FX Daily Strategy: APAC, May 29th

Waiting for the truce, the market seems to have given in to its own truce or at least exhaustion with ever diminishing returns to headline volatility. Indeed, bar any expressions that talks have broken down at the last, oil seems increasingly determined to sit it out near the May lows and wait and see if and when a MoU is forthcoming. The Axios report late on Thursday, quoting US officials, seemed to broad vibe with what the market was anyway assuming here – namely, that a MoU had been agreed but was waiting on Trump’s sign off, if skirmishes or internal politics don’t derail it first.

Patience won’t be open-ended of course and maybe there could be some judicious Friday covering of the week’s action just in case for weekend risk (Trump reputedly wants a couple of days to think about it).

Maybe the only other aspect to watch for Friday noise is any 4 o’clock fix month end adjustment flows. In theory that could lift USD/JPY after the relative performance seen in May, although that differential has tempered a bit in the last few days anyway. Otherwise, USD/JPY also continues to compress in the 159 handle range, somewhat backing off the immediate intervention risk levels on the dollar drift.

Geopolitical news aside, it was notable that for the first time in a while US data (discussed here) was, on balance, softer than expected Thursday: a falling savings ratio in April suggesting downside risks to consumers, and Apr core PCE prices backing off upward revised Q1 strength, albeit with the business investment trends still looking robust. That’s further helped temper the dollar while the short-end is getting capped back.

EUR/USD has found itself pretty trapped in the 1.16-1.165 area that has tended to define the space also for recent expiries and it really needs a cleaner break out of this zone on more definitive Iran news to be showing any great life. A close above 1.655 is needed to pop towards 1.17.

In the Eurozone, German May preliminary inflation data is the focus, where we see the reading jump from 2.9% to 3.3%-3.4%, the question being the extent to which such a pick-up remains almost entirely energy driven. Inflation for France and Italy also due alongside German labour market data. Regardless, as discussed here, a pre-emptive hike from the ECB currently looks baked in for June now.

BoE Governor Bailey is speaking Friday and the main interest out of the UK. Outside of the broader dollar direction, sterling is currently largely dominated by technical range trade within its well-defined range of recent weeks, with most of the recent slippage coming in reaction off the base (EUR/GBP 0.8620/30 target and reverse). 0.8670-87 seems like where the move ought to be running out of gas, on just chart driven swing action alone.

In the US, we expect the advance goods trade deficit to rise to $90.0bn in April from $87.45bn in March, while Fed’s Paulson is due to speak.