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Dollar Strong as Markets Look into US CPI

Yen was sold off sharply overnight after stronger than expected US producer price inflation data. Selling continues in Asian session as risk aversion receded. The impact of US-China trade war escalation on the markets was brief and limited. Most importantly, the China Shanghai Composite rebounded strongly and is trading up 2.15% at the time of writing. It’s back above 2800 handle at 2837, and keep the near term rebound instead. Such development is calming to other Asian markets as Nikkei is up 1.1%, Hong Kong HSI is up 0.9%.

While Dollar is trading slightly softer for today, it remains the strongest one for the week. The greenback has been benefited from trade war escalation along the way. Higher tariffs are expected to be passed through to consumers eventually which will quicken up inflation. And that would certainly solidify Fed’s current rate path. Additionally, the eventual outcome could even force Fed to hike through the neutral rate. With that as the background, today’s CPI release will be an highlight anticipated event.

Elsewhere, oil price tumbled sharply overnight and 70 handle in WTI is now at risk. The development sent Canadian Dollar sharply lower despite the hawkish BoC rate hike. Gold’s rebound this week was rather brief as it’s back pressing 1240 now. 1236.66 key support level in back in radar.

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BoC hiked as expected and stayed hawkish

BOC delivered its fourth post-crisis rate hike overnight. While the increase of 25 bps had been widely anticipated, the accompanying statement and the updated growth forecasts appear more hawkish. While raising GDP growth outlook for 2019 and 2020, BOC’s wage growth forecast remained benign. Meanwhile, it heightened its caution over US’ trade policy and reaffirmed that any monetary decision in the future would be data-dependent and adopted gradually.

On the monetary policy outlook, BOC reiterated that stance that “higher interest rates will be warranted to keep inflation near target”. This is accompanied by the emphasis that any decision would be data-dependent and carried out gradually. The central bank in particular added that it is “monitoring the economy’s adjustment to higher interest rates and the evolution of capacity and wage pressures, as well as the response of companies and consumers to trade actions”. More in BOC Review – Raised Growth Outlook but Upbeat Business Investment Might Diminish in Coming Year

Suggested readings on BoC:

WTI oil price dived as Libya resumed production, USD/CAD bottomed

WTI crude oil dropped sharply overnight to as low as 70.02 before closing the regular session at 70.38. It’s now staying soft at around 70.75. It’s originally lifted by larger than expected US inventory decline but than pressured as Libya resumed production. The Libya’s National Oil Corp. said that it would lift the force majeure on several major export terminals and resume shipments of oil. That would mean some 700k bpd to come back online even though it’s uncertain how quickly exports can return to normal.

Also, oil price seemed to be benefited from earlier comments from US Secretary of State Mike Pompeo too. Pompeo was quoted saying that “there will be a handful of countries that come to the United States and ask for relief from that. (Iran sanction). We’ll consider it.” Though he also emphasized that “make no mistake about it, we are determined to convince the Iranian leadership that this malign behavior will not be rewarded and that the economic situation in their country will not be permitted to be rectified until such time as they become a more normal nation.”

The development also pushed USD/CAD sharply higher, after it dipped following hawkish BoC rate hike. As expected in our technical report, 1.3067 key near term support was defended well. With 1.3173 minor resistance taken out and BoC risk cleared, USD/CAD maintained bullishness and is heading back to retest 1.3385 high.

New York Fed Williams: Overall strong economy, great time for businesses to step up

New York Fed President John Williams said yesterday that the US is now in a state of “overall strong economy”. And, “employers are now struggling to fill job openings.” He called it a “great time for businesses to set up” with internships, training programs and school partnerships.

And he’s not concerned with the rise in housing and stock prices. He pointed out that “we’re not seeing the kind of build-up in leverage in the financial system that was pretty obvious in the mid-2000s.” Also,  “we’re not seeing that kind of risk-taking in the financial system right now, but we are watching very carefully.”

South Korean Trade Ministry warns US-China trade dispute likely to be prolonged and proliferated

In a policy news release, the South Korean Ministry of Trade, Industry and Energy warned that the US-China trade dispute is likely to be “prolonged and proliferated”. And it urged private sector to seek analysis from the Korea Institute for Industrial Economics and Industry (KIEP) on the effects on imports and exports of each industry.

The Ministry also warned that “China’s home appliances, computers and telecommunication equipment are included in the additional tariffs, which suggests that exports of intermediate goods to China will decrease .” Meanwhile, the government would prepare a scenario for developing trade disputes with the US and prepare counter measures accordingly.

The issue regarding US 232 auto tariffs was discussed at a meeting with the motor industry representatives on July 10. Follow up actions including attending the US hearing by the government and the industry. In addition, delegation of representatives from the Ministry of Industry , Ministry of Foreign Affairs and the Ministry of Information and Communication , automobile industry association, Hyundai Motor , and trade association representatives, is scheduled to meet with US officials, legislators and automobile organizations.

ECB accounts and US CPI as highlights of the day

ECB monetary policy accounts is a major focus of today. The central bank is, in our opinion, adequately clear with its policy path. That is, the EUR 30B per month asset purchase will be tapered to EUR 10B after September. And the program will end after December. ECB will then keep interest rates at present level through the summer of 2019. The question is, meaning of “summer” is subject to interpretation. And different interpretations has triggered some volatility lately. To us, it’s rather meaningless to speculate whether it’s September or October 2019 when the first hike in years tis delivered. It’s after all, more than a year away. And, today’s ECB minutes are unlikely to give us a clear definition of “summer”.

US CPI will be another major focus. Headline CPI is expected to rise further to 2.9% yoy in June while Core CPI is expected to accelerate to 2.3% yoy. Yesterday’s PPI data was already an upside surprise to the markets. And, the impact of tariffs on Chinese goods are coming. The markets are getting increasingly confidence on another two rate hikes by Fed this year. Indeed, Fed funds futures are pricing in 57% chance of Federal funds rate hitting 2.25-2.50% in December. That’s notably up from 45.6% chance a month ago. Any upside surprise today will build up more confidence.

On the data front, UK RICS house price balance rose to 2 in June. Australia consumer inflation expectation dropped to 3.9% in July. German CPI and Eurozone industrial production will be featured in European session. Canada will release new housing price index. US will release jobless claims and above mentioned CPI.

USD/JPY Daily Outlook

Daily Pivots: (S1) 111.12; (P) 111.64; (R1) 112.53; More…

USD/JPY surges to as high as 112.37 so far today. The strong break of 111.39 resistance confirms resumption of whole rally from 104.62 low. More importantly, it adds much credence to the case of medium term reversal. Intraday bias is now on the on the upside for 61.8% projection of 104.62 to 111.39 from 109.36 at 113.54 first. Break will put focus on 114.73 key resistance for confirming the bullish case. On the downside, touching 111.34 minor support will turn bias neutral and bring consolidation. But outlook will remain bullish as long as 110.34 support holds.

In the bigger picture, at this point, we’re favoring the case that corrective decline from 118.65 (2016 high) has completed with three waves down to 104.62. Above 111.39 affirms this view and should target 114.73 for confirmation. Firm break of 114.73 will likely send USD/JPY through 118.65 towards 125.85 key resistance (2015 high). This will now be the preferred case as long as 109.36 support holds.

Economic Indicators Update

23:01GBPRICS House Price Balance Jun2.00%-2.00%-3.00%-2.00%
01:00AUDConsumer Inflation Expectation Jul3.90%4.20%
06:00EURGerman CPI M/M Jun F0.10%0.10%
06:00EURGerman CPI Y/Y Jun F2.10%2.10%
09:00EUREurozone Industrial Production M/M May1.10%-0.90%
11:30EURECB Monetary Policy Meeting Accounts
12:30CADNew Housing Price Index M/M May-0.10%0.00%
12:30USDInitial Jobless Claims (7 JUL)230K231K
12:30USDCPI M/M Jun0.20%0.20%
12:30USDCPI Y/Y Jun2.90%2.80%
12:30USDCPI Core M/M Jun0.20%0.20%
12:30USDCPI Core Y/Y Jun2.30%2.20%
14:30USDNatural Gas Storage55B78B
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