FX Daily Strategy: Asia, Aug 13

US CPI wasn’t the most thrilling data release but, by virtue of that, was dull enough to still see US yields drift off a little. It won’t have settled any big debates or changed many opinions perhaps, and we note some details like ‘lodging away from home’ perhaps dampening the last couple of outcomes, but the prints were ‘ordinary’ enough to not make the case for Fed action (and multiple actions) any more urgent at least.

That said, trend does remain higher than it should be, across many variants, and the current prints are occurring during the ‘window’ when some energy relief was in play - relief that has neither been extended nor currently looking that secure (with Iran still anything but in the clear and increasing warnings over strategic reserves, as well as refining).

With US2s nonetheless slipping back to 4.15% and just above from 4 ¼ % and just above, the dollar gave just a fraction of ground without really breaking out of the recent lethargy nor forcing any position adjustments or fresh chart moves. Support was quick to appear though especially on USD/JPY where the kneejerk didn't stick. 

Where there is still a bit more life in play is back in metals and, as previously flagged as a good bet, in precious metals especially. Silver for instance has made another 10% upside and still has trend-up action in place, towards the next 71 ½ ~ break area.

That metals backdrop isn’t doing AUD any harm at all at present either, outright or back again on the cross. The AUD/NZD break above the previous noted 1.2~ level did see a decent pop to 120 ½ and just above with 1.2100/30 area and low of 3 July next level up and stiffer resistance in terms of capping. 7150/.7200 area is next higher level on AUD/USD.

Is the wider market currently complacent in terms of its wider risk tone and volatility? Almost certainly yes, But in the near-term, the trend is the trend. It is worth keeping in mind though that this is why the precious trend is the ‘purer’ expression in that it captures both the current risk meltup supported flows/sentiment and the risk and currency diversification flows/sentiment too.

Turning to Thursday, the UK comes back into focus with the June and Q2 GDP releases. There could be some significant downside surprise risk from these prints, given past evidence that heatwaves can tend to take a lump out of GVA through lost hours. For example, one recent study suggested around GBP4.5bn lost so far this year through exceptional weather, with around GBP2.5bn of that in June. If that is at all correct, they imply rather sizeable hits to today's figures. 

As such, sterling might see a kneejerk lower if the data does indeed post a large downside miss. Whether any kneejerk lasts will depend more on how willing the market is then to discount any weakness anyway as erratic. It certainly wont harm the view that the BoE is a comparative laggard when it comes to being the very last of the majors to consider lifting rates, with the majority of the board still of the view that the downside risks to growth likely outweigh the upside risks to inflation, at least as things stand in the summer.

On the charts, on EUR/GBP, a close above 0.8560 is needed to stabilise price action and give way to consolidation within congestion beneath the 0.8585 monthly high of 30 July.

Norge Bank is the other main event of the morning. There’s about a 15% chance of a hike in the price and a hike not fully priced in until the turn of the year. Tone will of course be watched closely, but we continue to view policy as already quite tight and so the Bank already well ahead of the curve.

In the US, the inflation focus moves on next to PPI. Last month, the reaction to still firm PPI did temper the reaction to the CPI recede. Weekly initial claims are due, as usual, while Fed hawk Hammack and moderate Barkin will also speak.