43bp of tightening come the end of the Bank’s July meeting, which equates to just under a 75% chance of a 50bp hike. AUD/USD has bounced off last week's cycle lows, but remains well south of last week's best levels.
• Elsewhere, price action has generally been thin on the ground, with US markets broadly closed due to the July 4th holidays.
• Outside of the RBA rate decision on Tuesday, a number of BoE speakers are due, with Tenreyro speaking following the publication of the bank's financial stability report.

FX OPTIONS: Expiries for Jul05 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0450-70(E981mln), $1.0500-05(E596mln), $1.0600(E508mln)
• USD/JPY: Y137.00($1.7bln), Y139.00($2.2bln)
• EUR/GBP: Gbp0.8670-85(E1.5bln), Gbp0.8850(E1.1bln)
• EUR/JPY: Y144.00(E1.6bln), Y146.00(E1.6bln)
• USD/CAD: C$1.2900($675mln)

Price Signal Summary - EURUSD Path Of Least Resistance Remains Down

• In the equity space, S&P E-Minis maintain a softer tone following last week’s move lower and reversal from 3950.00, the Jun 28 high. A resumption of weakness would open 3735.00, the Jun 23 low. A breach of this level would expose key support at 3639.00, the Jun 17 low and bear trigger. Clearance of 3950.00 is required to reinstate a short-term bullish theme. EUROSTOXX 50 futures traded lower this week following the reversal from Monday’s high of 3584.00. The move lower has exposed the key support and bear trigger at 3384.00, Jun 16 low. A break would resume the primary downtrend. On the upside, clearance of 3584.0 is required to highlight a potential short-term reversal.
• In FX, the EURUSD trend needle still points south and the pair remains inside the bear channel drawn from the Feb 10 high. The channel top intersects at 1.0592 and this level represents a key short-term resistance. Attention is on 1.0350, May 13 low and the bear trigger. GBPUSD traded lower Friday before finding support. The move lower reinforces short-term bearish conditions with the focus on the bear trigger at 1.1934, the Jun 14 low. Resistance to watch remains 1.2406, the Jun 16 high. Initial resistance is at 1.2270, the 20-day EMA. The USDJPY path of least resistance remains up. Last week’s gains delivered a fresh cycle high and confirmed a resumption of the primary uptrend. Short-term retracements are considered corrective and initial support is at 134.27, the Jun 23 low. A resumption of gains would open 137.30 next, 1.50 projection of the Feb 24 - Mar 28 - 31 price swing.
• On the commodity front, Gold weakened Friday but did recover from the session low. Last week’s move lower reinforces bearish conditions and attention is on the key support and bear trigger at $1787.00, May 16 low. This level was breached, briefly, on Friday. A clear break would confirm a resumption of the downtrend and open $1780.4 Jan 28 low. Key trendline resistance intersects at $1861.7. The trendline is drawn from the Mar 8 high. In the Oil space, WTI futures found resistance last week at Wednesday’s high of $114.05. A break of this hurdle is required to confirm a resumption of the recent recovery and open $116.58, the Jun 17 high. For bears, an extension lower would instead open key support at $101.53, the Jun 22 low.
• In the FI space, Bund futures resumed their short-term uptrend last week and a bull cycle remains in play. The contract has traded above resistance at 149.00 and this has established a bullish price sequence of higher highs and higher lows on the daily chart. The focus is on 152.28, 76.4% retracement of the May 12 - Jun 16 bear leg. Gilts cleared resistance on Friday at 114.55, Jun 24 high The break highlights potential for a stronger short-term recovery and this has opened 117.48, 1.236 projection of the Jun 16 - 24 - 29 price swing.

COMMODITIES: Copper Hits Significantly Oversold Territory

• Crude oil prices have increased almost 2% today, helped by US drillers running low on drilled but not completed wells which could take longer to continue to increase production going ahead, whilst Kazakhstan's oil output is down 22% from May with planned maintenance. News that Ecuador oil output has rebounded 90% after political protests saw a small dip that was quickly reversed.
• CFTC money manager net longs for WTI and Brent were trimmed last week to the lowest since mid-May.
• WTI is +1.96% at $110.55, clearing resistance at $110.09 (20-day EMA) and opening $114.05 (Jun 29 high) required to see a resumption of the recent bullish trend.
• Brent is +1.68% at $113.50 as it moves further away from support at $108.03 (Jul 1 low) but continues to sit off $116.24 (Jun 29 high)
• Gold is -0.24% at $1807.13 after a quiet session, sitting squarely between resistance at $1830.5 (20-day EMA) and support at $1784.6 (Jul 1 low).
• Copper meanwhile continues its slide, down a further -2.5% to $8048 for a 30% decline from its all-time high in early March as copper enters a bear market with global economic activity decelerating sharply. The RSI shows the metal as being ‘significantly oversold’.