FX Daily Strategy: Asia, January 8th

The Australian Monthly CPI is expected to continue treading lower, following the momentum after the lift of energy rebates. But it is unlikely to change the RBA's mind, unless there is a big miss where we see such CPI data to be below 2%, as they have pivoted their focus towards the RBA trimmed mean CPI. The RBA's current forecast of first cut in mid 2025 sounds too pessimistic and should be revised soon to Q1 2025 but the magnitude of revision remains determined by the pace of CPI moderation. As monthly CPI has been treading closer to 2%, a few steady months of sub 2% CPI should convince the RBA that inflation is indeed entering the target range, thus began their easing. 

BoJ is another tough nut to crack. Labor cash earning has been more or less steady above 2% almost for the past year. Yet, BoJ is still looking for more supporitve evidence before they further tighten. The labor cash earning data to be released is likely to remain above 2% but unlikely to reach higher percentage. There is a good cahnce the BoJ would like to wait for the spring wage negotiation in March before another step and from early reports, we are hearing labor unions to be requesting a bigger package than 2024. While it is possible for large corporation to compile a similar magnitude of hike as in 2024, SMEs will unlikely be able to afford another round of big hike, given the only gradual change in price setting behavior and subsequently squeezed profit margin. A beat in the headline labor cash earnings may keep the inactive BoJ on their toes for they are running out of reason to procrastinate.

The fate on USD/JPY will be affected by the result of wage data to an extent. Despite supportive wage growth, the BoJ has been giving little commitment in their follow through tightening even when inflation now reached a sustainable. wage driven stage. There maybe a knee jerk reaction if we see a good labor cash earning. But for such (JPY strength) to persist, the BoJ has give the market a strong rhetoric to reinforce their stance in rate hike. Still, market participants/speculators maybe reluictant to go long JPY after being wrong footed by the BoJ mulitple times in 2024.

On the chart, the pair turned up from the 156.75/156.00 support area to pressure the upside and break of the 157.85/158.08 highs opening up further extension of gains from the September low. Daily studies remains positive and clear break here will see scope to the 158.85 resistance. Gains beyond this, if seen, will open up the 160.00 figure to retest. However, divergence showing up on daily chart caution corrective pullback with support at the 156.75/156.00 area to watch. Would take break here to open up room for deeper pullback to retrace strong run-up from the 148.64 low of December.