MNI EUROPEAN MARKETS ANALYSIS: USD On The Defensive Vs. G10 FX In Asia

US TSYS: Narrow Asia Trade

A muted round of Asia-Pac dealing sees TYU2 futures print -0-02 at 117-29 as we head towards London dealing, with the contract operating in the middle of a very narrow 0-04+ range, on volume of ~43K. Note that TYU2 experienced a brief and shallow show below its Tuesday base in early Asia-Pac trade, before ticking away from session lows. Cash Tsys sit 0.5bp richer to 1.0bp cheaper across the curve, with some light twist steepening observed.

• Hardline headlines out of China surrounding the U.S. naval presence in the Taiwan Strait did little to alter that particular narrative, while the continued uptick in new COVID cases in China failed to generate anything in the way of a meaningful market reaction.
• The proximity to impending central bank decisions, namely the FOMC (next Wednesday) & ECB (this Thursday) seems to be keeping may participants sidelined.
• Looking ahead, existing home sales data and MBA mortgage apps are due to cross on Wednesday, coming on the heels of softer than expected housing starts data and a building permits print that wasn’t quite as soft as expected, but was still negative in M/M terms. 20-Year Tsy supply is also due on Wednesday.

JGBS: Little Steeper Ahead Of BoJ

Cash JGBs run little changed to 1.5bp cheaper across the curve, with a very modest steepening bias apparent in limited dealing (20s provide the weakest point on the curve). Note that swap spreads are a touch narrower across the curve, with most of the major swap rates running marginally lower on the session.

• JGB futures ticked way from overnight lows, as wider global core FI markets nudged away from worst levels of the session, last +10..
• There has been little to note when it comes to local news flow.
• The latest liquidity enhancement auction covering off-the-run 1- to 5-Year JGBs saw firmer spread results than the previous offering, with the spread tail width remaining constant. However, the cover ratio eased below the 4.00x mark, suggesting that there was little in the way of widespread appetite at today’s auction
• Tomorrow’s domestic docket is headlined by the latest BoJ monetary policy decision. The Bank is set to leave its monetary policy settings as they are, with expectations for a markdown in immediate growth expectations and a mark higher for immediate inflation projections.

AUSSIE BONDS: Off Early Cheaps

Aussie bonds have edged away from worst levels observed after RBA Governor Lowe’s speech earlier in the session, with relatively limited trade in U.S. Tsys providing little impetus for the ACGB space. Cash ACGBs have bear flattened, running 3-5bp cheaper across the curve, while Aussie bond futures are off of session extremes. YM is -4.5 while XM is -4.0. Bills run 2 to 9 ticks cheaper through the reds.

• RBA Gov Lowe emphasised the need for a continued path of steady rate hikes in the coming meetings, in order to maintain the anchoring of inflation expectations, with the Governor also reiterating that the neutral cash rate is at least 2.50% (he also acknowledged the uncertainty surrounding such calculations), offering a slightly more conservative assessment of the neutral rate than that offered by Deputy Governor Bullock on Tuesday (albeit Lowe was more caveated with the “at least” and subsequent language surrounding inflation). The Treasurer also outlined the heavily awaited wide-spanning review of the RBA, with the details available here: (https://ministers.treasury.gov.au/ministers/jim-chalmers-2022/media-releases/review-reserve-bank)
• The ACGB May-32 auction went well, seeing the weighted average yield print 0.78bp through prevailing mids (per Yieldbroker), with the cover ratio printing 3.0025x, a shade above the 3.00x handle. The result builds on the recent run of strong ACGB auction results, with the easily-digestible DV01 and benchmark 10-Year status of the line facilitating smooth takedown.
• Tomorrow’s domestic data docket is thin at best.

FOREX: Sentiment Stays Buoyant, Greenback Extends Losses

Participants were keen to take on more risk as post-market surge in Netflix shares and a positive lead from Wall Street supported the broader equity space, outweighing a further increase in China's daily COVID-19 case count.

• Antipodean currencies led gains amid better risk sentiment. RBA Gov Lowe signalled that further hikes to the cash rate target are on the horizon but AUD/NZD ebbed lower.
• The greenback underperformed but the BBDXY Index struggled to penetrate yesterday's lows.
• USD/JPY sales emerged over the Tokyo fix but the rate then recouped the bulk of those losses.
• Inflation data from the UK & Canada as well as U.S. existing home sales & flash EU consumer confidence will hit the wires later today.
• Italy is gearing up for the next episode of its political saga, with PM Draghi expected to address the upper house at 9:30 CET.

FX OPTIONS: Expiries for Jul20 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0100(E1.1bln)
• USD/JPY: Y137.00($625mln), Y137.75($635mln), Y139.00($1.1bln)
• USD/CAD: C$1.2800-05($510mln), C$1.3285-00($1.0bln)
• USD/CNY: Cny6.6000($3.7bln), Cny6.7000($3.7bln), Cny6.8000(1.1bln)

ASIA FX: Won Leads Gains Amid Positive Mood Music, Baht Pares Loss On BoT Speak

The greenback showed some weakness, providing relief to emerging Asian currencies. Risk sentiment was firmer amid positive showing from regional equity benchmarks & U.S. e-mini futures.

• CNH: Spot USD/CNH bounced after an initial downtick and still holds ~30 pips above neutral levels. The rebound may have been facilitated by a continued acceleration in the spread of COVID-19 infections in China, with the daily case count nearing 1,000. The PBOC left Loan Prime Rates unchanged, as expected.
• KRW: The Korean won paced gains in the region, supported by firmer risk appetite. Domestic equity indices followed the regional trend, with the KOSDAQ up 1.44% as we type.
• CPO-tied IDR and MYR oscillated around neutral levels, struggling for a clear direction. Malaysia's trade balance widened to MYR21.93bn, exceeding the consensus forecast of MYR17.05bn.
• PHP: Spot USD/PHP recouped its initial losses and narrowed in on recent cyclical highs after the BSP reported a $1.574bn BoP deficit for the month of June.
• THB: The baht trimmed losses as BoT Gov Sethaput said monetary policy will put greater emphasis on inflation, with the economy on track for a recovery.

EQUITIES: Higher In Asia; Tech Stocks Lead Bid

Virtually all Asia-Pac equity indices are higher in Asia, tracking a strong, positive lead from Wall St. Tech-related equities across the region lead gains, with many reversing steep losses observed on Tuesday (with that move lower catalysed by source reports of Apple Inc planning to slow expansion plans), catching a bid on tailwinds from the previously-flagged bid in Netflix Inc (+7.9% after hours).

• The Nikkei 225 leads gains amongst regional peers, dealing 2.5% firmer at typing, outpacing the broader Topix index (+2.1%). The Nikkei is on track for a fifth consecutive higher daily close on gains observed in >95% of the index’s constituents, with the IT and materials sectors contributing the most to gains.
• The Hang Seng is 1.8% better off, hitting one-week highs on a rally in China-based tech (HSTECH: +2.4%) after a WSJ source report on Tuesday pointed to a possible $1bn fine on ride-hailing giant Didi Chuxing to conclude a year-long regulatory probe, adding to tailwinds from the previously-flagged bid in tech names after Netflix reported earnings.(+0.2%) lagged peers,
• The ASX200 deals 1.8% firmer at typing, with tech and commodity-related names contributing the most to gains. The S&P/ASX All Tech Index has added +3.7%, hitting a seven-week high earlier in the session, while the major miners trade 1.9-5.7% higher apiece on a rally in industrial metals (particularly iron and copper).
• E-minis sit 0.5-0.6% firmer apiece, operating around six-week highs at typing.

GOLD: Little Changed In Asia; Dollar Pullback Provides Little Relief

Gold deals a shade below neutral levels to print ~$1,710/oz at typing, operating around the middle of Tuesday’s ~$15 range in fairly directionless Asia-Pac dealing.

• To recap, the precious metal closed marginally higher on Tuesday, with a continued pullback in the USD from last Thursday’s cycle highs (with the DXY recording a third straight lower daily close) countering an uptick in U.S. real yields.
• Gold continues to tread water above $1,700/oz, with daily trading ranges keeping below ~$20 in recent sessions, keeping it within sight of last Thursday’s 11-month lows ($1,697.7/oz, Jul 14). Bullion’s tepid performance comes despite weakness in the Dollar and sideways action in U.S. real yields, with participants likely awaiting the upcoming FOMC (July 26-27) as Fed hawkishness continues to take focus for the space.
• From a technical perspective, gold remains in a downtrend, with moving average studies continuing to point to bearish conditions. Previously-flagged technical levels remain in play, with support located at $1,690.6/oz (Aug 9 ‘21 low), and initial resistance situated at $1,745.4/oz (Jul 13 high).

OIL: A Little Below One-Week Highs As Tight Supply Outlook Eyed Against China’s COVID Outbreak

WTI is ~-$0.30 and Brent is ~-$0.10, with both benchmarks operating just shy of their respective one-week highs made on Tuesday.

• China reported 935 fresh COVID cases for Tue (vs. 699 for Mon) as case counts in the hotspots of Guangxi (south) and Gansu (northwest) remain elevated. Meanwhile, Shanghai continues to see declining infections (15 for Tue vs. 23 for Mon) amidst a mass testing drive, while Beijing has seen single-digit case counts for over four weeks.
• Crude benchmarks were largely unmoved following the latest round of API inventory estimates on Tuesday. Source reports pointed to a larger-than-expected build in crude stockpiles with an increase in gasoline and Cushing hub stocks as well, while distillate inventories declined.
• Keeping within the U.S., fracking giant Halliburton has stated that oil companies without equipment for new wells are unlikely to secure them for at least the rest of ‘22 due to supply chain issues, limiting the (already scant) outlook for meaningful increases in near-term U.S. crude output.
• Brent remains in steep backwardation, with the prompt spread observed at ~$4.45 at typing.
• Elsewhere, Libya’s El-Feel oilfield has resumed production after three months, with output announced at 40K bpd (against 70K bpd capacity). Note that the new NOC chairman last Friday declared that the country would return to pre-crisis output levels “within a week” (potentially returning >500K bpd to markets).