EM ASIA CREDIT: Indonesia: Possible AUD deal

The BBDXY range Friday night was 1188.94 - 1191.05, Asia is currently trading around 1190. The BBDXY consolidated in a tight range around 1190. The price action is particularly poor given the surge in US yields and a market that is supposedly extremely short. The USD has opened pretty flat in the Asian session, -0.01%. The larger picture remains one of USD weakness and in the current environment rallies should continue to be met with supply, first resistance is back towards the 1205/1215 area.

• Chen Zhao of Alpine Macro on LinkedIn: “Historically, the only sustained period during which international equities outperformed U.S. stocks was from 2002 to 2007. But crucially, that outperformance was driven entirely by a sharp decline in the U.S. dollar.”
• “Take European equities as an example: when measured in local currency terms, the price return of the European equity index was identical to the S&P 500 Index over that period. Thus, the underperformance of U.S. equities was entirely attributable to a 40% drop in the dollar/euro exchange rate.”
• “Therefore, the decision to overweight or underweight international equities relative to U.S. stocks is, at its core, a currency call. This brings us to the key question today: with the DXY already down 11% this year and bearish sentiment on the dollar now the consensus, do you really want to double down on that view?”
• (Bloomberg) - Dollar bears looking for encouragement would’ve pricked up their ears at some of the comments from Treasury Secretary Scott Bessent on Bloomberg TV Thursday. “The price of the dollar has nothing to do with a strong dollar policy,” he said. “The strong dollar policy is, are we doing the things over the long term to ensure that the US dollar remains the reserve currency of the world.”
• There is a broad consensus that the USD is set to embark on a decent move lower as the world reduces its exposure to the US and repatriates a lot of these flows. This consensus will also result in some decent short squeezes as a lot of the market is positioned the same way.
• Data/Events :  NFP, S&P Global Services PMI, ISM Services Index, Factory Orders, Durable Good Orders

Fig 1: BBDXY Weekly Chart

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

This morning has seen US futures open a little higher but still off the highs from last week, ESU5 -0.35%, NQU5 -0.45%. This week the tariff deadline will be closely watched by a market that looks to have a lot of positives already baked in the price. The AUD has come back under pressure in the crosses as this deadline risks rocking the boat.

• EUR/AUD - Overnight range 1.7913 - 1.7993, Asia is currently trading around 1.8025. The pair found solid support around the 1.7900 area last week and this morning is breaking through 1.8000. Breaks made in an Asian Monday morning session are normally viewed through a skeptical lens. Support seen back towards 1.7850/1.7900 and the market will be watching for any momentum above this 1.8000 area.
• GBP/AUD - Overnight range 2.0799 - 2.0857, Asia is trading around 2.0880. Decent demand was seen back towards the 2.0700 area last week, the pair continues to trade sideways in the wider 2.0500 - 2.1050 range.
• AUD/JPY - Overnight range 94.58 - 94.87, Asia is trading around 94.30. The pair failed to build any upward momentum and has now turned back lower to the middle of its 92.00 - 96.00 range. A break back below 93.50 would see price turn its focus to the lower boundary of the range.
• AUD/NZD -  Overnight range 1.0810 - 1.0825, the cross is dealing in Asia around 1.0825. The cross is struggling to get any momentum for now. It looks to be in a 1.0750 - 1.0850 range for now as it awaits a catalyst to provide some direction.

Fig 1: EUR/AUD spot Hourly Chart

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

In Tokyo morning trade, JGB futures are weaker, -12 compared to settlement levels.

• Japan May labor cash earnings were weaker than forecast. Headline nominal cash earnings rose 1.0%y/y, versus a 2.4% forecast. The prior April outcome was also revised down to a 2.0% rise (initially reported as a 2.3 % gain). In real terms, earnings were down -2.9%y/y, against a -1.7% forecast and prior -2.0% outcome. For nominal earnings this is the weakest outcome since Mar 2024, while in real terms, it is back to Sep 2023 lows.
• (Bloomberg) Despite weak real wages, underlying wage trends remain strong, keeping the Bank of Japan on a path of considering further interest rate hikes, with wage momentum expected to remain strong following robust spring wage negotiations.
• (Bloomberg) The Bank of Japan is likely to maintain its view that underlying inflation is moving closer to its 2% target, and may raise rates by 25 basis points at its July 30-31 meeting.
• Cash US tsys are flat to 3bps richer in today’s Asia-Pac session after resuming trading following the long weekend.
• Cash JGBs are flat to 4bps cheaper across benchmarks, with a steeper curve. The benchmark 5-year yield is 0.9bp higher at 0.980% versus the cycle high of 1.596%.
• The swaps curve has bear-steepened, with rates 1-4bps higher. Swap spreads are generally tighter.