US CPI as the key risk event this week: S&P 500, USD/CNH, USD/JPY

Market Recap

The third straight session of gains in Wall Street has allowed the S&P 500 to reclaim both its 50-day and 100-day moving average (MA), as the US dollar took a breather after hitting its highest level since 2002 despite Treasury yields ticking higher to end the week. The recent upside does not seem to be underpinned by a strong fundamental reason, considering that the probability of a 75 basis-point (bp) hike in the September Federal Open Market Committee (FOMC) meeting saw a further build-up to 90% compared to 57% a week ago, while indications of a Federal Reserve (Fed)’s dovish pivot are still off the table. But after the heavy sell-off of close to 10% for the S&P 500 since mid-August, markets could be hoping to tap on the absence of hawkish Fed comments from its blackout period for some relief, until further cue is provided by the US Consumer Price Index (CPI) data release tomorrow. The Fed’s policy stance seems firm for further tightening thus far, but a series of cooler-than-expected reports will be looked upon to justify a quicker policy pivot and potentially sway the Fed’s views. July CPI release has marked the first step, with the upcoming August reading on watch for any downside surprise to provide further justification.

With its recent rally, the S&P 500 is hovering at a previous support-turned-resistance around the 4,087 level, where a key 38.2% retracement level stands in place. Some wait-and-see could potentially play out to kickstart the new week, with the CPI data being a key driver of volatility up ahead. Longer-term, the ongoing convergence of two opposing trendlines (one connecting lower highs, one connecting higher lows) seems to suggest that the S&P 500 has to come to a decision in determining its trend ahead, with one to watch for any break of either trendlines to indicate either buyers or sellers gaining control.

Asia Open

Asian stocks look set for a positive open, with Nikkei +1.31% and ASX +0.80% at the time of writing. With China, Hong Kong and South Korea markets off-trading due to holidays, along with a quiet economic calendar in Asia, market moves throughout the day could be somewhat limited. Some sentiments could also be on hold in the lead-up to the key US CPI data tomorrow. This week will bring China in focus, with its one-year medium term lending facility rate on watch, along with its slew of August economic data release. A cut to its one-year lending facility rate is not widely expected, but any surprise move on that front may drive a knee-jerk upside reaction for risk assets.

The upcoming economic data (industrial production, fixed asset investment, retail sales) later this week may also not be reflective of the impact from renewed virus restrictions in China, but could still provide some clarity on underlying economic conditions. Any outperformance could still seem to draw some reservations, as there could be some understanding that renewed restrictions are back in place to crimp economic activities and data are set to undergo further moderation over the coming months. All in all, the lower-for-longer growth picture remains the theme for China.

Recent US dollar weakness has driven the USD/CNH to break below an ascending channel pattern on its four-hour chart. A recent retest of its 50-day MA was met with a bearish rejection. Failure to reclaim the 6.933 level of resistance over the coming days could draw further downside to the 6.891 level next, where a key 38.2% Fibonacci retracement level stands in place.

On the watchlist: USD/JPY moderating from its 1998 high

A recent retest of its 145.00 level was met with some moderation for the USD/JPY (大口）, as the level marked its previous peak in 1998 when the Bank of Japan (BoJ) intervened to curb its weak yen. Reaching that level once again last week has led to renewed jawboning from government officials. That said, previous warnings have been heard before and as with past instances, any failure to follow through with concrete action may lead to some shrugging off eventually and just expressing words of concerns may have little effect in reversing the USD/JPY trend. The Deputy Chief Cabinet Secretary, Seiji Kihara, also expressed that the yen’s decline may work most effectively in attracting inbound tourism, which may suggest that some reservations on intervention could still linger until tourism rules are relaxed, potentially in October. Thus far, the USD/JPY remains on an upward trend, with further retracement placing the 140.00 level on watch for any formation of a new higher low.

Friday: DJIA +1.19%; S&P 500 +1.53%; Nasdaq +2.11%, DAX +1.43%, FTSE +1.23%