FX Daily Strategy: N America, Jul 14

Traction is proving hard to come by at present, as the summer heatwave (and World Cup) goes on. Whether that is prescience or drifting complacency in markets given the renewed chastening impact of military exchanges on Strait traffic flow (at much tighter remaining reserves in refined than crude) is to be seen. It’s still a controlled arm-wrestle but not without big consequence if it rolls on and on. Indeed, the latest ramp up from Trump on threatening the renewed blockade and voicing exerting a huge toll price for taking over Strait security underscores the disintegrating settlement horizon really. Oil has now been forced to partially adjust, Brent up to $85 from the prior $80 cap, and pressures are evident elsewhere with the growing crack spreads. 

Outside of Iran, even the Japan GPIF story as failed to really spark the market much either, at least at present, USD/JPY back on the 162 handle yet again. The theme is not without its implications, direct and indirect (discussed here), but may prove to be a slow burner if it is to gain more market prominence.

Honouree mention does still go to the kiwi, where the spec data actually showed the market doubling down even more extreme NZD short into the RBNZ hike and squeeze. Overnight hawkish comments from chief economist Conway gave some extra fuel to that, allowing some further range extension down to 1.1930/00 at least on the cross. Technically, lower will see extension to the 1.1930/1.1900 area then the 1.1800 level. 

Meanwhile, what is otherwise quite a slow week sees its main calendar focal points on Tuesday, with the US CPI data, followed closely by testimony from Fed Chair Kevin Warsh to the House Financial Services Committee due 90 minutes later.

In terms of CPI, we are broadly in line with market in looking for unchanged overall, but with a slightly firmer 0.3% rise ex food and energy, 0.26% before rounding. It is hard to ignore the overarching Iran context even here though as that number can be read very differently in the midst on an ongoing supply chain constriction than it can in an environment of full return to supply chain normality.

Comments from Fed's Waller late yesterday (“if we get another hot reading on core inflation this week, then the FOMC will need to consider tightening monetary policy in the near term") have added further piquancy. Heading into the data, the market is though already now pretty much has a 25bp hike fully priced into Sep and then virtually another by turn of the year. 

Warsh may well want to continue to stick to the message of no forward guidance but it may well still surface headlines of note.

Interesting from both will not just be the results but the impact or lack of. Spec data has been implying a market that is already broadly quite long dollar already (outside of the euro) and that does seem to be one of the factors (alongside spill over to everyone’s monetary policy reaction functions), that is tending to keep dollar haven blips relatively limited and short-lived at present, at least while volatility is still pretty stable and low.

EUR/USD in particular has found it harder of late to sustain moves too far from the tight 1.14~ pivot (more options there again today), with 1.1350~ support yet to really be challenged. 1.1450/1.1473 congestion and recent high is still the limit of ambition on bounces too though.