RBA's Pause Isn't the Endgame: Dollar Remains Trapped Amid Low FX Volatility

FX Daily: RBA's pause isn't the endgame

The Reserve Bank of Australia held rates for a second consecutive month, but we still think there is a chance the bank will hike one last time in September on the back of an inflation surprise. In the US, surveys will test the soft-landing story, but the dollar may stay 'trapped' amid low FX volatility for now.

 

USD: Still fighting for direction

We have recently made the case for the dollar to stay “trapped” in a situation where FX volatility fails to pick up, leaving room for carry trades to keep supporting high-yielders and weigh on funding currencies. The greenback probably needs some compelling evidence against the soft-landing narrative in the coming days to break lower.

Today will be the first occasion to put that narrative to the test this week. The US manufacturing sector has been in contractionary territory since November 2022, and the consensus expectations for a mild rebound from 46 to 47 this month may not have major market implications. We think JOLTS job openings data have a greater potential to move investors’ sentiment today, with the consensus already positioned for a cool-off in the hiring market. On the Fedspeak side, we’ll hear from Chicago Fed President Austan Goolsbee.

One data release that went slightly under the radar yesterday, but in our view contained key forward-looking information, was the Federal Reserve’s Senior Loan Officer Opinion Survey. As discussed by our US economist here, the survey pointed at a further tightening in US lending conditions and how both households and businesses are now warier about taking on additional borrowing. Given the centrality of credit flow to the US economy, this increases the probability of a faster return to target inflation.

Outside of the US, China continued to print disappointing data: the latest being July’s Caixin PMI manufacturing, which fell more than expected into contraction territory (49.2). This has set the stage for a risk-off-leaning environment in FX this morning, which can favour some modest dollar recovery into the US data releases and help DXY consolidate above 102.00, before facing harder data-related tests (ISM services and jobs report later this week).