FX Daily Strategy: Asia, Aug 25
Reactive policy, Canada, Iran, maybe later US election - chips away at risk sentiment but also dollar confidence
FX volatility likely picking up from the extreme summer lows
CAD reaction so far measured - well within 1.3850-1.39 bounce resistance and supply
US PCE, Nvidia, Warsh remain the week's key events
The week’s main events are backloaded starting with US PCE on Wednesday, Nvidia earnings then after the close, and the closely watched Warsh Jackson Hole speech on Friday. The latter may be particularly important for bond market sentiment after recent pressure and volatility – the market doesn’t need forward guidance, just a clearer sense of a reaction function that has credibility.
While those event risks are tending to keep action sidelined, it’s a by no means quiet environment with escalation risks apparent both in Canada and in Iran. No only does the Iran move to double down on ‘economic war’ over ‘military war’ cement the current impasse but it does also have the potential to ripple if the ‘consequences’ threats truly do have any substance - cycling back, once again, to threats and trade frictions with China. Deja vu all over again. The current situation truly does have quagmire qualities.
The situation in Canada likewise remains highly fluid and unpredictable but we are currently in the bluster and rhetorical escalation phase as Canada pledges dollar-for-dollar response and Trump widens to renew 50% tariff threats on all cars, trucks and steal from Jan 2027.
This is an environment that could prove very double edged: negative considerations for risk sentiment on the one side, but also having the potential to revisit more structural negative dollar sentiment on show early in the second Trump presidency. That is a risk profile that is also vey true of those that exist into and out of the US midterm elections – for more on that, see (here). Dollar performance through the recent long end yield moves and response also attest to a market that is having qualms over policy direction and what it means for the dollar’s risk profile. It’s an environment overall that is still playing out well for gold, both tactically (here) at present, but also on a much longer-term strategic hedge/portfolio balance perspective. That bigger picture gold framing will be discussed in a separate report shortly.
FX volatility has also picked up recently from the extreme summer lows and may also face upward pressure in the next few months given this complicated backdrop.
Reaction from USD/CAD meanwhile has so far been pretty measured rather than impulsive and within the bounds of normal technical oversold corrective territory after the recent steep down move. 1.3840/50 initial bounce resistance has so far held, maybe reflecting the fact that the spec market was still short CAD, at least as far as IMM was concerned, and the challenge in discerning lasting signal from noise as the exchanges play out. Any further headline driven action has higher resistance at 1.39 area as more critical resistance area, but there may still be stale shorts to cover into retracements and as yet there is no change to the overall longer timeframe chart setup.
It’s a relatively thin calendar Tuesday. The US sees August consumer confidence, for which risk is on the downside, and July new home sales, where we expect a modest dip to 620k from 628k