FX Daily: JPY looking better than USD as tensions rise

In overnight developments, China asked the US to close its Chengdu consulate: the retaliatory move was widely expected, but still kept the pressure on falling equities in China and the rest of Asia – which had opened lower after Wall Street’s grim day yesterday.

In FX, geopolitical tensions are mostly being mirrored by a weaker yuan (USD/CNY advancing above 7.00), which is spilling over into the AUD - the most CNY-correlated currency in the G10 space and some Asian EM (KRW, THB, primarily). What such tensions are not triggering is a sustainable dollar rebound, as equity underperformance was offset yesterday by grim US jobless data which raised concerns that the American recovery is already stalling.

In this view, the lack of US market-moving data today (PMIs should have no impact) is arguably good news for the USD, which may face milder upside resistance as turbulent geopolitics and some profit-taking in equities offer safe-haven support. However, in the longer run, a higher sensitivity of the USD to domestic data may be another point in favour of the USD bear story as our economics team continues to highlight we should prepare for a period of worsening economic news.

Turning back to today, we see scope for an uptick in the dollar, which should largely come to the detriment on activity currencies, and especially those most linked to China (AUD and NZD should underperform compared to CAD). Low-yielders should face limited downside pressure instead.

EUR/USD keeps hovering around the 1.600 mark, mostly driven by the USD leg.

Today, eurozone PMIs will be in focus, and while consensus appears to be expecting a move into the positive territory in manufacturing (>50), our economists expect a slightly less pronounced increase to 49.3. Still, barring a highly disappointing reading, the notion that sentiment is recovering in the eurozone should keep the EUR protected from any USD mild rebound.

UK retail sales moving above their pre-pandemic levels in June are having a very contained positive impact on GBP. Investors may also look beyond PMIs today, as manufacturing is expected to jump to 52.0, as the focus remains on the next steps in the Brexit negotiations after the downbeat comments from both EU and UK officials yesterday.

The yen’s short-term prospects are quite appealing. With geopolitical tensions back on the rise, JPY may attract more safe-haven demand than USD (dealing with worsening domestic data) and CHF (negatively exposed to EU sentiment momentum).

In the crosses, AUD/JPY may push below the 75.00 level.