Asia Day Ahead: Oil prices near 3-month high, Focus on USD/CNH

Wall Street Wrap

Wall Street saw the familiar 'good news is bad news' dynamics at play, as strong US labour data, combined with robust services Purchasing Managers' Index (PMI) and weekly jobless claims, pushed expectations for Federal Reserve (Fed) rate cuts further into the future. Current projections indicate a single rate cut in July 2025, with no additional cuts anticipated through the year-end.

On the back of discounted rate cut expectations, we saw an expected rise in US Treasury yields, which clearly seems too high for comfort at this point, with the 10-year yields adding another 7 basis points (bp) to its recent upward trajectory last Friday to 4.76%. Yields at this level—currently above 4.5%—appear to weigh heavily on risk sentiment, with market trends over the past year indicating persistent downward pressure whenever yields cross this threshold.

Weaker US data ahead will be the much-needed catalyst here in taking some heat off the ‘economic resilience’ story and call for a meaningful reversal in yields. However, this week’s data calendar still suggests a cautious outlook for now. We have the key US consumer price index (CPI) on Wednesday, with headline inflation expected to follow through with its third straight month of increase to 2.9%, while the core aspect is expected to reflect little disinflation progress. US retail sales data, set for release on Thursday, could reinforce the theme of consumer resilience, given its consistent outperformance since June 2023.

Asia Open

The Asian session looks set to open the week in the red, with the ASX -0.81% and KOSPI -0.30% at the time of writing. Japan markets are closed for holiday today. The strong greenback remains a key overhang for risk sentiments across the region, as it continues to find tailwind from stronger US data, extending its gains by another 0.44% to a new high since November 2022.

Higher oil prices offer another headwind for market participants to digest as well, with previous consolidation over the past months reflecting that bearish pressures have been exhausted and paved the way for a renewed move higher on headlines of tough US sanctions on Russian supplies. A break above a downward trendline resistance seems to bode well for prices, with any move above its 7 October 2024 high at the US$81.00 level likely to extend its run to the US$85.55 level next. For now, its daily relative strength index (RSI) has pushed into near-term overbought territory and while that may call for some cooling as per previous instances, any formation of a higher low will be on the lookout.

In the forex (FX) space, the USD/CNH may warrant some focus as China’s central bank stepped up efforts to cool the bond market by temporarily suspending its open market purchases of government bonds. It does seem like a move of last resort, given previous measures from warnings to fines have failed to curb the record low in bond yields and depreciation in the yuan is clearly causing some discomfort.

The USD/CNH has been consolidating just below its 7.369 level of resistance, with buyers seemingly eyeing for a break to fresh highs. We may have to see a move back below the 6 January 2025 low to be convinced of a shift in sentiments, otherwise a weaker yuan will likely remain the theme in light of still-weak economic data and the eventual success of recent measure by the People's Bank of China (PBoC) still seems questionable.