EM ASIA CREDIT: MNI EM Credit Market Update - Asia

ACGBs (YM +10.0 & XM +7.0) are richer but well below today's Asia-Pac session bests. 

• Markets continue to be hit by the ongoing trade-related pullback in risk appetite, although some have begun to stabilise at lower levels due to selling fatigue and profit-taking, including risk-sensitive AUD and oil prices.
• US equity futures are down sharply but also off their intraday lows.
• Some Asian countries have said today that they will take steps to stabilise markets if needed and Japan has said it will speak with the US.
• US tsy futures (TYM5) are dealing sharply higher at 113-19, +17 from closing levels, albeit well off the early high of 114-10. Cash US tsys are 3-13bps richer in today’s Asia-Pac session.
• Cash ACGBs are 5-7bps richer with the AU-US 10-year yield differential at +24bps.
• Bill strip pricing is +7 to +11, with whites leading.
• RBA-dated OIS pricing gives a 50bp rate cut in May a 50% probability, with a cumulative 117bps of easing priced by year-end (based on an effective cash rate of 4.09%).
• Earlier in the session, a 50bp rate cut in May was given an 80% probability, with a cumulative 133bps of easing priced by year-end.

The AUD/USD suffered its biggest daily drop since the sell off in 2008 as the sell off in risk assets intensified. The AUD is seen as a proxy for risk and will be sold to hedge risk by portfolio managers that are holding positions in other asset classes.

• This morning's gap lower on the open from the 0.6070 area in very thin liquidity eventually found some support around 0.5933.We have spent the rest of the session clawing back some of these losses as risk attempts to stabilise. AUD trades around 0.6015 at the time of writing.
• A big reason why the AUD/USD is so sensitive to US stocks markets is the Global Asset Allocation of Australian super funds that have significant exposure to US equities and other assets.
• Only last week there was a report from the RBA warning the pension funds' surging appetite for foreign assets could pose a risk to the country's financial system.
• During periods when the US stock market turns lower and is under pressure, these funds will actively adjust their currency hedging strategies by selling AUD. This and a capitulation of AUD/NZD longs would have contributed to Friday's ugly price action.
• In previous episodes where the AUD has collapsed in periods of risk aversion the market has been caught very long of AUD and has seen these positions having to be unwound in thin liquidity thus exacerbating the move.
• What is different this time is the market is already short, with leveraged funds already carrying a decent short position on.
• Historically the AUD has not spent a lot of time below the 0.6000 area and therefore the Super funds would normally be decent buyers of the AUD down here as they reduce their hedging ratios.The CFTC data backs this up showing their shorts having been pared back considerably from the early part of last year.
• Should these PM’s now think risk is about to move lower, and the AUD potentially sustaining a break sub 0.6000. These hedges will once more be increased and provide a significant headwind for the AUD as you can see below there is a lot of room for these positions to increase.
• While this risk averse environment dominates the AUD will continue to find sellers on any meaningful bounces and expect the 0.6070/0.6100 area to first be the level of resistance.

AUD CFTC positions

Source: MNI - Market News/Bloomberg

RBA-dated OIS pricing is 8-16bps softer across meetings today, with late 2025 leading. 

• Markets continue to be hit by the ongoing trade-related pullback in risk appetite, although some have begun to stabilise at lower levels due to selling fatigue and profit-taking, including risk-sensitive AUD and oil prices.
• US equity futures are down sharply but also off their intraday lows and yields are trending higher.
• Some Asian countries have said today that they will take steps to stabilise markets if needed and Japan has said it will speak with the US.
• A 50bp rate cut in May is given a 52% probability, with a cumulative 117bps of easing priced by year-end (based on an effective cash rate of 4.09%).
• Earlier in the session, a 50bp rate cut in May is given an 80% probability, with a cumulative 133bps of easing priced by year-end.

Figure 1: RBA-Dated OIS – Today Vs. Prior

Source: MNI – Market News / Bloomberg