FX Daily Strategy: Asia, Aug 12

We expect a subdued July CPI, up by 0.1% overall and 0.2% ex food and energy, with the respective gains before rounding being only 0.06% and 0.19%. This will however be less weak than June’s 0.4% decline overall, with the June core rate ex food and energy having been unchanged. Weekly data on gasoline shows that prices fell to their lowest level since mid-March in the first week of July before subsequently moving higher, but this still leaves gasoline prices in July averaging less than they did in June. We expect gasoline to lead a 1.9% fall in energy, following a 5.7% decline in June. We expect food to see a moderate 0.2% increase for a third straight month.

There were two main factors in the exceptional softness of June’s core rate. Firstly, a 2.3% increase in lodging away from home, which is a volatile component and we expect to see a partial reversal here.  The World Cup may be  an upside risk, but had little visible impact in June. Secondly motor vehicle insurance fell by 2.0%, a second straight sharp fall. Here we expect little change in July, consolidating but not extending recent weakness. Lower energy prices mean some downside risk in air fares, so we expect a second straight decline in transport services overall.

On the chart, cautious trade beneath congestion resistance at 100.00 has given way to a pullback to congestion support at 99.50, where mixed intraday studies are prompting fresh consolidation. Daily readings are under pressure and broader weekly charts are bearish, highlighting room for further losses in the coming sessions. A close below 98.50 will add weight to sentiment and extend late-June losses towards the 99.20 Fibonacci retracement. A further close beneath here will open up the 98.60 retracement. Meanwhile, resistance remains at 100.00 and extends to the 100.35 weekly low of 15 July. This range should cap any immediate tests higher.

USD/JPY direction remain in spotlight. The joint intervention definitely has put a lid on the pair but without BoJ's pivot, JPY is hard to gain further traction if not heading the other way. Jiji reported that the BoJ may consider a September hike, earlier than the previous anticipated October hike. Such could provide the fundamental support JPY need to cover more grounds. Yet, the forward guidance need to indicate more hikes to come, to give a sustainable boost for the JPY.

The break above 158.00 see extending gains from the 155.22 low to reach resistance at 159.00/45, congestion and January high. The daily stuides are still tracking higher, having turned up from oversold areas and suggest scope for further gains. Break will open up room to the 160.00 figure then 160.50 congestion and March high. Corrective gains are expected to give way to renewed selling pressure later. Meanwhile, support is raised to the 158.50/158.00 congestion area. Break here will return focus to the downside for retest of support at 157.00/156.65 area and 156.00.