FX Daily Strategy: Asia, May 12th

Another Monday, another Trump comment, another overnight oil bounce. And then another day of waiting out the noise and trending on regardless. Not so much complacency it seems, as a market slightly imprisoned in its state of fake calm and lack of volatility through the lack of signal to noise in the headlines, the hope that logic will dictate a resolution, and the FOMO and gamma action in the heated equity sectors. The challenge with these episodes is that these artificial compressions in volatility do eventually tend to resolve in an eventual breakout when a catalyst does appear but it can be hard to second guess as the benign action rolls on.

There are of course plenty of conceivable candidates for that, be it a harder to ignore Iran re-escalation, or even an eventual break in the ‘dash for compute’ equity fever. The semiconductor market has been a bit of an arm wrestle between spot and options trading of late, but it is hard to not view the recent vertical acceleration as ‘stretched’ as it stands, regardless of your take the medium-term outlook after recent massive spend commits out of earnings season. In any case, the broad risk market seems priced for the most benign scenarios, which leaves the risk of surprise quite skewed. For now, the trend is still very evidently up and with no relent in that trend. With the market still making that weekly stretch outside its Bollinger band, along with RSI and stochastics right up at the range tops, how heated the move has got in the process is of course very much on show.

If and when the action breaks in coming days, then the dollar does likely firm against the grain. There's still that sense in the FX market that a further dollar bounce is the most unloved scenario, which is frequently the one the market somehow has a habit of delivering. The yen crosses still offer that ‘optionality’ given the BoJ desire to floor the yen downside and the relative cheapness of the yen by recent year’s standards on any spread or risk premium benchmark. For EUR/JPY though it would need an impetus to push below 184 to look to 182, and a break below the latter to be looking more negative and encourage some follow through on the major trend break.

In terms of data, Japan sees household spending, where the focus is to judge the impact of higher prices after a poor February. This greater negative domestic sensitivity effect seen in recent years from import costs compared to the positive beta to exports is one of the key reasons the MoF has been determined to stem the yen weakness in the face of the commodity price gains. Australia sees Westpac consumer confidence and NAB business sentiment.

The main highlight will be US CPI. We are in line with market in looking for 0.6% overall and 0.4% ex food and energy, albeit with a likely one-time boost from a distortion in owners’ equivalent rent, adding 0.1% to our forecast. This lifts the yr/yr growth to 3.7% from 3.3% overall and to 2.8% from 2.6% ex food and energy and leaves the Fed in its current defensive wait-and-see mode.

Focus will then be turning to US-China trade talks and summit Wednesday onwards, events that could distract Trump from Iran and keep the wires busy. Ordinarily, you would expect these to be pre-choregraphed but with Trump the potential for unexpected comment is always high. USD/CNH has been nudging 3 year lows into the event reflecting the trend action, tendency for CNY to firm through these meetings, as well as support from resilient domestic data and the strong commodity cycle.