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The USD has rebounded, with the DXY index trading to 101 as short USD positions are squared ahead of FOMC. Market expectations for this week’s FOMC decision lie on the dovish side, with futures pricing in a 2/3 chance of a 50bps rate cut compared to a 25bps cut. Should the Fed disappoint markets and signal a gradual, calibrated pace of rate cuts, there may well be a knee-jerk rebound in the USD as short-end rates reprice higher. Still, we expect a softening USD in the medium term due to the larger scope for Fed rate cuts compared to other central banks in this cycle, and the high valuation of the USD relative to fundamentals. A high US federal debt burden may also pose tail risks for the USD, especially if there is an unexpected recession that triggers more fiscal spending.
USD/JPY had rebounded to 142 amid USD strength, and also spurred by comments from Japan’s Finance Minister Suzuki yesterday that he is watching FX moves closely. While Suzuki had made comments over the undesirability of rapid FX moves in the past, this is the first time his comments were made in the context of a strengthening JPY, rather than a weakening JPY. We don’t see this as prelude for any market intervention to sell JPY, but it is perhaps aimed to reassure and temper JPY volatility in the event of an FOMC shock today. In the event of market shocks, JPY could also outperform the other safe haven CHF. Corporate Switzerland has grew highly concerned over excessive CHF strength unlike corporate Japan over the JPY (which is weak), and there are prospects of a larger SNB rate cut next week, in contrast to a BOJ that is waiting to hike rates.
USD/CNH is consolidating around 7.10, with onshore markets returning today from holidays. Chinese data released over last weekend were uniformly weak, with retail sales, industrial production, and fixed asset investment all underwhelming expectations. We remain of the view that RMB will lag gains in other Asian currencies for this Fed rate cut cycle. China could accept some RMB gains, but not too much given the need to support growth. While there is new RMB positivity from Harris leading Trump in polls, this by no means imply that tariff threats from the US are over, though the worst-case scenario has become unlikely. The Biden administration had proposed to prohibit low-value Chinese exports to the US from being eligible for exemption from tariffs, which was a long-standing rule for de minimis imports. Given US election and political uncertainty, we expect a political risk premium to keep RMB gains in check.
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Stephen King
September 18 in history
Old Faithful Geyser was observed and named by Henry D. Washburn in 1870.
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