Overview: The US is consolidating today with a weaker profile against most G10 and emerging market currencies, ahead of Fed Chair Powell’s speech at Jackson Hole (10 a.m. ET). He is unlikely to do much more than confirm what the market already thinks it knows: namely, that the first rate cut will come next month. By acknowledging that the economy has performed broadly as the central bank expected, it would be a gentle counterpunch to speculation about a 50 basis point rate cut. In the current context, a rate cut will not usher in a loose policy, but merely make the current stance less hawkish. The dollar index fell to its lowest level of the year midweek and remains in the trough. The BOJ’s Ueda explained last month’s rate hike and did not withdraw his forecast for further rate hikes barring a new shock. The dollar remains within yesterday’s range against the yen.
Global equity markets were undaunted by yesterday’s sharp sell-off in the U.S. Most major markets in Asia-Pacific rose, except Australia, Hong Kong and South Korea. The Stoxx 600 is up for the third straight session. It’s the third weekly rise, the longest since March. U.S. index futures are trading higher but look technically vulnerable. Benchmark 10-year yields are slightly mixed today, and the 10-year Treasury yield is unchanged at 3.85%. Gold is consolidating in yesterday’s range, remaining at $2,500. October WTI ended a four-day downtrend yesterday, up 1.5%, and has gained another 1% to nearly $74, partly in response to the Red Sea attack.
Asia-Pacific
BOJ Governor Ueda defended last month’s decision to raise interest rates and kept open the possibility of further rate adjustments, even if they do not occur immediately (next month).. Like other central banks, the BOJ wants to avoid changing its policy amid market turmoil, but that is a tactical decision. Strategically, Ueda is leading the central bank toward a gradual normalization of monetary policy. The market recognizes this, and overnight swaps show that a tightening of nearly 11 basis points was priced in before the end of the year and has changed little after today’s release of the national CPI. The CPI report contains little new information. It had already been expected a few weeks ago when the CPI for August was released in Tokyo. The headline rate was unchanged at 2.8% (instead of falling to 2.7% as many expected). The core interest rate rose slightly to 2.7% (from 2.6%) as utility subsidies were cut. The figure, which excludes fresh food and energy, fell to 1.9% (from 2.2%), the first reading below 2% since September 2022.
Say what you will about the BoJ and interest rate differentials: The rolling 30-day correlation between changes in the yield on 10-year US Treasuries and the exchange rate is at the upper end of the level that has existed for the last five months (~0.60). The correlation between changes in the 10-year differential and the exchange rate is a third lower. Rising US interest rates appeared to push the dollar up to 146.50 JPY yesterday as the European session drew to a close. Recall that Wednesday’s high was reached in the rapid rise around the apparently partially delayed release of the jobs data at 146.75 JPY. We suspect US interest rates have reached a short-term low. The dollar is trading within yesterday’s range (~144.85 JPY-146.55 JPY). The Australian dollar has risen sharply in recent days, approaching the high reached before the carry trade carnage. The more than four cent rise has stretched momentum indicators and profit-taking occurred yesterday. After trading above $0.6760 on Wednesday, the Aussie was pushed to $0.6700 yesterday. This range remained in place today and the Australian dollar reached almost $0.6730-35 amid consolidation activity. The (38.2%) retracement of the recent advance from the August 15 low of $0.6570 is just below $0.6690. The halfway point is $0.6665. The dollar’s recovery against the yen signalled gains against the offshore yuan. The dollar rose to a three-day high at 7.15 CNH. It also records an inside day. The dollar is again stronger against the offshore yuan than against the onshore yuan, which also indicates buying pressure on the dollar. To simply return to the upper end of last week’s range, the greenback can rise to 7.1850 CNH. The series of lower dollar fixings ended today. The PBoC set the dollar’s reference rate at 7.1358 CNY (7.1228 CNY yesterday and 7.1464 CNY a week ago). It is the fifth consecutive week that the dollar has fallen against the onshore yuan, for a total loss of about 1.5%.
Europe
In Europe, today will be overshadowed by the BOJ governor’s defense of last month’s move to slightly reduce monetary easing and Fed Chairman Powell’s speech at Jackson Hole. The ECB survey showed a stable one-year inflation expectation of 2.8%, while three-year expectations rose to 2.4% from 2.3%. Next week’s calendar includes the preliminary CPI for August and unemployment figures for July. The ECB says it is data dependent, but the market is confident it will make at least another 50bp cuts this year and is trending (~60%) toward 75bp at the remaining three meetings of the year. The UK economic calendar is bare of market-moving data points today and next week. After the UK led the G7 in growth in H1 24, July data and the preliminary PMI for August show the UK economy has gained momentum at the start of Q3. There are three BOE meetings left this year. The market is confident there will be another cut, but has reduced the likelihood of another cut by Q1 25.
The strong upswing of the euro came to a halt yesterday. It recorded its lowest level in three days. Given the tight momentum indicators, there is a reasonable chance that the consolidation/correction phase we expected has begun. It is trading mostly quietly between $1.1110 and $1.1130. The yearly high was reached on Wednesday at $1.1175. We suspect the $1.1140-$50 range will now top out. The pound also appeared to have stalled, but hit a marginal new high today at $1.3135, just a tenth of a cent below its 2023 peak. The intraday momentum indicator is overextended, suggesting that upside in North America may be limited today.
America
Fed Chairman Powell’s speech at Jackson Hole overshadows any interest that may have existed in July new home sales (first increase in three months?) and the Kansas Fed’s services activity survey (the services PMI slowed to 53.5 from 55.0). What can Powell say that we don’t already know? There is little doubt that the Fed will cut rates in September. Ahead of the September 6 jobs report and the September 11 consumer price index, Powell may avoid direct details on the magnitude. Still, the overall impression will be that the economy is moving pretty much along the lines the Fed expects (including the downward revision to jobs growth), and the implication would be a 25 basis point cut. The first cuts can and perhaps will be couched in terms of tapering tightening policy. Ultimately, the economy is likely to grow at a pace close to what the Federal Reserve sees as a noninflationary pace. It does not share the urgency of many Wall Street economists. Canada reports retail sales for June. Economists expected another decline. Through May, retail sales rose only once this year (April).
The US dollar hit its lowest level in four months against the Canadian dollar yesterday (~1.3570 CAD). It recovered to almost 1.3620 CAD, but was back at 1.3580 CAD in the European morning. Intraday momentum indicators are overextended, suggesting that yesterday’s low may hold. The greenback has come a long way. It peaked at around 1.3945 CAD on August 5. A moderate correction could initially yield 1.3650 CAD. The Mexican peso was sold off sharply yesterday for the third day in a row. The weakness of the yen did not ease the pressure on the peso, and the US dollar traded above 19.50 MXN for the first time in two weeks. Economic data was encouraging against the peso. The IGAE economic survey for June showed that the economy had weak momentum and the consumer price index for the first half of August was weaker than expected. The core interest rate fell below 4% for the first time in four years. But it’s not like the market needed a new reason to sell the peso, driving the peso down more than 3% in the first three days of the week. The dollar is consolidating in a tight range (~19.4370-19.5335 MXN) so far today. Note that the 19.60 MXN is the (61.8%) retracement of the dollar’s decline after reaching 20.2180 MXN on August 5.
