US
USD is weaker reflecting mostly JPY and CHF strength. Bond and stock markets steadied, while Brent crude oil prices are up and closing in on $100 a barrel.
We expect USD to stabilize in the near-term, except against JPY. Fed funds rate hike pricing will remain elevated into the September 16 FOMC decision, with the August CPI print on September 11 the decisive test.
We don’t expect the FOMC to hike this month, which will ultimately lead to a dovish repricing against USD. Wage growth is consistent with the Fed’s 2% inflation target, and Fed policy is already somewhat restrictive, assuming a nominal neutral rate of 3.00%.
New York Fed President John Williams cooled rate hike bets yesterday. Williams said the inflation data recently “has been encouraging…I am actually seeing the trend in inflation moving slowly down as some of the effects of the tariffs move into the rearview mirror.” Odds of a September 16 Fed funds rate hike dropped from a high of 72% to 60% after his comments. Fed Governor Christopher Waller is up next (1:30pm London, 8:30am New York).
Meanwhile, the latest Fed Beige Book remained indicative of solid economic activity and stable labor markets. “The general outlook for the coming months was positive…Employment rose very slightly overall.” The inflation outlook was mixed. Firms broadly reported significant health care and insurance cost pressures. But “consumer-facing contacts in a few Districts noted that heightened price sensitivity among customers was putting a limit on their ability to pass through input price increases.”
The ADP August private payrolls data showed labor demand remains unimpressive. The economy added +38k private sector jobs in August (consensus: +47k) vs. +46k in July, the lowest reading since January. Of note, the correlation between monthly change in ADP private payrolls and nonfarm payrolls (NFP) is weak. Over the full sample since 2010, the correlation is 0.26, and year-to date it’s virtually zero.
August Revelio Labs employment is due today (1:30pm London, 8:30am New York). There is no consensus estimate for Revelio Labs employment, but in July it showed the economy added +79.2k jobs, when NFP lost -23k jobs. According to Revelio Labs, its employment data has a 0.74 correlation coefficient with the NFP survey.
August Services ISM is the other highlight (3:00pm London, 10:00am New York). The data should remain indicative of resilient demand and sticky inflation pressures. The headline index is seen at 54.1 for a second straight month, and the Prices Paid index is expected at 70.0 vs. 70.3 in July.
JAPAN
JPY is outperforming across the board with USD/JPY slicing through its 200-day moving average at 158.46 and eyeing its post July intervention low around 155.00. Speculation Japan’s Government Pension Investment Fund may boost its allocation target for domestic bonds and hawkish BOJ repricing fueled the rally in JPY. The swaps curve briefly priced 40% odds of a 50bps BOJ hike on September 18 before retreating to 0%.
As we flagged yesterday, a jumbo BOJ hike this month is a real possibility given that inflation expectations account for most of the rise in 10-year JGB yields. A forceful rate move could ultimately cap the long end of the yield curve by anchoring inflation expectations and support JPY.
SWITZERLAND
CHF is today’s second best performing major currency, behind JPY. Swiss inflation ran hot in August reinforcing SNB rate hike expectations. Headline CPI rose more than expected to 0.8% y/y (consensus: 0.5% y/y) vs. 0.4% in July. Headline inflation is the highest since September 2024 and above the SNB’s Q3 forecast of 0.6% y/y. Core CPI inflation also surprised to the upside at 0.4% y/y (consensus: 0.3%), following four straight 0.3% readings.
The swaps curve continues to fully price in a first 25bps hike to 0.25% in June 2027. The SNB has plenty of room to keep rates at 0.00% for some time, given that inflation remains well within the bank’s price stability mandate of less than 2% per annum. That’s an ongoing headwind for CHF. CHF is the worst performing G10 currency so far this quarter.
MALAYSIA
USD/MYR is steady. Bank Negara Malaysia (BNM) delivered a hawkish hold. BNM left the policy rate steady at 2.75% for a seventh consecutive meeting, as expected, but tweaked its neutral guidance. The statement scrapped reference it considers the monetary policy stance as being “appropriate,” suggesting it could soon start raising rates. Malaysia’s positive real rates should keep MYR an Asian FX leader.
CANADA
USD/CAD is testing key support at 1.3800, with a break opening the door to further downside. The Bank of Canada (BOC) delivered a hawkish hold yesterday. As was widely expected, the BOC kept the policy rate at 2.25% for a seventh consecutive meeting but warned that “the upside risks to inflation have increased.”
As a result, markets brought forward expectations for a first 25bps hike from January to December and firmed up odds of 75 to 100bps of tightening over the next twelve months. That’s too aggressive in our view given core inflation is near the BOC’s 2% target and indicators point to continued excess supply in the economy.
