US
Brent crude oil prices are up and within a whisker of $100 a barrel. Iran-backed Houthi militants reportedly targeted Saudi oil facilities on Monday and Tuesday. The rally in crude is weighing on stocks and bonds, while giving USD a modest lift.
Nonetheless, Friday’s US August CPI report remains the main near-term market driver that will decide the Fed’s September 16 rate decision. A hot CPI print would all but seal a September hike and underpin a firmer USD. A cooler reading would strengthen the case for a hold and leave USD vulnerable to a dovish Fed repricing.
More importantly, even if a September Fed hike becomes a done deal, we doubt USD will make new cyclical highs. Tightening by other major central banks limits policy divergence, with the ECB widely expected to deliver a 25bps hike on Thursday.
August New York Fed consumer expectations survey is due later today (4:00pm London, 11:00am New York). Long-term inflation expectations are critical to watch for confirmation that long-term inflation expectations remain anchored.
JAPAN
USD/JPY dropped briefly to a seven-month low at 152.89 before rebounding above 154.00. The next support sits near 152.00, the January-February double bottom, while resistance is offered at 155.00.
JPY’s recent overshoot has come despite no meaningful hawkish BOJ repricing and a modest pullback in longer term JGB yields. This points to a flow driven JPY rally, supported by possible repatriation flows by Japan’s government pension fund (GPIF), and amplified by an unwind of speculative net short JPY positions.
The sustainability of the USD/JPY plunge hinges on next week’s Fed and BOJ rate decisions. We see four scenarios, with the risks skewed towards a stronger JPY:
• Fed hold, BOJ +25bps: USD/JPY down
• Fed hold, BOJ +50bps: USD/JPY sharply lower.
• Fed +25bps, BOJ +25bps: USD/JPY rebound.
• Fed +25bps, BOJ +50bps: USD/JPY down.
Japan’s July wage data was mixed. Total nominal wage growth quickened more than expected to 4.7% y/y (consensus: 3.8%) vs. 4.0% in June, the fastest pace since 1997. However, the less volatile scheduled pay growth for full-time workers unexpectedly slowed to 2.7% y/y (consensus: 2.9%) vs. 2.9% in June.
In our view, a jumbo 50bps BOJ hike next week cannot be ruled out. Inflation expectations account for most of the rise in 10-year JGB yields. A larger hike could re-anchor inflation expectations, cap the long end of the curve, and turbocharge the JPY recovery.
AUSTRALIA
AUD/USD is holding above support at 0.7200. Australia consumer and business sentiment weakened in September and August, respectively, but inflation remains the RBA’s chief concern. Assistant Governor (Economic) Sarah Hunter warned that “if there is a sense that inflation’s going to be stronger than we think in the context of our forecast, that the Board may well have to raise interest rates to tackle that.”
Australia trimmed mean CPI held at 3.6% y/y in July, above the RBA’s 3.3% year-end forecast. Meanwhile, real GDP growth reached 2.1% y/y in Q2, beating the RBA’s 1.9% forecast. The data supports the case for a 25bps hike to 4.60% on September 29 (70% priced-in). Still, the RBA could wait until November 3, allowing it to assess both the August and Q3 CPI prints on September 30 and October 28, respectively.
More broadly, Australia’s attractive carry alongside the country’s strategic exposure to commodities linked to energy, AI, and defense remain key AUD tailwinds.
