Dollar Rebounds on Short Covering, Yen Extending Decline

Dollar saw a significant rebound overnight, a rally that carried on into the Asian trading session today. This surge is mainly attributable to short covering, particularly as central bank rate hikes this week failed to drive an extended selloff in the greenback. In fact, Dollar is currently the second strongest performer for the week, closely trailing Canadian. However, the possibility of a shift in this ranking by the week’s end remains on the table.

Japanese Yen, on the other hand, is experiencing a momentum pick-up in its decline. Yet, the selloff seems mostly concentrated against Dollar. The Japanese currency currently ranks as the third worst performer, following the Australian and New Zealand Dollars.

Australian Dollar is being dampened by risk aversion within Asia, reflected in its joint weakening with the Hong Kong’s HSI. This shared downturn is being interpreted as a lack of confidence vote in the Chinese economy. As for European majors, they are currently mixed, with Sterling showing a slight lower hand. Both Euro and Pound will be looking to today’s PMI data for further inspiration.

Meanwhile, USD/JPY’s rally is worth a note. Purely from a technical standpoint, break of the medium term channel resistance suggests upside acceleration. Clearing of 61.8% retracement of 151.93 to 127.20 at 142.48 could also set the stage for further rise back to retest 151.93 high. Nevertheless, it’s unsure at what level Japan will intervene.

In Asia, Nikkei closed down -1.45%. Hong Kong HSI is down -1.64%. Singapore Strait Times is down -0.70%. Japan 10-year JGB yield is down -0.0044 at 0.374. Overnight, DOW rose 0.37%. S&P 500 rose 0.95%. NASDAQ rose 0.95%. 10-year yield rose 0.076 to 3.799.

Japan CPI core eased to 3.2% in May, but core-core surged to 42-yr high

Japan CPI core eased from 3.5% yoy to 4.2% yoy in in May. CPI core (ex-fresh food) fell from 3.4% yoy to 3.2% yoy. CPI core has now stayed above BoJ’s 2% target for the 14th consecutive month. Meanwhile, CPI core-core (ex-fresh food and energy), jumped from 4.1% yoy to 4.3% yoy, the highest level in 42 years since 1981.

Energy costs fell -8.2% yoy, thanks to government subsidies. Food prices accelerated from 9.0% yoy to 9.2% yoy, highest since 1975. Durable goods prices rose 9.0% yoy. Goods prices were up 4.7% yoy while services prices rose 1.7% yoy.

Japan PMI manufacturing fell to 49.8, services down to 54.2

Japan PMI Manufacturing declined from 50.6 to 49.8 in June, below expectation of 50.2. PMI Manufacturing Output fell from 50.9 to 48.3. PMI Services dropped from 55.9 to 5.4.2. PMI Composite decreased from 54.3 to 52.3.

Annabel Fiddes, Economics Associate Director at S&P Global Market Intelligence, said:

“A fresh fall in manufacturing output coincided with a softer rise in services activity, leading to the weakest expansion of overall output for four months….

“The softening of growth momentum fed through to reduced optimism around the outlook, with business confidence slipping to a five-month low…

“However, there was some better news in terms of inflationary pressures, which showed further signs of easing. Notably, input price inflation softened to a 22-month low in June, while output charges increased at the softest pace since January.”

Australia PMI composite fell to 50.5, RBA has time on their side

Australia PMI Manufacturing ticked up from 48.4 to 48.6 in June. PMI Services fell from 52.1 to 50.7. PMI Composite declined from 51.6 to 50.5.

Warren Hogan, Chief Economic Advisor at Judo Bank said:

“The loss of momentum in recent months will probably give the RBA some comfort that economic activity is slowing down across the economy in 2023, following their consecutive rate hikes in May and June…

“The survey suggests that the RBA has time on their side and does not necessarily need to hike rates again in July. The slowdown taking place across the economy provides further evidence that the point at which the RBA can undertake a genuine pause in their tightening cycle is getting closer.

“We cannot rule out a further hike in the next few months, but we are close to a level of interest rates whereby the RBA can sit back for 4-6 months and observe the effects of past interest rate increases.”

EUR/USD Daily Outlook

Daily Pivots: (S1) 1.0933; (P) 1.0972; (R1) 1.0995; More…

EUR/USD’s break of 1.0891 support suggests short term topping at 1.1011, on bearish divergence condition in 4H MACD. Fall from 1.1011 is seen as the third leg of the corrective pattern from 1.1094. Intraday bias is back on the downside for 55 D EMA (now at 1.0838). Firm break there will target 1.0634 support and below. Nevertheless, rebound from current level, followed by break of 1.1011 will target a test on 1.1094 high instead.

In the bigger picture, as long as 1.0515 support holds, rise from 0.9534 (2022 low) would still extend higher. Sustained break of 61.8% retracement of 1.2348 (2021 high) to 0.9534 at 1.1273 will solidify the case of bullish trend reversal and target 1.2348 resistance next (2021 high).

Economic Indicators Update