NZD: Asia Wrap - NZD/USD Probing Pivotal Support On A Dovish RBNZ Cut

NZGBs closed just off session bests, with benchmark yields 3-4bps lower. 

• The RBNZ’s sector factor model result for Q2 was in line with other underlying CPI measures, showing that core inflation remained below the top of the 1-3% target band. Its measure of core inflation eased 0.1pp to 2.8% y/y, the lowest rate since Q2 2021, and is now only 0.1pp above headline CPI. Thus, with activity data still lacklustre, another 25bp rate cut on August 20 seems likely.
• With cash US tsys not trading during today’s Asia-Pac session (due to the Japan holiday), and US futures trading slightly higher, today’s move leaves the NZ–US 10-year yield differential around +16bps. At this level, the spread remains near the midpoint of the -20bps to +40bps range observed year-to-date.
• Swap rates closed 2-6bps lower, with the 2s10s curve steeper.
• RBNZ-dated OIS pricing is 5-8bps softer across meetings following today’s Q2 CPI data. 21bps of easing is priced for August, with a cumulative 37bps by November 2025.
• Tomorrow, the local calendar will see Trade Balance data.
• On Thursday, the NZ Treasury plans to sell NZ$225mn of the 3.0% Apr-29 bond, NZ$175mn of the 2.75% Apr-37 bond and NZ$50mn of the 5.0% May-54 bond.

The Asia-Pac USD/JPY range has been 147.91 - 148.66, Asia is currently trading around 148.50, -0.20%. USD/JPY gapped lower on its open in a surprising reaction to the ruling coalition losing its upper house majority. The risk back drop still looks pretty good and this election outcome should only add to the headwinds for JPY longs, was this morning's reaction a “buy the rumour sell the fact” ? I expect there will continue to be demand on dips in the short-term, first support towards 147.00 then the important pivot area around 144/145.  CFTC Data shows a clear turning in sentiment now as Asset managers reduced their shorts meaningfully and Leveraged accounts actually began to build JPY shorts.

• Focus will be on whether Ishiba is able to stay in the PM role. Bloomberg notes: "The last three LDP prime ministers who lost an upper house majority stepped down within two months, including Shinzo Abe in 2007 during his first stint as premier." But adds: "The opposition is split among roughly a dozen parties that are too fractured to pull together any kind of stable alternative if it brings a no-confidence vote against Ishiba, meaning the LDP will probably trudge along by cutting deals to cobble together support on an issue-by-issue basis."
• (Bloomberg) - “Dollar-yen may climb above 152 as Japan’s ruling Liberal Democratic Party and its partner Komeito grapple with their poor showing at Sunday’s upper-house election, according to HSBC. Yen weakness may overshoot if the Bank of Japan sees the need to adjust its JGB purchases to smooth potential bond market volatility, Paul Mackel, global head of FX research, writes in a note.”
• Options : Close significant option expiries for NY cut, based on DTCC data: 145.50($1.29b).Upcoming Close Strikes : 147.00($1.44b July 22), 147.50($1.45b July 24), 147.00($495m July 24) - BBG.

• CFTC data shows Asset managers starting to reduce JPY longs more aggressively +71610, while leveraged funds have started to build into a new short JPY position -12606.

  Fig 1 : JPY CFTC Data

   

  

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

Regional Asia Pac stocks are off to a mixed start this week. This follows a fairly indifferent lead from offshore markets in Friday cash trade, with US bourses little changed. US futures are up a touch, while EU futures are down modestly so far today, as focus remains on EU/US trade outcomes. BBG reported that EU officials are meeting this week to plan retaliatory measures if no deal can be reached before the Aug 1 deadline. 

• Japan markets are out, so we can't judge the market reaction to the weekend election result, where the ruling LDP coalition lost its majority. The result was in line with opinion polls from last week, while USD/JPY hasn't moved much so far today.
• China and Hong Kong markets are up around 0.25-0.30% so far today. The CSI 300 is building on recent positive momentum, with a weekend dam project approved aiding steel futures and iron ore prices, potentially providing some positive spill over. The index finished last week at fresh highs back to late last year. The HSI is off session highs, but still close to re-testing the 25000 level, which would be multi year highs back to 2022.
• Taiwan markets are down slightly, after a strong run through the tail end of last week. We were last down around 0.20% to 23330. The Kospi is higher though and aiming to close above 3200. Morgan Stanley raised the local index to market weight, citing reforms as a positive.  
• Australia's ASX 200 has retreated from record highs and is underperforming so far today, the index down over 1%. Bank stocks underperformed in the first part of trade.
• In SEA, trends are mixed, with Malaysia and Thailand down modestly, while Indonesia is outperforming. The JCI was last around 0.80% higher and aiming to test the 7400 region.