Sentiments remain sensitive to debt ceiling negotiations: US dollar, China A50, AUD/NZD

Market Recap

A sour tone in the US debt ceiling negotiations put a pause on Wall Street’s recent rally to end last week (DJIA -0.33%; S&P 500 -0.14%; Nasdaq -0.24%), although the smaller extent of losses still suggests broad optimistic bets that a default may be avoided. Nevertheless, sentiments will remain highly sensitive to further negotiations between US President Joe Biden and House Republican Speaker Kevin McCarthy later today, which may keep a cautious lid on Wall Street for now as the risks of an impasse remain on the table.

The US one-year credit default swap continues to surge to a new high since 2008. Treasury Secretary Janet Yellen also reiterates that early June is a "hard deadline" to raise the debt ceiling, reflecting some sense of urgency but at the same time, policymakers may want to take advantage of the heightened pressures nearing the deadline to push for their aim, making any quick resolution less likely for now.

On another front, market rate expectations, which were wavered by hawkish Fedspeak over the past week, found the much-needed reassurances from Federal Reserve (Fed) Chair Jerome Powell’s comments last Friday. The Fed Chair mentioned that policy rate may not need to rise as much as expected, which kept rate bets leaning back towards a pause in June (82% probability, up from 67% before the comments).

With that, the US Dollar took a pause on its recent rally after finding resistance at the upper edge of its Ichimoku cloud as well at the 103.12 level. The recent Commodity Futures Trading Commission (CFTC) data continues to show that the aggregate US dollar positioning vs G10 currencies headed further into net-short territory last week, which could challenge recent upside for the dollar. Any move above the 103.12 level may be on watch as a mark of victory for the bulls, which could drive a subsequent retest of the 105.00 level next.

Asia Open

Asian stocks look set for a mixed open, with Nikkei +0.05%, ASX -0.38% and KOSPI +0.85% at the time of writing. The Nikkei 225 index continues to hold onto its recent gains, despite a surprise decline in Japan’s March machinery orders (-3.5% YoY versus 1.4% forecast). But given that the readings have been uneven and largely volatile, more data will be on watch to provide a more sustained view.

While the region largely remains lacklustre, Chinese equities are attempting to recover from previous bearish sentiments. It has kept its benchmark lending rates unchanged for the ninth month in May, with a lower watermark for its growth target (around 5%) reducing the likelihood of substantial policy easing for now. The Hang Seng Index is defending its 200-day moving average (MA) but the lower highs in place since the start of the year could still leave the possibility of any bounce being a short-lived move.

The China A50 index continues to trade within a tight range on its daily chart, finding support off the lower consolidation base recently but with a series of resistance ahead to overcome. Ongoing struggle around its 200-day MA and a flat-lined moving average convergence/divergence (MACD) suggests some indecision. Greater conviction for a more sustained upside may have to come from a move back above the 13,600 level to suggest bulls in greater control (break of range, Ichimoku resistance). On the downside, a break below the 12,800 level could pave the way towards the 12,300 level next.

On the watchlist: AUD/NZD retesting year-to-date low ahead of RBNZ meeting this week

A significantly weaker-than-expected Australia’s labour data has raised the pressure for the Reserve Bank of Australia (RBA) to pause its tightening cycle, which is a stark contrast to the surprise hawkish hike delivered just at the start of the month. That puts a halt to AUD/NZD’s attempt for a bounce in mid-May and drove the pair back to retest its year-to-date low at the 1.060 level.

Interest rate futures are leaning firmly to an impending rate pause in June (84% probability) while on the other hand, the Reserve Bank of New Zealand (RBNZ) is expected to keep hiking, with the policy divergence keeping upside in check. Recent downside has marked a potential breakdown of a support confluence. Any hawkish rhetoric from the RBNZ at the upcoming meeting may prompt further downside to retest the 1.047 level, where its December 2022 bottom resides.

Friday: DJIA -0.33%; S&P 500 -0.14%; Nasdaq -0.24%, DAX +0.69%, FTSE +0.19%