Fed policy update & NFP report deliver one-two punch to USD

USD: Peak now in place for US yields & USD?   

The US dollar has continued to trade at weaker levels during the Asian trading session following the sharp sell-off at the end of last week. After a period of consolidation at higher levels since late September, the dollar index broke to the downside on Friday triggered by the release of the much weaker than expected non-farm payrolls report for October. It was the largest weekly sell-off for the dollar index since the middle of July just before the recent bull run had started. Together with the less hawkish policy update from last week’s FOMC meeting, the much weaker non-farm payrolls report has reinforced market expectations that the Fed is unlikely to raise rates further  in the current tightening cycle, and that the next move for the Fed is likely to be a rate cut by Q2 of next year. The US rate market has adjusted to price in around 33bps of Fed cuts by the June FOMC meeting and around 95bps of cuts by the end of next year. The dovish repricing of the Fed policy outlook has helped to bring down US rates both at the short and long end of the curve. The 2-year US Treasury yield has fallen further below the high from last month at 5.26% to a low on Friday of 4.80% while the 10-year US Treasury yield has fallen by a similar amount from last month’s high of 5.02% to a low on Friday of 4.48%. The price action suggests that US yields and the US dollar have now likely put in place peaks for this year. US yields and the US dollar also peaked in late September/October of last year. The window for further US dollar gains in the near-term appears to have closed on the back of rising US rates.         

The release of the non-farm payrolls report for October provided clearer evidence that labour demand is weakening. Private employment growth in the establishment survey slowed to 99k in October which brought the five month average down to 138k. Even including the outsized job gains recorded in September, there has been a clear slowdown in employment growth over the last five months. The softening in employment growth will provide further reassurance to the Fed that policy tightening implemented to date is helping to dampen upside risks to inflation from the labour market. Employment growth was even weaker in the more volatile household survey where it fell by -348k in October which follows a softer 86k gain in September as well. As a result, the unemployment rate continued to rise gradually by 0.1 point to 3.9% as it moved further above the cycle low from January at 3.4%. The ongoing rise in the unemployment rate has re-heightened some concerns over US recession risk. The Sahm rule suggests that a recession has started when the three-month moving average of the unemployment rate has increased by 0.5 point or more relative to its low during the previous 12 months. On that basis the three-month moving average has increased by 0.3 point so far. It was also encouraging that average hourly earnings growth continued to slow for the third consecutive month in October. The developments leave the US dollar vulnerable to further weakness in the week ahead. We recommended short USD/SEK and USD/MXN trade ideas in our latest FX Weekly report (click here).       

US PRIVATE EMPLOYMENT GROWTH IS CLEARLY SLOWING

Source: Macrobond & MUFG GMR

JPY: BoJ Governor Ueda’s comments act to dampen yen gains

The broad-based USD sell-off and decline in US yields has helped to drag USD/JPY back below the 150.00-level. The pair hit a low on Friday of 149.21 as it moved further below the peak from the end of last month at 151.72. In the process, the yen has reversed most of the losses sustained against the US dollar immediately following the BoJ’s last policy meeting when it made yield curve control more flexible. The price action highlights that the outlook for US rates and Fed policy remain important in driving yen performance, and have helped to ease some of the pressure on Japanese policymakers to intervene to support the yen and/or bring forward plans to tighten monetary policy. Heightened US recession fears and/or market expectations for more aggressive Fed rate cuts would be needed to trigger a more sustained reversal lower for USD/JPY heading into next year. Last year’s peak for USD/JPY coincided with US rates peaking in October and Japan intervening to support the yen. Our bullish outlook for the yen in 2024 is based on our forecast for the Fed to cut rates aggressively next year and the BoJ to raise rates back into positive territory (click here).  

Our analysts in Tokyo are sticking to their forecast for the first BoJ rate hike in January of next year. Comments from BoJ Governor Ueda overnight have dampened expectations for an even earlier rate hike in December of this year. He stated that “it’s impossible to say the chances are zero, in truth” that the BoJ might be able to discern this year that their 2.0% target has been met…”but, as I just said, there are less than two months left” which implies it is not the base case scenario. He did though state that the judgement of when the inflation target is met could “theoretically” come at any meeting. He repeated that “the likelihood of realizing the outlook for achieving the price stability target of 2 percent seems to be gradually rising”. However, there are high uncertainties over wage growth and other factors which mean that the can’t judge with sufficient certainty that the target is met on sustainable basis.  

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
EC	09:00	Services PMI	Oct	47.8	47.8	!!
UK	09:30	Construction PMI	Oct	46.0	45.0	!!!
EC	09:30	Sentix Investor Confidence	Nov	-22.2	-21.9	!
CA	15:00	Ivey PMI	Oct	--	53.1	!!
US	16:00	Fed Governor Cook Speaks	--	--	--	!
UK	17:00	BoE MPC Member Pill Speaks	--	--	--	!!
GE	18:00	German Buba President Nagel Speaks	--	--	--	!!
US	19:00	Loan Officer Survey	--	--	--	!
JP	23:30	Average Cash Earnings (YoY)	--	1.0%	1.1%	!!!

 

Source: Bloomberg