USD rally continues after busy week of G10 central bank updates

USD: A tenth consecutive week of gains for the dollar index

It has been a quiet start to the week for the foreign exchange market with the major currencies trading in narrow ranges overnight. It follows another week of gains for the US dollar resulting in the dollar index recording its tenth consecutive week of gains and hitting an intra-day high of 105.78 on Friday. The US dollar’s upward momentum was reinforced last week by the Fed’s hawkish hold. The Fed is now more confident that the US economy is heading for a softer landing that has pared back plans for rate cuts next year resulting in US yields hitting a new cyclical highs last week. The 2-year and 10-year US Treasury yields hit highs of 5.20% and 4.51% respectively last week. The better than expected US economic data flow is continuing to encourage the Fed and US rate market participants to buy into a softer landing outlook for the US economy. The implied yield on the December 2024 Fed Fund futures contract has risen from 4.31% at the end of August to a high last week of 4.79% as US rate market participants have moved to price out almost 50bps of Fed rate cuts by the end of next year. A similar amount to the 50bps of rate cuts that were taken out of the Fed’s updated projections highlighting that US rate market participants‘ and the Fed’s outlooks for policy next year are currently well aligned.  

In the week ahead, Fed Chair Powell is scheduled to speak on Thursday and New York Fed President Williams on Friday. With the US rate market currently priced at around 50:50 for one final hike from the Fed this year any comments from the Fed leadership on policy will be scrutinized closely in the coming months.  The main US economic data releases in the week ahead will be the GDP data for Q2 (Thurs) including the initial results from the 2023 comprehensive update of the National Economic Accounts. It has been speculated that it could include downward revisions to GDP growth to narrow the gap to GDI growth that has been much weaker so far this year. It has been reported so far that GDP growth has averaged an annualized rate of 2.0% in the first half of this year compared to annualized contraction of -0.7% for GDI. It would have to reveal a significant downward revision for GDP growth to undermine the US dollar’s upward momentum. Then at the end of the week on Friday, the release of the latest PCE deflator report for August is expected to reveal further evidence that the core inflation pressures have slowed in recent months supporting our forecast the Fed to leave rates on hold through the rest of this year.    

JPY SHORTS HAVE BEEN SCALED BACK AMONGST LEVERAGED FUNDS 

Source: Bloomberg, Macrobond & MUFG Research 

JPY: BoJ Governor Ueda chooses not to further encourage rate hike expectations

The broad-based rally for the US dollar and adjustment higher for US yields is helping to lift USD/JPY closer to the 150.00-level. It has though been a hard grind higher over the past week for the pair reflecting heightened unease amongst market participants over the risk of Japan intervening to support the yen as it falls back closer to the lows from late last year. There have been no fresh comments from Japanese officials over the weekend after Prime Minster Kishida and Finance Minister Suzuki both warned at the end of last week that they won’t rule out any options against excess FX moves and will watch FX moves with a high sense of urgency. While we believe that the level of intervention risk is at the highest level, it would be harder to justify intervening when the yen is weakening slowly as it has done over the past week.

The main focus overnight has been the comments from BoJ Governor Ueda in a speech to business leaders in Osaka. However, he mainly repeated the message delivered at Friday’s policy meeting. He reiterated that the uncertainties regarding the sustainability of wages and inflation are high, and therefore the BoJ believes that its goal of achieving 2% inflation target accompanied by wage gains “has not yet come in sight”. He believes that this is an extremely important juncture for nurturing “the buds of change in the economy”. As a result, the BoJ remains wary about tightening policy too soon before they are more confident that higher inflation can be sustained. Until then the BoJ will continue with their easing framework patiently. Overall, it adds to the impression from last week’s BoJ meeting that Governor Ueda was wary about encouraging Japanese rate market participants to further bring forward BoJ rate hike expectations from Q1 of next year. It shifts the onus more on to the government to support the yen through intervention if they want to prevent/slow further yen weakness.  Please see our latest FX Weekly for more details (click here). 

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
GE	09:00	German Ifo Business Climate Index	Sep	85.2	85.7	!!
UK	11:00	CBI Distributive Trades Survey	Sep	-33	-44	!
EC	14:00	ECB President Lagarde Speaks	--	--	--	!!
EC	14:00	ECB's Schnabel Speaks	--	--	--	!!
US	23:00	FOMC Member Kashkari Speaks	--	--	--	!!

 

Source: Bloomberg