ASIA FX: Sharp Rebound in USD/CNH

The cash JGB curve has seen some light twist steepening during Tokyo hours, with the impetus from Monday’s U.S. Tsy trade and an uptick in most of the major regional global equity indices in the driving seat.

• That leaves cash JGBs running 0.5bp richer to a little under 1bp cheaper. Futures are roughly in line with late overnight levels, +2, unwinding an early uptick, but sticking to a narrow 12 tick range during the Tokyo session.
• Local headline flow has been limited, with Finance Minister Suzuki & BoJ Deputy Governor Amamiya reaffirming the heavily discussed policymaker view re: recent FX moves, while Amamiya also reiterated the central BoJ view re: aspects of monetary policy.
• We also got confirmation of the previously outlined story re: small trial tourist groups being allowed to visit Japan later this month, as the country looks to re-open its borders.
• Prelim Q1 GDP data & 5-Year JGB supply headlines the local docket on Wednesday.

• RES 4: 1.0852 High Apr 22
• RES 3: 1.0758 Low Apr 14 and a recent breakout level
• RES 2: 1.0642 High May 5 and key short-term resistance
• RES 1: 1.0529/0583 High May 12 / 20-day EMA
• PRICE: 1.0447 @ 06:22 BST May 17
• SUP 1: 1.0350 Low May 13 and the bear trigger
• SUP 2: 1.0341 Low Jan 3 2017 and a key support
• SUP 3: 1.0333 1.236 proj of the Feb 10 - Mar 7 - 31 price swing
• SUP 4: 1.0296 2.0% 10-dma envelope

EURUSD gains are likely a correction and the trend direction is down. The pair traded to a fresh cycle low Friday, reinforcing current bearish conditions. Support at 1.0472, Apr 28 low, was breached last week. This confirmed a bear flag breakout and a resumption of the downtrend. MA studies remain in a bear mode condition, highlighting current sentiment. The focus is on 1.0341 next, Jan 3 2017 low and key support. Key resistance is 1.0642, May 5 high.

The previously outlined positive risk sentiment observed in wider Asia dealing seemed to be the driving factor behind the pressure on the ACGB space during Sydney trade, overriding the bull flattening seen in overnight dealing.

• Some pointed to the fact that the RBA’s May meeting minutes revealed the discussion of a 40bp rate hike as a driver of the move (the Bank also discussed a 15bp move, in addition to the 25bp hike implemented), although subsequent movements in RBA pricing seemed to be more closely linked with the broader risk-on flows, as opposed to a direct response to the meeting minutes. Note that the IB strip is currently pricing ~36bp of tightening for the June meeting and a year-end cash rate of ~2.75%, with both measures incrementally higher vs. yesterday’s closing levels.
• The RBA meeting minutes also contained discussion re: inflation psychology, with the Bank clearly cognisant of the risks surrounding de-anchored inflation expectations.
• On B/S matters the Bank noted that “in some years' time, after the Bank's balance sheet had reduced further, the Board would need to consider the broader issue of the longer-term optimal size and composition of the balance sheet, including the size of Exchange Settlement balances. In this context, it might consider the use of longer-term bond holdings, although this would be driven by the appropriate operating framework in light of evolving conditions and would not have implications for, or have a bearing on, the stance of monetary policy."
• YM & XM are hovering just above session lows, -5.0 & - 4.5, respectively. Wider cash ACGB trade sees the longer end of the curve lead the way lower, with 30s cheapening by just under 6bp. EFPs are little changed on the day.
• WPI data headlines the local docket on Wednesday, with plenty of discussion evident re: the ability of the print to tip the RBA’s hand when it comes to the level of tightening that it will deploy at the June meeting.