AUD: Asia Wrap - AUD/USD Retraces A Little Going Into NFP

The AUD/USD has had a range of 0.6565 - 0.6583 in the Asia- Pac session, it is currently trading around 0.6583. The pair tested lower on the back of a lower than expected retail sale sprint, bids emerged back around 0.6560 and the pair has erased all of its losses going into London. US Equity futures have drifted higher in Asia, ESU5 +0.30%, NQU5 +0.35%.  The market will be watching for signs of this move building upward momentum for a more significant move higher, could the catalyst be NFP on Thursday ?

• Australian retail sales rose a modest 0.2%m/m in May, after a revised flat outcome in April (originally reported as a -0.1% dip). The market consensus for the May outcome was a +0.5% rise. Other data showed May building approvals up 3.2%m/m, which was slightly below the 4.0% forecast. The April fall was revised to -4.1%m/m.
• (Bloomberg) -- Weak retail sales confirm our concerns about Australia’s consumers, who are keeping their wallets shut despite the Reserve Bank starting rate cuts in February and May. So far, there’s little sign the moves are reviving spending, and a stronger rebound likely hinges on additional easing.
• The AUD/USD is breaking through the top of its recent range as the pressure on the USD increases. First support is seen back towards 0.6500.
• The AUD needs a sustained break above 0.6550/0.6600 to potentially start building momentum for an extended move higher, a close back above 0.6600 and the focus would turn back to 0.6900/0.7000.
• Options : Closest significant option expiries for NY cut, based on DTCC data: 0.6550(AUD654m). Upcoming Close Strikes : 0.6600(AUD2.55bm July4).
• AUD/JPY - Today's range 94.30 - 94.53, it is trading currently around 94.50, +0.1%. Choppy price action as the pair establishes a range between 92.00 - 96.00. Momentum higher seems to be stalling, a break sub 0.9350 would be needed to see the focus turn lower once more.

Fig 1: AUD/USD spot Daily Chart

Source: MNI - Market News/Bloomberg Finance L.P

The TYU5 range has been 111-27 to 111-30+ during the Asia-Pacific session. It last changed hands at 111-27, down 0-00+ from the previous close. 

• The US 2-year yield has drifted higher trading around 3.776%.
• The US 10-year yield has edged higher trading around 4.25%, up 0.01 from its close.
• The 10-year yield has seen a bounce after a very strong move lower with some paring back of longs ahead of NFP. Any bounce back to the 4.35% area would offer buyers a decent level to add again.
• (Bloomberg) - “Jerome Powell repeated that the Fed probably would have cut rates further this year absent Trump’s expanded use of tariffs, although he didn’t rule out easing at July’s meeting.”
• “The $3.3 trillion US tax and spending bill passed the Senate after JD Vance cast the tie-breaking vote. The House is expected to vote on the package Wednesday, but passage isn’t guaranteed.”(BBG)
• Data/Events:  MBA Mortgage Applications, ADP, Challenger Job Cuts

Fig 1: 10-Year US Yield Daily Chart

Source: MNI - Market News/Bloomberg Finance L.P

NZGBs are richer today, with benchmark yields 2bps lower. The NZGB 10-year has slightly outperformed US 10-year since yesterday’s close, with the NZ-US yield differentials 2bps tighter on the day. 

• At +25bps, the NZ-US 10-year differential is in the top half of the -20bp to +40bps range seen this year.
• A simple regression analysis of the 3-month forward swap rate spread (1Y3M) over the past 18 months indicates the 10-year yield differential is around 7bps below its estimated fair value of +32bps.
• Notably, the regression error has fluctuated within a range of ±15bps over the past year, highlighting some variability in the relationship​.
• The 1Y3M differential continues to be a key driver of market expectations for long-term yield convergence.

Figure 1: NZ-US 10-Year Yield Differential

 Source: Bloomberg Finance LP / MNI