FX Daily Strategy: Asia, Jul 16

With the market mindful of the self-generated (and maybe spoof enhanced) setback seen into the US holiday, this naturally brings Japan’s Marine day on Monday into focus.

In reality, the argument for MoF to rock the boat with sudden guerrilla action intervention doesn’t feel compelling. But that regardless, it is worth being on alert for real and imagined noise over the next couple of days - some spec interest might indeed decide to step to the side just in case which could allow some nearby slippage.

In terms of the broader story, MoF’s attention does seem to have moved on to more strategic ideas though, as highlighted by the GPIF explorations (see here for more on that). It is interesting that some banks do seem to be suggesting anecdotally that maybe some real money and hedge fund adjustment has started to come through on the back of this possible environment shift, although if that’s the case its not really evident in the price action yet it has to be said.

On Thursday, the main European interest comes from UK GDP – May data may show conflicting signals, with a 0.1% m/m still consistent with Q2 growing by 0.2%, absent revisions of course. 

On the back of recent renewed Iran worries, like most other majors, the BoE is back to being priced by the market for two hikes, if slightly slower (first by November, second by March). 

We haven’t rally had any further clues on the current stance recently (the Mansion House speech mainly focused on regulation). The market outlook is more hawkish than our central view – we do see market driven tightening coming through channels like mortgage resets over coming months nd the economic picture still dull. It does need to be acknowledged though that an entrenched abnormal Strait scenario and ongoing supply side impact does make the Bank’s position more challenging especially if food prices also do pick up on the back of various factors like weather and costs. 

Near-term sterling is still tending to focus more on the backdrop coming from the short spec base as well as some politics monitoring. Pick as chancellor is now the next knee-jerk consideration the market is attaching to. There has been a somewhat UK-press-amplified demonisation of Miliband as a source of general danger, and recent speculation has focused on Burnham allies blocking his appointment and favouring Mahmood. If that proves the case that is (apparently) sterling friendly. 

In the US, data has recently been tending to show a lift to sentiment and activity and a drop back in price pressures, but with a large amount of uncertainty over how much of this is durable, especially given the renewed geopolitical backdrop and lift to energy prices.,

Thursday sees weekly initial claims and June retail sales. The latter will be watched to see if recent consumer resilience persists. We expect a 0.2% decline overall and a 0.4% decline ex autos, but a 0.2% increase ex autos and gasoline. May business inventories, where existing data suggests a rise of 0.6%, July’s NAHB homebuilders’ index, and June pending home sales follow.

The dollar having got a bit overbought has tended to lean a bit heavy (at least when its not being spiked by headlines). It is essentially in a tight range for now. 

Most pairs have been a bit heavy by virtue of that long positioning.  USD/CAD was one such, and on pure technicals alone seems a candidate to try and stretch for 1.4/1.398~ (38% retracement), The BoC didn’t seem to give the market much initial further impetus though, slightly disappointing its hopes for something a bit more tightening-biased perhaps. The Bank is more positive on the economy though still highlighting the huge risks and uncertainties and in no hurry to be changing policy.