USD/JPY, China A50 Analysis: Asian Open - 4th August 2023

Market Summary:

• The BOE (Bank of England) opted for a 25bp hike to take their base rate to a 14-year high of 5.25%, with 8-1 in favour. MPC member Mann (the lone ‘dissenter’) wanted a 50bp hike, but the BOE now see policy as ‘restrictive’ and inflation falling below target over the medium term, which has seen bets for the terminal rate fall to 5.65% from 5.74% ahead of the meeting.
• GBP/USD fell towards (but didn’t quite reach) our 1.26 target outlined in the European Open report, before a weaker US dollar allowed GBP/USD to recoup earlier losses and close the day with a bullish pinbar
• European indices gapped lower and extended Wednesday’s US credit-downgrade driven losses, although the DAX formed a small Doji to suggest bearish momentum is waning. Downside volatility also receded on Wall Street with the S&P 500 posting a small bullish candle at a new 3-week low.
• ISM services PMI was slightly lower than expected at 52.7, which was pulled back by slower new orders, business activity and employment. Although the report says “the majority of respondents are cautiously optimistic about business conditions and the overall economy”
• China’s services PMI beat expectations to expand at 54.1 (53.96 prior, 52.5 expected) although companies were “less optimistic when assessing the 12-month outlook for business activity, with overall confidence slipping to the lowest level since last November" according to private Caixin survey
• Apple (AAPL) earnings were mixed, with its flagship iPhone sales missing expectations yet announced record-setting services revenue. Apple shares rose 2.7% during after-hours trade but now trade -1.5% lower from the official close
• Weak economic for Australia continued to back up bets that the RBA are done hiking for now, with services PMI contracting at its fastest pace since December and retail sales contracting for a third consecutive quarter
• Around a third of Chinese provinces have lower investments YTD according to a Bloomberg analysis of reports from local governments, with soe of the the most debt-laden provinces seeing the largest fixed asset investment declines

Events in focus (AEDT):

• 09:30 – Japan’s retail sales, cash earnings
• 11:30 – The RBA’s SOMP (Statement on Monetary Policy) is their quarterly report which includes their updated forecasts for the economy. As always, I’ll go straight to the final section to view their updates for inflation (CPI and trimmed mean) because any downward revision is as good as saying rates may have peaked
• 22:30 – Nonfarm payroll: AN NFP miss would likely prompt the largest reaction for the US dollar, as traders could offload it as they scaled back bets for another Fe hike. Yet this seems unlikely given the resilience of employment data elsewhere, such as layoffs hitting an 11-month low and ADP employment printing over 300k jobs earlier this week (and nearly 500k last month).

Technically Speaking:

The US dollar index (DXY) formed a small bearish Doji at a 19-day high, to show a loss of momentum below the 103 handle. Precisely if or when it may occur remains to be seen, but I suspect it is due a pullback after posting strong gains since the July low. Of course, we have nonfarm payroll later today (NFP) which could prompt some volatility and easily send the US dollar higher with another strong set of data points, but I suspect we’re approaching an inflection point whether it occurs later today (with weak employment data required) or perhaps next week.

• EUR/USD is hinting at a potential inflection point as it drifts down towards 1.0900 and its 100-day ema
• USD/CNH also formed a bearish engulfing day and closed back beneath the 2019/2020 highs
• The Nikkei 225 is on track for a bearish engulfing week and closed to a 10-day low, and the July low is around day’s trade away for bears
• The Hang Seng close lower for a third day but formed an inverted hammer to suggest a loss of bearish momentum on the daily chart

ASX 200 at a glance:

• The ASX 200 fell to a 9-day low, although its daily range was less severe than Wednesday’s high to low range
• With SPI futures effectively flat and bearish momentum receding on Wall Street, we see the potential for some stability on the ASX 200 today (of not a bounce)

USD/JPY 1-hour chart:

USD/JPY formed a bearish engulfing candle yesterday to suggest all is not well around the cycle highs. However, a bullish hammer formed at the daily low and helped prices recover above the 100-hour EMA and found support at that level. Momentum is now turning higher on USD/JPY, so perhaps it can test the daily pivot point. Beyond that, it is likely down to NFP as to where USD/JPY finishes the week. 1-day implied volatility sit near the daily R1 and S1 pivot, although note the 200-hour EMA sits just beneath a weekly cycle high, near the 142 level (which is potentially a strong support zone).

China A50 daily:

We noted in yesterday’s report that the China A50 had retraced for three day, and that 13k was an important level for bulls to defend. And they did. A bullish engulfing day has formed just above 13k and around the 200-day EMA and June high, to show momentum has realigned with the bullish Marabuzo candle last Friday.

Bulls could seek dips towards Wednesday’s high and retain a bullish bias whilst prices remain above 13,000 (or Wednesday’s low). We’re now looking to see if prices can return to the 13,500 – 13,581 zone – a break above which brings the 13,820 high into focus.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge