FX Daily Strategy: Asia, Aug 18

The week starts with a familiar dichotomy still very much in play. On the one side, the summer low volatility risk mood intact. That, in combination with the trimming back in Fed expectations, helping keep the dollar and especially dollar/risk giving ground. DXY holds around 99.50 with 99.20 fib support ahead of 99-98.6.

Compartmentalised on the other, the ongoing standoff on Iran, seemingly going nowhere as both double down into a staring contest, seeing who running down time breaks first. While recent inventory data did take the edge off last week, that is keeping the oil curve propped, prone to drift out, and with more pressure evident out in distillates.

For now, pulling off this dual track mentality is the trend, although how long that can survive out of the summer doldrums is to be seen. Risk events lurking down the track out of holiday season remain. These include Iran, the US election, sustainability of the latest retail risk pump, and also, potentially, the lasting ripple effects of drought in Europe into the autumn. The latter spans the direct agricultural impact through to river freight and resulting industrial production logjams. This topic will be discussed in more detail in a separate report tomorrow, but the upshot is that some of the water level extremes registered in recent days could play out to further price vs growth risk headaches for Europe in coming weeks.

Where both sides of this schizophrenic market mood is still tending to more logically support is precious metals, that typically sitting in the the sweet spot of risk on and risk hedging.

CAD remains a particular focal point for the week going into Wednesday’s deadline. Talks continue ‘to the wire’ with US and Canada provinces having their own sticking points. The Trump-factor makes this genuinely unpredictable, and not even just on the day itself. Canada CPI data meanwhile was ignored into this key date. Under normal circumstances the firming data would be backing up the message coming from the real economy side and making more of an impression. The fact that the market remains almost at the peaks for CAD shorts, even now one week later on the IMM data, still underscores the fact that positionally some risk downside is being covered and the market is skewed towards short covering in the event of positive or neutral outcome.

CHF has taken a breather, after finding the test of the stronger EUR/CHF Dec25 0.94~ highs exhaustive for now and drawing in profit-taking. Support remains at 0.9350 and extends to 0.9325. Overbought conditions aside though there’s no change in tone implied yet outside of the corrective trade. It would likely take a notable spike in the volatility and risk backdrop to be turning the broader trend.

Turning to Tuesday, the UK has the June/July labour market data with the consensus looking for some retreat in the headlines earnings figure to 4% from 4.3% 3m y/y, and the unemployment rate to 4.8% from 4.9%, with some focus too on the timelier HMRC payrolls data after the slight dip last month.

German ZEW data is also seen ticking up in Aug although sentiment might be more chequered and disappoint if the drought factor does enter the mix already.

In the US, we expect July housing starts to fall by 4.7% to 1360k while permits fall by 0.3% to 1370k. July pending home sales are also due. Tuesday also sees July industrial production, where we expect a 0.4% increase overall with manufacturing rising by 0.2%, and July import and export prices.

.