JPY: Asia Wrap - USD/JPY Trades Sideways After Stalling Above 148.00
The USD/JPY range has been 147.60 - 147.87 in the Asia-Pac session, it is currently trading around 147.80, +0.05%. USD/JPY stalled above 148.00 overnight and continues to chop around sideways without really going anywhere. The USD retracement stalled as sellers reemerged even with some clearly hawkish rhetoric from Fed speakers overnight. The price is still in the middle of its recent 146-149 range, and we need a convincing break on either side to see some clearer direction again. Neither the FOMC nor the BOJ were able to provide any clarity, the market will start turning its focus towards payrolls which seems a lifetime away.
- Bloomberg - “Deutsche Bank Says Dollar to Extend Drop Against Yen This Year. George Saravelos, head of FX research anticipates more weakness for the dollar, predicting that it will fall below 140 yen by year-end. Says the need to address inflation in Japan is growing. BOJ rate hikes at a time when the Fed is cutting should support the yen, he says. “Starting from a very undervalued position, the yen has a long runway provided the political pieces fall into place following the upcoming LDP election”
- Koizumi Still Seen As Favorite For LDP Leadership Race : Koizumi continues to lead, last at highs of 70 (since the LDP election was called a few weeks ago). Koizumi noted earlier today: “MUST BE MINDFUL OF NEED FOR FISCAL DISCIPLINE, BUT ACHIEVING SOLID ECONOMIC GROWTH IS BASIS FOR GUIDING SOUND FISCAL POLICY” - RTRS
- "JAPANESE PM CONTENDER TAKAICHI: WILL USE TAX REVENUES TO FUND TAX CUT, SPENDING FOR STEPS TO COMBAT RISING PRICES BUT IF NECESSARY, SHOULD ISSUE BONDS.” - RTRS
- Options : Close significant option expiries for NY cut, based on DTCC data: 145.00($856m), 145.50($750m), 146.00($476m). Upcoming Close Strikes : 145.00($1.52b Sept 24), 152.00($1.67b Sept 26) - BBG.
- CFTC data shows last week asset managers reduced their JPY longs slightly +71162( Last +87239), leveraged funds again used the dip to add their short position believing the support will continue to hold -58811(Last -49951).
Fig 1 : USD/JPY Spot 2H Chart
Source: MNI - Market News/Bloomberg Finance L.P
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FED: NatWest Now Sees Cuts In 2025, Starting In September
As with Deutsche earlier, NatWest has changed its Fed call after the Powell Jackson Hole speech to reflect a 25bp September cut. Previously, the call was for no cuts in 2025. The new baseline outlook includes further 25bp cuts in December and March, bringing rates closer to neutral ("however, the changing composition of the committee becomes far less clear once Powell term expires in May").
- "While the August jobs and CPI reports will be watched carefully, it is clear to us that Powell has already seen enough to decide renewed action to counter downside economic risks is likely warranted, and so we now look for a 25 basis point rate cut on September 17th.
- "We expect officials will very much downplay the likelihood of a 50bp rate cut leading up to the jobs data, but we have to admit if the report is "weak enough" (e.g., the unemployment rate increases by 0.3pct to 4.5% (where officials had it at year end) anything can happen and wouldn't rule anything out. However, given the latest pivot and with financial markets pricing (86% of a 25bp rate cut) a lot has to happen (unemployment rate 3-handle and core CPI +0.5%) for the FOMC to undeliver and hold off from a rate cut in September. "
USDCAD TECHS: Bull Cycle Hindered
- RES 4: 1.4111 High Apr 10
- RES 3: 1.4019 38.2% retracement of the Feb 3 - Jun 16 bear leg
- RES 2: 1.3968 High May 20
- RES 1: 1.3925 High Aug 22
- PRICE: 1.3840 @ 16:55 BST Aug 22
- SUP 1: 1.3794 20-day EMA
- SUP 2: 1.3769/22 50-day EMA / Low Aug 22
- SUP 3: 1.3576 Low Jul 23
- SUP 4: 1.3557/40 Low Jul 3 / Low Jun 16 and the bear trigger
Gains this week in USDCAD and the breach of resistance at 1.3879, the Aug 1 high, marked a positive development, however the slippage into the Friday close undermines this sentiment - for now. Moving average studies have crossed and are in a bull-mode position, reinforcing current conditions. An extension higher would signal scope for a climb towards 1.4019, a Fibonacci retracement. On the downside, support to watch lies at 1.3769, the 50-day EMA - a level not yet challenged by the correction lower.
CANADA: Q2 Expected To See GDP Contraction, BOC's Estimate Looks Too Negative
The June retail sales release helps wrap up the last major data before Canadian Q2 GDP is released on Friday August 29.
- Current Bloomberg analyst consensus shows Q2 is expected to show a 0.7% Q/Q annualized contraction, versus +2.2% in Q1. The private sector consensus is more optimistic than the Bank of Canada's -1.5% estimate in its July Monetary Policy Report (which MNI thinks is too low) but the component-by-component breakdown is similar if of differing magnitudes.
- Widely expected are: a softening in household consumption growth (+1.2% in Q1), with a pickup in government spending, continued weakness in fixed investment (-3.0% in Q1) though with residential outperforming business capital formation, and a reversal of Q2's positive contribution from net exports. In short, the data are expected to confirm that trade activity was brought forward to Q1 ahead of tariffs, with the effects reversing in Q2.
- Going forward, the BOC envisages growth resuming in Q3 (+1.0% in its "current tariff" scenario). In the meantime, a weak Q2 reading could provide Governing Council with more conviction to resume easing rates in September, with the July meeting decision noting "If a weakening economy puts further downward pressure on inflation and the upward price pressures from the trade disruptions are contained, there may be a need for a reduction in the policy interest rate".
