JGB TECHS: (U6) Resistance Remains Intact

The USD/JPY range overnight  was 161.62-162.39, Asia is currently trading around 162.25. The pair continues to be supported on any dip and this price action would be a real concern for the MOF as US yields and the broader US Dollar pulled back in response to the US CPI data overnight. Japanese officials continue to insinuate a change to the GPIF asset allocation is still possible but I don’t think the market will react to this unless they see confirmation of this new strategy being approved, which looks to be a process in and of itself. On the day, the first support is toward 161.50 and then the 160.00-160.50 area. The market is still sitting short Yen as the underlying story regarding Yen weakness remains the same and core positions are reflecting that. I suspect only a faster rate hike cycle will probably suffice to break this perpetual loop which the current administration does not seem in favour of. The market will be watching closely when two hawks, Takata and Tamura, finish their terms this month. If their replacements are reflationists similar to Asada the board flipping Dovish would not bode well for the Yen.             

• MNI US INFLATION: Disinflationary Core Services Swing Drives Core Miss The surprise swing into sequential deflation in core CPI (-0.02% M/M June from +0.21% May) was driven by a surprisingly sharp pullback in core services inflation, which saw its joint-lowest print (0.03% M/M) since May 2020. As noted, June's services pullback was underpinned by disinflation across the board, from housing to lodging to medical services to airfares - overall core services' contribution to core CPI fell by 0.20pp vs May.
• (Bloomberg) - “Yields Trim Declines as Warsh Dismisses Inflation Optimism. Yields are ticking slightly higher, paring declines, after Fed Chairman Kevin Warsh said that “mission accomplished” is not his view after Tuesday’s soft CPI report.”
• “Warsh remarked Tuesday that a hawkish Fed with inflation credibility will actually reduce long-end bond yields by lowering inflation expectations.” - BBG
• Options : Close significant option expiries for NY cut, based on DTCC data: 160.50($1.91b), 162.00($857m). Upcoming Close Strikes : 158.00($1.28b July 16), 162.00($2.69b July 20), 164.25($1.92b July 16) - BBG.
• The USD/JPY Average True Range(ATR) for the last 10 Trading days: 69 Points
• Data/Event : Core Machine Orders, Tertiary Industry Index

Fig 1 : USD/JPY Spot Daily Chart

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

Oil prices continued trending higher driven by ongoing US and Iran strikes on each other’s military assets. In addition, the attack on two UAE tankers traversing the southern route through the Strait of Hormuz is likely to see most seaborne energy exports shut in again derailing the expected surge in global supplies from the MoU. As a result, crude broke above 50-day EMA resistance levels signalling the rally could be extended.

• WTI rose 2.2% to $79.83/bbl after reaching $81.27 during the European morning. Initial resistance is now at $83.57, a retracement point. It is now up 16.2% since 6 July. It started today higher at $80.24 and is now at $79.86.
• Brent is up 2.1% to $85.08 after breaking above initial resistance at $86.70 with an intraday high at $87.55. The benchmark is now 18% higher than 6 July.
• President Trump just threatened Iran that if they don’t start negotiating, the US will begin to hit its energy infrastructure and bridges. He also insisted that there needed to be free shipping and that the Strait was open but not for Iran, although the level of risk is likely to deter commercial shipping for now.
• He dropped his proposed 20% fee for US assistance through the Strait in exchange for negotiating trade deals after pressure from Gulf allies.
• He noted that pipelines are being built to avoid the Strait. UAE is fast tracking one and has also announced a new port on the southern side of the Strait.
• Bloomberg reported a 600k barrel crude drawdown in the US last week, according to API data. Product stocks were mixed with gasoline down 1.7mn but distillate up 2.3mn. Official EIA data for last week is published Wednesday.

The NZD/USD had a range overnight of 0.5783 - 0.5841, Asia is currently trading around 0.5810. The NZD pop higher in our session yesterday proved to be prescient, and it extended above 0.5800 in reaction to the US CPI print. The market has clearly been caught quite short and a pullback in US Yields and the US Dollar is adding to the tailwinds from a hawkish RBNZ and better local data. The issue the NZD market has is when everyone is positioned the same way the liquidity in the market is just not big enough for everyone to get out at once. This can sometimes lead to outsized moves and reversions going further than expected. On the day, the price is testing its pivotal resistance in the 0.5800-0.5830 area and I have been skewed toward fading this move looking for it to top out and turn lower again at some point. I still err on this side of the trade but I am cognisant of it potentially challenging higher than I expect as a short market is squeezed.       

• "New Zealand June House Price Index Falls 0.8% Y/y: REINZ. The Real Estate Institute of New Zealand publishes residential property data for June, showing the House Price Index dropped 0.8% from a year earlier." - BBG
• MNI FED: Warsh Testimony Text: No FOMC Tolerance For Persistently High Inflation Warsh comments clearly dominated by a far softer than expected CPI. He said "The members of our Committee have no tolerance for persistently elevated inflation. And we share a resolute commitment to restoring price stability. This was the focus of our June meeting, at which we decided to hold the target range for the federal funds rate at 3.5 to 3.75 percent."
• Options : Closest significant option expiries for NY cut, based on DTCC data:  0.5770(NZD338m). Upcoming Close Strikes : 0.5750(NZD319m July 20) - BBG
• The NZD/USD Average True Range for the last 10 Trading days: 48 Points
• Data/Event: Card Spending

Fig 1: NZD/USD Spot Daily Chart

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