US
USD is consolidating yesterday’s gains with the DXY index testing resistance at its 200-day moving average (99.17). Brent crude oil prices are in a holding pattern under $90 a barrel. Nvidia Corp beat Wall Street revenue and sales expectations reinforcing the strength of the AI capex boom.
Yesterday, the US July PCE print showed inflation stuck above the Fed’s 2% target but not accelerating, while real personal spending stalled. That gives the Fed room to hold and leaves USD vulnerable to a dovish repricing. Fed funds futures price in 36% odds of a 25bps hike to 3.75-4.00% at the next September 16 meeting and a total of 40bps of tightening over the next twelve months.
Headline PCE rose 0.2% m/m (consensus: 0.1%) vs. -0.1% in June, to be 3.7% y/y (consensus: 3.6%) for a second straight month. Core PCE matched expectations at 0.2% m/m vs. 0.1% in June and held at 3.3% y/y for a second straight month. The less noisy Dallas Fed trimmed mean PCE and the Cleveland Fed median were unchanged at 2.3% y/y and 2.7% y/y, respectively.
The Jackson Hole Economic Symposium starts today, with Fed Chair Kevin Warsh speaking tomorrow. Clear policy signal will likely be scarce given Warsh’s reluctance to provide forward guidance and the absence of a Q&A session. Instead, Warsh may preview the Fed five task forces’ early findings on communications, the balance sheet, economic data, productivity and jobs, and the inflation frameworks.
EUROZONE
EUR/USD is directionless around 1.1650, with the 200-day moving average at 1.1633 offering key support. The ECB Account of the July 22-23 meeting is due today (12:30pm London, 7:30am New York). Rates were held unanimously at 2.25%, so the focus will be on how seriously policymakers debated a hike.
The swaps curve has virtually fully priced in a 25bps ECB rate hike to 2.50% at the next September 10 meeting and a total of 60bps of tightening over the next twelve months. That’s reasonable and supportive of EUR. Eurozone inflation is above target, and leading indicators point to stronger economic activity.
JAPAN
USD/JPY remains entrenched between resistance at 160.00 and support at the 200-day moving average (158.40). Bank of Japan (BOJ) Deputy Governor Ryozo Himino stuck to the bank’s hawkish guidance. Himino stressed that “raising rates in a timely manner will help avoid a spike in inflation and abrupt rate hikes in the future,” adding “we should pay greater attention to the upside risk to prices than in the past.”
Indeed, underlying inflation in Japan has firmed, though it remains around the BOJ’s 2% target or just below. We expect the BOJ to deliver a 25bps rate hike to 1.25% at its next September 18 meeting (80% priced-in).
In our view, the catalyst for a lower USD/JPY will come from a dovish Fed repricing rather than a hawkish BOJ repricing. We doubt the BOJ can tighten more aggressively than is currently implied over the next twelve months (75bps) given that underlying inflation pressures remain contained and private consumption activity was flat over Q2.
In the meantime, FX intervention threat significantly raises the cost of shorting JPY and limits USD/JPY overshoots above 160.00. The size of Japan’s end-July FX intervention will be released next Monday. Estimates suggest Japan used a record of about ¥14 trillion to prop up JPY.
SOUTH KOREA
USD/KRW is holding near a one year low. Bank of Korea (BOK) delivered a back-to-back 25bps hike to 3.00%. Most analysts polled by Bloomberg (14 of 22) had a hike penciled in, the rest expected a hold. BOK voted 6-1 to hike with one member favoring a hold after July’s unanimous decision to raise rates.
BOK hawkish guidance was tempered. The statement scrapped the line that “it is judged that it will be necessary to continue a policy stance consistent with further rate hikes,” reiterating instead that it “will determine the timing and pace of further Base Rate hikes based on incoming data.” Its six-month ahead conditional policy rate projection shows six members at 3.50%, ten at 3.25%, and five at 3.00%. The swaps curve implies a policy rate closer to 3.50% in the next six months and 3.75% in the next twelve months.
Overall, KRW fundamentals are positive. KRW is significantly undervalued, South Korea has a massive current account surplus (9.4% of GDP in Q1), full WGBI inclusion by November should sustain foreign bond inflows, and BOK has scope to deliver more hikes.
PHILIPPINES
USD/PHP is rising towards last week’s record high of 62.00. Philippine central bank (BSP) delivered a third straight 25bps hike to 5.00%. Most analysts polled by Bloomberg (20 of 25) had an increase penciled in, the rest expected a hold. According to the statement, today’s hike was a “preemptive monetary action” against upside price risks from “severe El Niño conditions on agricultural prices” and “potential wage adjustments.”
However, with inflation already above the bank’s 4% upper tolerance band, the move looks more reactive than preemptive and leaves policy behind the curve. The markets imply nearly 75bps of tightening over the next 12 months, but negative real rates should keep PHP lagging its Asian peers.
