Dollar storms back (but not against the Yen) after Fed signals low bar to September cut

Overview: Neither the FOMC statement nor Fed Chair Powell's press conference dented the markets confidence that the Federal Reserve will begin an easing cycle at its next meeting in September. Yet, the dollar is bid against most of the G10 currencies, but the yen and Swiss franc. The Norwegian krone, apparently helped by a stronger PMI and the recovery in oil prices, is the strongest with a 0.25% gain. Most Asian emerging market currencies, but the Chinese yuan, are slightly firmer, while central European currencies have been dragged lower by the falling euro. The euro and sterling are at new lows for the week ahead of the BOE's rate decision shortly. 

The dollar fell to about JPY148.50, a new low since mid-March and it took a toll on Japanese stocks. The Topix fell by 3.25% and the Nikkei fell 2.5%. Outside of Japan and China, the other large markets rose, led by Taiwan's 2% gain and South Korea's 1.3% rise. Europe's Stoxx 600 is giving back a little more than half of yesterday's 0.80% gain. US index futures enjoy a firmer bias. Asia-Pacific bond markets played catch-up after yesterday's strong US Treasury rally. European benchmark 10-year year yields are narrowly mixed today, and the three basis point decline in UK Gilt yields stands out. The US 10-year Treasury yield fell to 4.03% yesterday, its lowest since early February. It is hovering around 4.05% today. The two-year yield fell to nearly 4.25%, a new five-month low. It is now near 4.28%. A stronger dollar and firmer US yields is taking some of the shine off gold after the yellow metal rose to briefly above $2458 before reversing lower. It has come off more than $25 and may re-test $2400. The threat of widening Middle East conflict helped oil recover yesterday. September WTI had fallen to near $74.60 on Tuesday and reached $78.65 yesterday. The gains were extended a little today (~$78.90) before steadying around $78.50. 

Asia Pacific

High-frequency economic data from Japan have been rendered moot by the BOJ's announcements yesterday. The weekly MOF portfolio capital flow report will be interesting next week to see if the rate hike and QT changed preferences. Japanese investors sold foreign bonds for three consecutive weeks and in five of the past six weeks. Year-to-date, they have been small net buyers of foreign bonds. Note that yesterday's report showed July BOJ intervention was JPY5.5 trillion (~$36.6 bln) in July. Early indications had suggested around JPY5 trillion of intervention. That brings the year-to-date intervention to around JPY15 trillion. Australia reported an A$5.6 bln trade surplus, which is a little more than half of the June 2023 surplus. In the first half of this year, Australia recorded a trade surplus of about A$38.2 bln. In H1 23, it was almost A$68.9 bln. Exports have slipped this year while imports have risen. China's Caixin July manufacturing PMI fell to 49.8 from 51.8. It is the first break of the 50 boom/bust level since last October. 

Early North American traders joined the band wagon to sell dollars against the yen and triggered stops below JPY150. The greenback fell to about JPY149.80 and bounced to JPY150.50 before running out of steam. It took another leg down to JPY148.50 in Asia Pacific turnover, which corresponds to the (61.8%) retracement of this year's dollar rally. Although it has stabilized, the dollar has not been above JPY150.35 since the low was recorded. Australia's softer than expected core CPI and the flip in market expectations toward a rate cut took the Aussie to $0.6480 yesterday, nearly a three-month low. It has held above $0.6500 today but has not been able to re-establish a foothold above $0.6550. We suspect the Australian dollar's 3.2-cent sell-off since July 11 has completed or early completed the move. The RBA meets next week, and it is not clear that officials will share the market's enthusiasm for what amounts to be a small increase in the year-over-year rate and a 0.1% slip in the trimmed mean. The weighted median fell more (4.1% from 4.4%) but is still above 4%. The yen's recovery appeared to aid the Chinese yuan. The dollar settled below its 200-day moving average (~CNH7.23) against the offshore yuan for the first time since mid-May. In July, the offshore yuan rose by a little more than 1%, its best month since last November. The dollar initially extended yesterday's losses to almost CNH7.21 before the bouncing back to CNH7.2520. Yesterday's high was slightly higher (~CNH7.2530). Stronger resistance is seen near CNH7.26. The PBOC set the dollar's reference rate at CNY7.1323 (CNY7.1346 yesterday). 

Europe

The focus is on today's Bank of England meeting. The odds of a rate cut have crept up in the swaps market over the past few days. It stands near 63% now up from about 40% at the start of last week. The market has two cuts fully discounted before the end of the year and at least two more in H1 25. If the BOE does not cut rates today, strong confidence of a cut at the next meeting on September 19 is unlikely to wane. The final manufacturing PMI is of little significance for the UK or the eurozone for that matter. The preliminary is sufficient for market participants, though both were revised slightly higher. Separately, the aggregate eurozone June employment was reported, and it ticked up to 6.5% after holding at 6.4%, the record-low during the EMU era for the previous two months. 

The euro recovered from the dip below $1.08 on Tuesday to $1.0850 yesterday, where options for 1.55 bln euros expire today. It has taken another leg lower today. The selling pressure began in late Asia Pacific turnover and extended through the European morning. The single currency approached $1.0775 and has now met the (61.8%) retracement of the rally from the late June low (~$1.0685). This has stretched the intraday momentum indicators. Nearby support may be around $1.0750. It takes a move above $1.08 to stabilize the tone. Sterling broke down out of Monday's range (~$1.2805-$1.2890), which has confined activity. It has fallen to nearly $1.2750. The (61.8%) retracement objective of sterling rally from the July 2 low (~$1.2615) is about $1.2780. The next chart support is in the $1.2715-30 area. It could be setting up a "sell the rumor, buy the fact" type of activity. 

America

The Federal Reserve met the low expectations. It acknowledged further progress on inflation and recognized the uptick in unemployment. It did not change its forward guidance that a rate cut will be appropriate to cut rates until it has greater confidence that "inflation is moving sustainably toward 2%." After all, there are two employment and CPI reports before the next FOMC meeting. Still, the Jackson Hole confab at the end of August provides a venue for Powell to update (and further firm) its forward guidance. Powell acknowledged that there was a discussion about cutting rates at yesterday's meeting. Even though he indicated that there was no discussion of a 50 bp cut in September, the market has a modest chance (17%) of such an event. Today's Q2 productivity and unit labor costs are not directly observed and are derived from the GDP data. Hence, productivity likely rose to almost 2.0% from 0.2% in Q1. It follows that unit labor costs rose at around half the 4.0% rise in Q1. Weekly jobless claims are overshadowed by tomorrow's employment report. The preliminary manufacturing PMI slipped below 50 for the first time this year, but the ISM manufacturing has been below 50 since October 2022 with the sole exception of the March 24 fluke rise to 50.3. New orders and employment are expected to continue to fall while prices paid are expected to slow. Lastly, US auto sales are expected to have recovered smartly to above the 16 mln unit annualized paced, helped by more incentives and a bounced back from the five-month low of about 15.3 mln in June. June sales were depressed by the cyber-attack that disrupted sales. The two-month average is likely in line with this year's average. Maybe more noise than signal. Canada and Mexico see the July manufacturing PMI, and Mexico has the IMEF industry surveys and June remittances.

The slightly better than expected Canadian May GDP (0.2%) and the broader risk-on environment saw the greenback trade below CAD1.38 for the first time in four sessions. However, the close back above there warns more work may be needed to forge a top. The US dollar is holding above CAD1.38 today and reached slightly above CAD1.3835. The intraday momentum indicators have turned down before the week's high near CAD1.3865 could be tested. The dollar approached MXN18.95, slightly shy of the post-election high closer to MXN19.00 on June 12. The greenback reversed low and fell a little below MXN18.52. However, it did not close below Tuesday's low (MXN18.5760), reducing some of the technical sting. The dollar has not settled below its five-day moving average (~MXN18.58) against the peso for two weeks, illustrating the strength of the move. The peso looks vulnerable, and the greenback may retest the MXN18.80 area.