FX Daily Strategy: N America, May 1st

Tokyo headline CPI is expected to arrive below target range of 2% as energy stimulus continue to cushion the oil spike due to Middle East disruption. Core-Core inflation will likely stay above target range while core CPI could be close to 2%. Indeed, all three item of Tokyo CPI came in below target in April, continues to point towards government stimulus hiding the underlying inflation and oil shock. Until wage growth is shown to be affected by energy prices, we believe the underlying inflation momentum is unfazed and should see sustainable inflation trajectory intact.

However, with the lack of hawkish commitment from the BoJ. USD/JPY is likely to search for higher grounds as haven bids favor USD even after the intervention that drove the pair five figures lower. The lack of strong commitment from the BoJ may disappoint hawks that have priced in a June/July hike. If they realize such maybe inappropriate from the drag in Middle East, market pricing may change rapidly and cutting the legs off JPY.

On the chart, anticipated gains have posted a fresh year high around 160.70, before falling sharply in both USD- and JPY-driven trade. Prices have reached 155.55, before bouncing sharply to currently trade around 156.75. Resistance is at the 157.50 weekly low of 19 March and extends to congestion around 158.00. But negative intraday studies and deteriorating daily readings should prompt renewed selling interest towards here. Following cautious/choppy trade, fresh losses are looked for. A close below the 156.35 Fibonacci retracement will add weight to sentiment and open up congestion around 156.00, ahead of the 155.40 retracement.

Despite risks coming from the Middle East, we expect April’s ISM manufacturing index to increase to 53.5 from 52.7, delivering a fourth straight clearly positive reading and the highest level since June 2022. Signaling a stronger reading are improved data from the S and P manufacturing index, Philly Fed and Empire State surveys.

These surveys suggest a bounce in new orders after two straight slowings, we expect to 55.0 from 53.5. We expect production to be little changed at 55.0 from 55.1 and only marginal increases in employment and inventories, to still negative levels. Delivery times may be inflated by war-related supply shortages and we expect a rise to 61.0 from 58.9, completing the breakdown of the composite.