FX Daily Strategy: Asia, Jul 28

A welcome ‘timeout’ from US-Iran exchanges is giving some space for further talks. Whether seen as the US blinking on election polling damage, blinking into the Fed, backing off as equities looked a little wobbly, or (on some press suggestions) running low on some key missile stocks, the upshot is still the same: the hope that Trump is looking for an exit ramp again (as are Iran) and that it at least arrests the cycle of escalation. Actually ‘solving’ the arm wrestle over Strait control of course remains the elephant in the room further out but that background situation has almost become normalised.  

For FX, purist expression always tends to be found in the scandis on these machinations - so NOK was indeed again the day’s main casually to start the week, vs majors and SEK - but it was notable that more widely the dollar was more reluctant to cede ground.

That reflects the market’s stickier Fed sentiment reset and of course the immediately pending event risk with the Fed meeting outcome. Even with some of the let up in the last month’s data (easier CPI and payrolls) the market does still have a not insignificant 35-40% probability of a 25bp move in the Fed funds price, so it is not just notional risk here.

'No change' is therefore allowing some hedge unwind perhaps but for the wider money market curve and short-end, the vote also materially matters here if there is anything more than the expected minor dissent. In other words, it might need no change and less than say 2 dissents for any proper kneejerk dollar relief, while any more significant vote tally against would tend to keep the dollar bolstered.

High profile earnings (particularly Microsoft and Meta after the close Wednesday, Amazon post-Thursday) and this much watched Fed meeting therefore do have the potential then to leave the market trapped in waiting mode for much of the early week and still holding in on the dollar even with the haven respite. Options concentrations are also tending to keep Europe-dollar pegged at current pivots too (1.14 +/- on EUR/USD)

Note that month end is also coming into frame. While this has typically proved dollar supportive more often than not, it is worth noting that the S&P has clearly outperformed the heavier Nikkei this month as things stand, so it may in theory at least be a capping influence on the pair all else equal.  Technically, USD/JPY is slightly backfilling off the overbought run higher (163-162.85 support) but otherwise on the face of it the charts themselves haven’t changed their trend action, unless and until something happens to reset this. (The market has zero probability of action from the BoJ this week and very little expectation of a change in script, so deviation here would clearly be more of a shocker). 

Turning to Tuesday, there is relatively minor Eurozone data (French consumer confidence, Spanish unemployment, as well as Swedish trade).

The main notable US release of the day is the advance June trade data. We expect the deficit to correct to $100.8bn from May’s sharply higher $105.9bn.

Advance June wholesale and retail inventories are also due. Tuesday also sees May house price data from FHFA and S and P Case-Shiller and July consumer confidence.