FOREX: USDJPY Approaching Bear Trigger Once More

• Ahead of Jackson Hole, Canadian CPI is scheduled Tuesday, which is expected to show steady core inflationary pressures on a Y/Y basis (trim/median average 3.05%, unch from June). This is the first of two CPI reports before the BOC's next decision release on Sep 17 (for which a rate cut is around 25% priced).
• A pullback in employment in July has helped keep further BOC easing on the table since July's hold, and has helped USDCAD broadly consolidate around the 1.38 mark.
• However, the CPI data will be very closely eyed given stronger-than-expected core price momentum in Q2 and an upside surprise would place the technical focus on both the 20- and 50-day exponential moving average supports, located around 1.3760. A clear break would resume the correction off the early August high at 1.3879, signalling scope for a move back to 1.3576, the Jul 23 low.

BMO note “versus the stock of longs, due to the UK’s large overhang of long bonds, UK 10s30s still looks relatively too flat: but versus the flow of longs - thanks to the DMO’s cuts to planned long supply - UK 10s30s looks somewhere between about right to perhaps even slightly too steep. To put it another way, the DMO’s decision to cut back long supply has done a lot to prevent UK 10s30s steepening even further.”

• Still, they note that “UK 10s30s remains more than 20bps flatter than implied by a model based on the long bond overhangs and issuance plans of international peers. We believe this is due to some specific factors, which may unwind over time”.
• BMO highlight three levers authorities could pull to keep the UK 10s30s curve flatter:
• “The DMO could again reduce the number of Long gilts it sells”.
• “The BoE could alter its QT programme to end or reduce its sales of Long gilts”.
• “The government could alter the regulatory environment for insurance companies providing pension annuities, which presently incentivises them to replace their gilts with other assets”.
• They conclude by noting that if “both the BoE and the Treasury acted, our international model would lead us to expect UK 10s30s to flatten towards 70bp: still steeper than the US; but flatter than Italy, Spain and France. This would help the UK to reduce its ongoing cost of debt service; and ease its future funding pressures, by maintaining a longer weighted average maturity. Otherwise we would be concerned that UK 10s30s would continue to steepen towards the level currently implied by our international model".

• Softer price action for major equity benchmarks on Monday is providing a moderately supportive backdrop for the dollar, as US yields hold on to the majority of last week’s late advance following the US PPI release. Despite this, the USD index continues to operate around the 98 mark, consolidating its 2% decline across August and keeping a bearish medium-term trend outlook intact.
• Strong pivot resistance just above the 100 handle marks the key topside level of interest for the DXY, while a move back below 97.10 would signal scope for a test of cycle lows and key support, located at 96.38.
• The Fed’s Jackson Hole Symposium kicks off Thursday, with the focus on the keynote speech by Chair Powell. Attention will mostly be on any nod to a potential September cut, but a large portion of his comments will touch on the findings from the Fed's policy framework review.
• JP Morgan note that while the underlying macro conditions of USD weakness remain intact, markets are increasingly facing a shrinking pool of imminent catalysts that have a defined date for the next leg weaker. JPM believe US data needs to slow further or market concerns on Fed independence need to intensify for the next bout of high-intensity greenback weakness.
• Goldman Sachs expect USD depreciation largely because US economic performance no longer supports the currency’s high valuation. GS highlight that much of the dollar’s recent dip can be attributed to either quiet markets, which they think reveals the “easiest” direction of travel, and foreign developments such as BoJ rate hike speculation.