FX Daily Strategy: N America, Aug 11

Cautious start to the week, USD/JPY and yen crosses the main interest but that action still dominated by technicals more than anything, with the break of recent highs seeing a good pop yesterday. It was a  Japan holiday overnight so that keeping the yen quiet after Monday’s corrective action. Press leaks suggesting the BoJ may go for a Sep hike could offer some support but recent moves have been largely technical, and the charts still see a bit more headroom for this backfilling move on USD/JOY (159 ½ to 160 or even 160 ½ ) and crosses before running into supply and fresh downside weight.

The mid-week US CPI data still represents the week’s key focal point, other than ongoing Iran watching, leaving action otherwise a little bit in waiting mode.

Oil is leaking out somewhat within the band of recent weeks as a deal still not materialising and with Iran being ‘maximalist’ on its US trolling and push for concessions. There remains a lot of doubts about whether this is heading anywhere the US can swallow and the logistically (in terms of issues like insurance, terrorism legislation etc) how easily it flies even if they did.  Indeed, it was always hard to see Trump not biting and firing back with his own rhetoric, and his calls for Iran to pay reparations shows the ongoing political and psychological obstacles to a tidy solution. The market still holds on to some hopes its all bluster otherwise Brent would be back at $95-100 already.  It's nudging that way with every day of disappointment though. 

In the meantime, the RBA decision was the main event although it passed without much incident with the expected unchanged and the market not reading overly much into the at face value slightly hawkish commentary at this point. AUD/USD has run to 0.7075 as the recent cap where it’s a bit overbought. Circa 1.2~ is key resistance on the AUDNZD cross, testing now, above which on a close is needed to extend the corrective bounce.

Stepping back from the daily, we will write about this in more detail elsewhere but for note just to note that there is something to be said for the idea of positioning for a CAD short squeeze. Recent data is suggesting some pickup in economic momentum in Canada. Into the Aug 19 US trade deadline, the market is already fully bearishly positioned and could therefore potentially see a positive surprise if recent Canada concessions (and global diversification threats) do result in progress.

Perhaps as importantly, recent spec data showed that extreme and still rising CAD shorts were an outlier amid some extreme long dollar paring, suggesting the market is again positionally maximum bearish and at risk of a short CAD squeeze. Whether that is expressed outright (maybe vs EUR) or, for instance, on a CADNOK oil cross, there is therefore some good arguments for looking for a potential CAD outperformance bounce turned squeeze in coming days.

See 'Is CAD poised for a short-squeeze?' (here) for more details. 

Otherwise on the calendar Tuesday, Tuesday sees July’s NFIB small business optimism survey, while later we expect a 1.5% fall in July existing home sales to 4.03m.