JAPAN: PM Ishiba's Position Looks More Assured As Polling Improves

Gilts trade away from session lows after the GBP3.0bln 4.375% Jan-40 auction generated solid demand metrics.

• Cues from Japan (trade deal with the U.S., a soft 40-Year JGB auction and questions surrounding the future of PM Ishiba) provided the bearish pressure at the open.
• Futures last -42 at 91.70 vs. session lows of 91.58, contract sticks within yesterday’s range.
• Yesterday’s boundaries present initial support and resistance (91.46/92.15).
• The recent recovery from multi-week lows threatens the bearish technical backdrop.
• Yields 3-6bp higher, curve steeper.
• 10s in the middle of the range in play since late January, last ~4.62%.
• 2s10s and 5s30s remain tethered to 75bp and 140bp, respectively, with the latter on track for a cycle closing high at current levels.
• Spread to Bunds 1.5bp wider at ~199.5bp. There hasn’t been a close above 200bp since June 20.
• GBP STIRs are a little more hawkish on the day. SONIA futures flat to -4.5. BoE-dated OIS showing just under 50bp of cuts through year-end, with ~90% odds of a cut priced for next month.
• Little of note on the wider UK macro calendar today, which will leave cross-market impulses at the fore.

• USD/JPY had an unusually volatile Asia-Pac session as Trump announced the reaching of a trade deal with Japan, speculation spilled over on a potential resignation of PM Ishiba (before being formally denied by the PM himself) and markets waded through a particularly weak long-end JGB auction. As a result, USD/JPY traded in a 100 pip range between 146.20 and 147.21 - and sits in minor positive territory headed through the NY crossover. Nonetheless, the overnight print at 146.20 extended the streak of lower lows - although the weaker dollar this week remains the dominant force.
• EUR is nominally the weakest currency in G10 Wednesday, but ranges are well worn at these levels, with EUR/GBP drifting to contain the price below 0.8700 and prevent any further bullish breakout. AUD and NZD are at the other end of the scale, rallying alongside core strength in global equity futures.
• AUD/USD is on course for a test of 0.6595 and the 0.6600 handle - the cluster of daily highs. The renewed strength has been bolstered by the pair failing to close below its 50-day EMA, keeping the bullish trend setup intact. The July 07 cycle high is located at 0.6595, and clearance of this hurdle would resume the uptrend.
• AUDJPY also stands out on the chart, having broadly respected the prior breakout level of 95.75 on Tuesday and bouncing firmly today. An initial target was reached last week at 97.33 and this remains the primary resistance. A break above here would target a move back to the 2025 highs at 99.17.
• Datapoints are few and far between Wednesday, with just the existing home sales print for June on the schedule. The Fed and ECB remain inside their pre-decision media blackout periods, which should limit any commentary on monetary policy today. 

• AUD and NZD remain the clear outperformers on Wednesday, benefitting from the buoyant price action for major equity benchmarks on the back of a US/Japan trade deal being reached overnight. Renewed bearish dollar sentiment this week is underpinning the move higher for antipodean FX, with the latest comments from Tsy Sec Bessent aiming at extending a tariff truce and widening the discussions with China also providing a tailwind.
• Furthermore, recent dovish data surprises in both Australia (weak June employment report) and New Zealand (softer Q2 CPI) may have skewed short-term positioning, potentially bolstering the chances for a more protracted squeeze as we approach some interesting chart points.
• Specifically for AUDUSD, spot is approaching a cluster of daily highs, just below the 0.66 handle. The renewed strength has been bolstered by the pair failing to close below its 50-day EMA, keeping the bullish trend setup intact. The July 07 cycle high is located at 0.6595, and clearance of this hurdle would resume the uptrend.
• Above here, resistance is scant until 0.6688, the Nov 07 high, printed shortly after the US election last year. Additionally, 0.6700 represents the 76.4% retracement of the Sep 30 ‘24 - Apr 9 bear leg.
• AUDJPY also stands out on the chart, having broadly respected the prior breakout level of 95.75 on Tuesday and bouncing firmly today. An initial target was reached last week at 97.33 and this remains the primary resistance. A break above here would target a move back to the 2025 highs at 99.17.