US TSYS: Holding Cheaper

Spot USD/JPY added just 10 pips on Tuesday after recouping its modest losses registered in early Tokyo hours. The rate held a relatively tight ~50 pip range through the day, with participants were on the lookout for fresh catalysts ahead of the release of the much awaited U.S. CPI report on Wednesday.

• Even as the spot rate oscillated within a tight range, USD/JPY risk reversals kept rising across the curve, led by longer-dated skews, hitting multi-week highs. One-year tenor moved above parity for the first time since mid-June, signalling a dissipation of bullish yen sentiment among options traders.
• Worth noting that the latest CFTC Positioning Report for the week through Aug 2 showed that leveraged funds trimmed their net JPY short positions by 3,206 contracts to the least since Mar 2021. However, the expectation-busting U.S. jobs report released last Friday revived hawkish Fed bets, generating fresh headwinds for the yen.
• The Japanese currency failed to benefit from post-Asia weakness in global equity markets on Tuesday, ignoring an uptick in the VIX index. A move higher in U.S. Tsy yields took precedence, lending support to USD/JPY.
• When this is being typed, USD/JPY trades at Y135.26 after adding 20 pips as U.S. Tsys softened a tad in early Tokyo trade. From a technical perspective, a move through the 61.8% retracement of the Jul 14 - Aug 2 sell-off at Y135.96 would shift focus to Jul 27 high of Y137.46. Conversely, key initial layers of support are provided by the 100-DMA/Aug 2 low at Y131.16/130.41.
• In the absence of notable local data releases during the remainder of the day, Japan's Cabinet/LDP executive line-up reshuffle will likely steal the limelight.

Fig. 1: USD/JPY vs. USD/JPY 1-Year Risk Reversal

Source: MNI - Market News/Bloomberg

CNH outperformed the late USD rebound in NY trading, see the chart below. Support was evident for the pair in the low 6.7500 region though. We currently track slightly higher at 6.7570/80, as broader USD sentiment has started the session on the front foot. As we noted earlier, the domestic focus today will be with CPI and PPI inflation prints for July (see here for more details).

• The China currency has generally outperformed the move up in short term US yields in recent sessions. This is most evident in CNH/JPY, where the pair is back above 20.00. Note the 50-day MA comes in at 20.11.
• Relative equity trends have stabilized somewhat with the rest of the world as well, although this is as much to do with global equities faltering along with China equity sentiment stabilizing (the Shanghai composite is +2.65% above recent lows).
• Note the China Dragon index has dropped for the past 3 sessions, although this is likely to be reflective of broader tech wobbles.
• Domestic covid trends persist, although the major cities are avoiding a rebound in case numbers for now.
• CNH implied vol trends remain fairly benign, the 1 month not too far away from 5%, which is very much in line with the bounded spot range.

Fig 1: Short Term USD/CNH & DXY Trends

Source: MNI/Market News/Bloomberg

Alongside the expected Cabinet reshuffle, Japanese Prime Minister Fumio Kishida is set to announce a minor rejig of senior executive officers of the ruling Liberal Democratic Party.

• As flagged earlier, local media outlets reported that Sanae Takaichi is leaving LDP Board to serve as Japan's Economic Security Minister. She will be replaced by Koichi Hagiuda of the Abe faction, even as he initially appeared reluctant to accept the offer.
• Hiroshi Moriyama is expected to become the LDP's new election strategy czar. He leads the smallest faction in the ruling party (7 lawmakers), which was previously known as the Ishihara faction, before its former leader lost his seat in the 2021 election.
• The following table was created based on a report circulated by Japan's public broadcaster NHK.

Table 1. Tentative Plan Of LDP Executive Line-Up Reshuffle

* Endo is a member of a quasi-factional Tanigaki Group that split off the Kishida faction. He backed Kishida's LDP leadership bid and played an important role in managing his campaign. The Tanigaki group has 19 members but 11 of them also belong to other factions.