Overnight, media reports suggested that the North Korean leader Kim Jong-un decided not to launch missiles against the US territory of Guam, at least for now. He was quoted by state media as saying that he will watch US actions ‘a little more’ before deciding what to do. This marks a significant step towards deescalating the situation in our view, as it may imply a temporary ceasefire in the recent war of words between the two sides. Market participants seem to be in agreement that tensions may be easing, evident by safe haven assets such as gold, JPY, and CHF coming under selling pressure yesterday, giving back some of their recent gains. The sell-off accelerated following these news overnight. In the absence of any further headlines, we would expect the latest price action to continue for a few days. Specifically, safe havens could remain under pressure, while riskier assets such as equities may recover further.
USD/JPY traded higher overnight, after it hit support near the 109.40 (S2) level. The rate broke above the 109.90 (S1) hurdle, which acted as the lower bound of the range that had been containing the price action from July 28th to August 10th, between that zone and 111.00 (R1). Given that the pair is now back within that range, and that it also broke above a short-term downtrend line taken from the high of the 14th of July, we see the case for further upside extensions, perhaps towards the upper bound of the range at 111.00 (R1). The fact that the rate rebounded from near an upside support line taken from the low of the 17th of April also enhances the case for more bullish advances. If buyers manage to overcome 111.00 (R1), they could initially aim for the 111.70 (R2) area.
RBA minutes do not jawbone the AUD; Wage data in focus
The RBA may not be that concerned with the recent strength of the Australian dollar, the minutes of the latest policy gathering showed overnight. Policymakers only noted that ‘further appreciation’ of AUD could weigh on the outlook for inflation and growth. In an indirect way, this is similar to the RBA saying that the levels the Aussie is currently trading at are tolerable. Importantly, the minutes also reiterated the Bank’s concerns regarding low wage growth. As such, we think that the wage price index for Q2, due out during the Asian morning Wednesday, is likely to attract a lot of attention. The consensus is for wages to have grown at the same pace as previously. We view the risks surrounding that forecast as tilted to the upside, considering that the NAB business survey for Q2 showed that growth in labor costs accelerated notably. A positive surprise in this index could alleviate some of the RBA’s concerns about subdued wage growth and thereby, support the Aussie.
AUD/USD traded lower on Monday, after it found fresh sell orders near the 0.7910 (R1) area. The rate declined to hit support near the 0.7840 (S1) level and subsequently it rebounded somewhat. Given the price structure on the 4-hour chart and the pair’s proximity to the key barrier of 0.7800 (S2), we maintain our flat view for now. That barrier acted as the upper bound of the sideways range that contained the price action from March 2016 until July 2017 and thus, we remain mindful that it may be proved a rebound zone now. In addition, in case we are right about a positive surprise in tonight’s wage data, the bulls could retake control and push the battle higher. A potential break above 0.7910 (R1) could open the way for the next resistance of 0.7950 (R2).
Today’s highlights:
In the UK, CPI data for July will take center stage. The forecast is for both the headline and core CPI rates to have ticked up. Even though a rebound in these rates could keep alive some speculation about a BoE rate hike in the near-term and thereby support the pound, we remain skeptical on whether a hike will actually materialize. Policymakers showed little urgency for such action at the latest BoE meeting, and we do not blame them considering the still-lackluster economic growth and wage prints. Germany preliminary GDP data for Q2 are also due out.
We also get CPI data for July from Sweden, and the forecast is for both the headline and the underlying inflation rates to have risen. Such a rebound in inflation could amplify speculation that the Riksbank may remove its interest rate easing bias soon and as a result, bring SEK under renewed buying pressure.
From the US, we get retail sales for July and expectations are for both the headline and the core rates to have rebounded after declining for two consecutive months. Such prints could prove positive for the dollar, but we think that the currency’s near-term direction may be decided primarily by the FOMC July minutes due out tomorrow. We also get the Empire State manufacturing and the NAHB housing market indices, both for August.
USD/JPY
Support: 109.90 (S1), 109.40 (S2), 108.70 (S3)
Resistance: 111.00 (R1), 111.70 (R2), 112.20 (R3)
AUD/USD
Support: 0.7840 (S1), 0.7800 (S2), 0.7750 (S3)
Resistance: 0.7910 (R1), 0.7950 (R2), 0.8000 (R3)
