USD: Retraces Lower With US Yields

In Tokyo morning trade, JGB futures are stronger and at session highs, +27 compared to settlement levels.

• (Bloomberg) -- Many Bank of Japan board members held the view that if the central bank cuts its buying of Japanese government bonds too quickly, it might have an unforeseen impact on market stability, according to the minutes from the central bank’s June meeting.
• S&P Global PMIs for July have printed: Services Index rises to 53.6 from 51.7 in June; Composite Index rises to 51.6 from 51.5 in June.
• Cash US tsys are slightly mixed, with a steepening bias, in today’s Asia-Pac session after yesterday’s modest extension of Friday’s rally.
• Cash JGBs are flat to 3bps richer across benchmarks, led by the 10-year. The benchmark 10-year yield is 3.2bps lower at 1.485% ahead of today’s supply.
• Tuesday’s sale of 10-year JGBs may help the nation’s debt recover further from its recent struggles should it go off at similarly strong metrics to the last two sales. Yields are high enough to potentially entice buy-and-hold investors, while the international backdrop turned positive with     Friday’s weak US payrolls data. (BBG)
• Swap rates are slightly lower. Swap spreads are mostly wider.

The US Equity market seems to be concentrating on the potential rate cuts coming and ignoring the worries about growth that would make the cuts possible for now. This morning has seen US futures open a little higher, ESU5 +0.18%, NQU5 +0.20%. The AUD continued to trade heavy in the crosses, which was interesting price action considering the bounce we saw in risk across the board.

• EUR/AUD - Overnight range 1.7841 - 1.7901, Asia is currently trading around 1.7880. The pair found decent demand around the 1.7700 area and bounced nicely from there, negating the potential correction that seemed possible. Considering the bounce in risk overnight it's surprising to not see this a little lower. The direction US stocks ultimately decide on following will have a direct impact on the direction of this pair.
• GBP/AUD - Overnight range 2.0476 - 2.0560, Asia is trading around 2.0540. The pair continues to chop around just above its 2.0450 support area. The pair has found good demand towards the lower end of its 2.0400 - 2.1050 range; and with risk looking vulnerable this probably offers a good/risk reward to play from the long side looking for a move abc to 2.07/08.
• AUD/JPY - Overnight range 94.91 - 95.86, Asia is trading around 95.15. The pair failed on multiple attempts above 97.00 and has moved swiftly back to test its first support around the 95.50 area. Like the rest of the crosses I am the price action stands out that this pair has not benefited at all from the strong bounce in risk overnight. There should be sellers around the 96.00/96.50 area initially.
• AUD/NZD -  Overnight range 1.0941 - 1.0966, the cross is dealing in Asia around 1.0950. The Cross continues to trade sideways as the pair tries to build some momentum to move higher.

Fig 1: AUD/JPY spot 120min Chart

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

European and US natural gas diverged again on Monday due to differing supply situations. European prices rose 0.8% to EUR 34.26, close to the intraday high of EUR 34.38, due to an unplanned Norwegian outage and continued concern over US threats against purchasers of Russian fossil fuels with the August 8 deadline for a ceasefire in Ukraine approaching. Monday’s move shows that the European gas market remains vulnerable to unexpected developments.

• Planned maintenance continues in Norway but Karsto has had a disruption ahead of its scheduled works. However, the Hammerfest LNG export facility came back on line on the weekend, which given it accounts for around 5% of Norwegian gas exports (according to Zenergi & reported by Bloomberg), is an important supply development.
• Demand may strengthen in Egypt and Asia as temperatures rise. However in Europe, after some mild weather, it is expected to warm up approaching the weekend in the UK, France and Germany. 
• US gas fell another 4.3% to $2.952 reaching a low of $2.895. It is currently around $2.935. Prices are down 18% since the July 18 peak on continued strong supply and Monday was the first break of $3 this year. Forecasts for cooler weather over the central and eastern US over the second week of August (Atmospheric G2) have added to excess supply concerns from the rising rig count and storage at around 6.7% above the 5-year average (Bloomberg), which have pressured prices for the last few weeks.