In FX Risk Sentiment Sours – USDJPY Eyes 108.00

Market Drivers June 12, 2019
HK protests turn to riots
US CPI on deck
Nikkei -0.35% Dax 0.92%
UST 10Y 2.13%
Oil $52/bbl
Gold $1336/oz

Europe and Asia:
No data

North America:
USD CPI 8:30

It’s been a generally quiet night in FX with no major news releases in either Asia or London session, but risk sentiment has clearly turned sour as protests in HK have turned into full-fledged riots pressuring USDJPY back towards the 108.00 figure.

The standoff between HK legislature and protesters turned violent over the opposition to the new extradition law that would send suspected criminals to China for prosecution. HK legislators have argued that the law was necessary to apprehend mainland Chinese criminals who have been hiding in HK to avoid Chinese authorities.

Protesters, however, argue that the new law allows China to abrogate the British based rule of law system in HK and essentially will destroy the legal rights of HK residents.
Clearly, the issue has hit a nerve on the island as HK citizens fear that they will lose their special legal protections and will fall under the threat of authoritarian rule of mainland China. The protests have been coming to a slow boil for the past few weeks, but today’s violent eruptions indicate that the conflict could spread, especially if the legislature proceeds with the new law sparking fears that HK will lose its status as a well-governed rule of law place to do business.

USDJPY has been pressured lower all night touching a low of 108.20 and could drift towards the key 108.00 figure if the risk-off flow accelerates into North American open. On the docket, the market will only get a look at the US CPI data which is projected to print at 1.9% versus 2.0% the period prior. That is cooler but hardly deflationary and raises the question of whether the futures markets may be overreacting to the prospect of a Fed rate cut in July.

Currently, the pricing is for an 80% chance that the Fed would cut, but Chairman Powell has clearly shown that the Fed is reluctant to move on the policy rate unless absolutely necessary. As we noted earlier, the Fed only has a small number of basis points to work with and they do not want to waste them on unnecessary moves responding to political pressures. To that end, today’s data is unlikely to have much impact as the true marquee event of the week will be US Retail Sales on Friday