FOREX: Asia FX Wrap - USD Shorts Being Pared Back Into NFP ?

The Asia-Pac USD/JPY range has been 147.06 - 147.91, Asia is currently trading around 147.60, +0.12%. USD/JPY reacted to the capitulation in US yields and had a kneejerk move lower. The JPY got the double whammy of the move in rates and as a safe haven as risk wobbled off its highs. Price moved very quickly away from the pivotal 151/152 area much to the relief of Institutional JPY longs and the BOJ. The Pair opens in Asia testing its first support around 147.00, the more important level will be around 145.00. CFTC Data shows leveraged accounts had started to aggressively build Yen shorts last week so this quick move lower would be a bitter pill to swallow. A move sub 145.00 would turn momentum lower once more, until then the 145.00-151-00 range should dominate. USD/JPY moved higher into the Japanese fix, I suspect the price will find it tough back towards 148.50 initially.

• News flow has seen focus on the fiscal outlook, with the following headlines crossing. "ISHIBA: IMPLEMENTATION OF SUBSIDIES DEPENDS ON TALKS W PARTIES" - BBG, along with "*CDP'S NODA: TO DISCUSS SALES TAX CUT W OTHER OPPOSITION PARTIES, and "ISHIBA: MUST MULL HOW SALES TAX CUT MAY IMPACT YIELDS, TRUST" - BBG.
• Otavio Costa on X: “ The yen just recorded its biggest one-day gain against the US dollar since December 2022, when the BoJ loosened its yield curve control and allowed 10-year yields to rise. This isn’t just a one-off move, in my view, it’s part of a broader fiscal survival response. The reality is that both the US dollar and interest rates must come down, in my opinion. This kind of fiscal and monetary adjustment isn’t optional — it’s the last viable path to avoid the US economy hitting a debt wall.”
• Options : Close significant option expiries for NY cut, based on DTCC data: 149.50($752m), 150.00($1.16b), 150.50($967m).Upcoming Close Strikes : 147.65($1.14b Aug 7) - BBG.
• CFTC data shows asset managers surprisingly added slightly to their JPY longs +75119( Last +72326), while leveraged funds aggressively added to their newly built short JPY position -31280(Last -11571).

Fig 1 : JPY CFTC Data

Source: MNI - Market News/Bloomberg Finance L.P

Australian bond futures sit off earlier highs. The 3yr (YM) got above 96.70 in early dealings, but sits back near 96.65 currently, still +.105 for the session. The 10yr future (XM) got above 95.80, but is now back at 95.72, +.065 for the session. 

• Like elsewhere news flow has been fairly light so far today. This has left market largely following US moves, which pared earlier gains. Broader risk appetite has held up ok, which has likely aided some yield retracement (albeit very modest with Friday's yield losses).
• On the data front, the Melbourne Institute headline inflation gauge for July showed a material increase to 2.9% y/y from 2.4% in June as it rose 0.9% m/m. Its trimmed mean measure rose 0.8% m/m to be up 1.9% y/y from 1.2%, the highest since January. This can lead the monthly CPI trimmed mean by up to 6 months and thus could be signalling that it troughed in June around the bottom of the RBA's 2-3% target band and may rise in coming months.
• In a week of second tier data, the focus is likely to be on Tuesday’s June household spending data which will now replace retail sales, which had its last print last week. The Q2 chain volume measure is also out. Bloomberg consensus expects June consumption values to rise 0.8% m/m to be up 4.9% y/y after 4.2% in May. The ABS noted that discounting in the month had boosted June retail sales.

The AUD/USD has had a range of 0.6462 - 0.6484 in the Asia- Pac session, it is currently trading around 0.6483, +0.14%.  US Yields collapsed in response to the NFP data which sparked a kneejerk response lower in the USD. This was also a very bad day for US stocks which finally look to be pulling back from elevated levels. The question for the AUD going forward is does the USD see sellers quickly return in response to the move in rates, or can the USD rise from the ashes and return as a safe haven. The AUD bounced nicely off the 0.6400 area but I suspect sellers again back towards 0.6500/50 initially as risk wobbles and the market wrestles about what to do with the USD.

• AUSTRALIAN DATA: MI Underlying Inflation Gauge Rises Signalling Possible Trough. The Melbourne Institute headline inflation gauge for July showed a material increase to 2.9% y/y from 2.4% in June as it rose 0.9% m/m. Its trimmed mean measure rose 0.8% m/m to be up 1.9% y/y from 1.2%, the highest since January. This can lead the monthly CPI trimmed mean by up to 6 months and thus could be signalling that it troughed in June around the bottom of the RBA’s 2-3% target band and may rise in coming months. The headline inflation gauge has less signal to it. Currently the RBA remains focussed on quarterly CPI data but a more complete monthly series will be released in November.
• Options : Closest significant option expiries for NY cut, based on DTCC data: 0.6465(AUD727m), 0.6450(AUD402m). Upcoming Close Strikes : 0.6600(AUD1.97b Aug 7), 0.6800(AUD1.72b Aug 7) - BBG
• CFTC Data shows Asset managers reduced their shorts slightly -49183(Last -53959), the Leveraged community added to their own shorts -13997(Last -12010).
• AUD/JPY - Asia-Pac range 95.13 - 95.82, Asia is trading around 95.70.  The pair failed on multiple attempts above 97.00 and has moved swiftly back to test its first support around the 95.50 area. With risk having a huge reversal lower last week the headwinds for JPY crosses are growing and should risk remain under pressure I suspect bounces will initially be met with supply.

Fig 1: AUD CFTC Data

Source: MNI - Market News/Bloomberg Finance L.P