Japanese data shows inflationary pressures are firm and that exports remain resilient despite tariffs. An upbeat flash purchasing manager’s index suggests the economy is on the recovery path. While these outcomes favour a Bank of Japan rate hike in December, government pressure to keep policy loose might delay a move until next year
Concerns about the US credit market have eased further since the weekend, prompting a hawkish repricing in the Fed curve and justifying a stronger dollar. EUR/USD may slip all the way to 1.160 in the next few days, but it may require a hot US CPI print to extend the drop. Elsewhere, Japan’s new PM Takaichi was confirmed by parliament this morning
Japan’s July consumer price inflation data was broadly in line with the market consensus. Headline inflation slowed thanks to falling energy and utility prices. Yet, core prices remain sticky and well above 3%. We believe core price trends will prompt the BoJ to hike rates as early as October
Until the corporate savings rate attains a normal negative level and structural deflationary pressures are eliminated, the policy mix of monetary and fiscal policies should maintain the expanding power of the Japanese economy. The increased predictability of firms’ sustained nominal GDP expansion would cause firms to shift their management strategies from cost cutting to investment.
The yen is finishing the week on a softer footing with USD/JPY rising back above 149.50 after hitting a low yesterday at 148.18. The pair is currently on course for the second consecutive week of modest gains. The yen has been undermined this week by the BoJ’s cautious policy update (click here) when they expressed more unease over elevated overseas uncertainties which were described as “rising quickly”.
KRW, IDR, AUD and NZD depreciated the most vs. USD in historical US equity bear markets; JPY, CHF, and EUR may outperform this time.
“When the path is uncertain you go a little bit slower” – Chair Powell. The expectation is for the Fed to leave their policy rates unchanged at 4.25-4.50%. To us, uncertainty around the macro environment and politics will likely equate to little changes to the Fed’s forward guidance. Powell will likely want to keep all the options open.
• USD firmer as markets trade cautiously into Fed decision.
• CAD slips back from probe through upper 1.42s.
• EUR drifts lower after another failure around 1.0950 yesterday.
• GBP tracks peers, short-term price patterns may be tilting negative.
• JPY drops after BoJ holds policy rate at 0.50%, as expected.
• AUD, NZD lower in line with peers; Aus jobs, NZ GDP data due tonight.
• MXN softer on the day but holds gains back through 20.
It has been a quiet start to the week for the major FX rates ahead of a busy schedule of G10 central bank meetings this week including the BoJ and Fed on Wednesday followed closely by the SNB, Riksbank and BoE on Thursday. Ahead of those policy updates the US dollar is continuing to consolidate at weaker levels against other major currencies with the dollar index trading just below the 104.00-level.
