FX Daily Strategy: Asia, Aug 26

We expect a preliminary Q2 estimate of 1.6%, a marginal upward revision from the advance estimate of 1.5%, with the revision to be led by business investment. We expect the largest revision by component to come from private non-residential structures, though it will remain negative. A small upward revision to equipment is likely to add to the overall upward revision to business investment, making it increasingly positive. Public construction is also likely to see a small upward revision, as are inventories.

Weighing against this are likely modest downward revisions to retail sales and housing investment. Net exports are also likely to see a marginal downward revision due to service exports being revised up by more than service imports.  We expect final sales (GDP less inventories) to be unrevised at 2.2% though with a small upward revision in USD terms. We expect final sales to domestic buyers (GDP less inventories and net exports) to be revised up to 3.2% from 3.1%.

We expect July PCE price data to match the July CPI, rising by 0.1% overall and 0.2% ex food and energy. We expect a modest 0.2% increase in personal income, outperforming an unchanged outcome from personal spending. PCE price data has outperformed CPI in most recent months, a contrast from its usual tendency to underperform. Before rounding CPI rose by 0.074% but PCE prices are less sensitive to gasoline. Core CPI rose by 0.215%. We doubt core PCE prices will be quite strong enough to round up to 0.3%.

Yr/yr core PCE prices would then slip to 3.2% from 3.3% in June and a recent high of 3.4% in May. This is still well above the 2.0% Fed target. Overall PCE prices would slow to 3.6% from 3.7% in June and a recent high of 4.1% in May. The energy surge did appear to have some feed through to the core rate.

We expect a 0.6% increase in July durable goods orders with a 0.7% increase ex defense and a 0.8% increase ex transport. This will suggest some loss of what remains healthy underlying momentum, though the slowing probably reflects prices more than volumes. 

A lot of the recent volatility in overall orders has come down to aircraft. Boeing orders slipped in July after a bounce in June, but with aircraft not having seen much of a bounce in June after seasonal adjustment they may not show much of a fall in July. We expect transport to be unchanged, as a rise in autos after a fall in June offsets a modest drop in aircraft. We expect defense, which has a large overlap with transport, also to be unchanged, remaining at an elevated level. Defense bounced in March and April and changed little in May and June, sustaining its bounce.

Cautious trade above strong support at the 98.60 Fibonacci retracement is giving way to a push higher, as intraday studies improving, with prices currently pressuring congestion resistance at 99.00. Oversold daily stochastics are ticking higher, suggesting room for a test above here. But the bearish daily Tension Indicator and negative weekly charts should limit scope in renewed selling interest beneath further congestion around 99.50.

Following cautious/corrective trade, fresh losses are looked for. However, a close below 98.60 is needed to turn sentiment negative once again and extend late-June losses towards congestion around 98.00.