USD/JPY eyes test of key highs ahead of US CPI: Asian Open – 10th August 2023

Market Summary:

• Wall Street indices were lower a day after a report showed that US consumers borrowed a record amount on their credit cards in a quarter, and on the eve of today’s key inflation report
• The Nasdaq 100 leading the way lower and falling to a 21-day low, the S&P 500 fell to a 20-day low yet the Dow Jones held above Tuesday’s low and 35k
• China’s headline CPI deflated for the first time since January 2021, although it remains debatable just how low it will go given its relatively small amount of time printing negative numbers over recent history. Furthermore, producer princes hinted at a trough which can be a precursor for the CPI level to follow suit, and core CPI was higher than expected at 0.2% m/m
• AUD/USD caught an early bid in Asia following the softer China inflation, but was then given another burst higher as RBNZ’s survey of expectations saw the 2-year inflation forecast rise 4bp to 2.83%
• Energy markets are continuing to rise which risks inflation pressures following suit
• WTI crude oil broke to a fresh YTD high on concerns that Russia’s Ukraine war will continue to escalate and block supply chains further
• Hotter weather in the US has increased air condition use, with Natural Gas futures seemingly on the cusp of breaking above $3 for the first time since January
• In a move that could fuel further tensions between the US and China, President Joe Biden has signed an executive order to ban US investments in semiconductor, microelectronics and quantum IT sectors and certain artificial intelligence systems

Events in focus (AEDT):

• 09:50 – Japan’s PPI
• 11:00 – Australian inflation expectations (Westpac-Melbourne Institute)
• 22:30 – US inflation

Technically Speaking:

• With US inflation data now the main event hanging over markets, the next 24-hours will likely be surrounding a stronger or weaker dollar (which should coincide with weaken-than-expected, versus softer-than-expected inflation).
• AUD/USD has formed inverted hammer on the daily chart (assuming it breaks highs), or it will be a bearish hammer if prices break beneath its low. Unless we see a strong US CPI report, the bias remains for a rise to (and above 66c) whilst prices remain above 60c.

ASX 200 at a glance:

• It was the most bullish day in six for the ASX 200, which isn’t saying much given the low levels of volatility or that period (not to mention that day also marked a high before the selloff)
• Today’s US CPI report in the US session is a key risk event overnight, which could easily weigh on the ASX tomorrow if it comes in hot or send it higher if it comes in soft enough
• Traders then need to decide if they want to hold such risk overnight, or square up their positions before today’s ASX close
• We may find price action to be slightly erratic today, so sometimes the best trade is to step aside unless a high probability setup presents itself
• 7343 is likely a key resistance level today

USD/JPY daily chart:

USD/JPY rose for a third consecutive day, although it is headed for a key resistance area just below 144 which includes last week’s high and a trendline projected from the October high. Whilst the area may prove to be pivotal and confirm either a breakout to 145 or prices roll over, it’s a level where we could expect some noise leading into CPI, so I don’t expect perfection with such technical levels around big events.

The 1-week risk reversal for USD/JPY has fallen to a 9-day low, which shows that put demand (downside protection) has increased relative to call demand (upside protection) to indicate a bearish bias over the next week. With that said, it remains elevated to the data point of ten days ago, so whilst there are some second thoughts on the eve of CPI as traders hedge for a weaker inflation report, the positioning is not overly bearish either. The 1-day risk reversal sits at a 4-day low to also show a slight increase in put demand.

USD/JPY 1-hour chart:

The 1-hour trend remains firmly bullish, although volatility is understandably receding as we approach the key resistance zone around 144. With the daily pivot and weekly R1 level sitting around 143.50, any low-volatility retracement towards this level could tempt bulls to the table for another crack at testing 144 ahead of tonight’s inflation report. But it is likely going to be the CPI report itself that triggers to true direction and level of volatility. Note that the upper 1day implied volatility level is around 144.55 and the lower 1-day IV band is 142.75. So volatility is clearly expected.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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