Dollar Recovery on Shaky Footing
- USD will remain under broad downside pressure until we get top-line data that shows the US labor market is adjusting smoothly.
- The are no policy-relevant US, UK, or EU economic data releases today.
- Bank of Israel is expected to keep rates steady at 4.50%.
USD decline paused overnight. US and European equity futures point to modest gains at the open. Aggressive Fed easing expectations (100bps of cuts by year-end) and US solid economic activity will continue to support the recovery in risk assets in the near-term. Meanwhile, USD will remain under broad downside pressure until we get top-line data that shows the US labor market is adjusting smoothly. The July JOLTS and August non-farm payrolls prints are due next week.
In our view, the soft landing in US labor market condition suggests Fed funds future rate reduction expectations have gone too far. The JOLTS layoff rate dipped to 0.9% in June, matching the April 2022 low, indicating firms are managing headcount through attrition rather than layoffs. Moreover, the job vacancy rate is near pre-pandemic levels at 4.9% and above the 4.5% threshold that typically signals a worrisome rise in the unemployment rate.
Interestingly, Fed Governor Michelle Bowman highlighted in an August 20 speech that “the rise in the unemployment rate in July was largely accounted for by workers who are experiencing a temporary layoff and are more likely to be rehired in coming months. Hurricane Beryl also likely contributed to weaker job gains, as the number of workers not working due to bad weather increased significantly last month.”
The are no policy-relevant US economic data releases today. Atlanta Fed President Raphael Bostic (FOMC voter) speaks about the economic outlook later this evening (11:00pm London).
EUR/USD is down roughly 0.5% after testing fresh highs around 1.1200 Monday. Today’s focus is on the Eurozone July money supply data (9:00am London). Broad money growth (M3) is expected to rise to a 17-month high at 2.7% y/y vs. 2.2% in June. Overall, credit dynamics are improving but remain weak by historical standards.
GBP/USD retreated after rising yesterday to its highest level since March 2022. Hawkish Bank of England (BOE) policy maker Catherine L. Mann speaks today on a panel titled “The Value of Economic Research for Policy” (1:15pm London). Yesterday, Keir Starmer paved the way for higher taxes in the upcoming October 30 budget. Tighter fiscal policy could leave the BOE more room to ease policy. But with the UK economy in a good place, we doubt the BOE will deliver more than the 50bps of easing priced-in by the money market by year-end. Bottom line: EUR/GBP has room to edge lower.
USD/JPY is up over one full figure from Monday’s low near 143.45. Bank of Japan (BOJ) Deputy Governor Ryozo Himino reiterated the bank’s hawkish policy stance. Himino stated the BOJ “will adjust the degree of monetary accommodation…if it has growing confidence that its outlook for economic activity and prices will be realized. Still, Himino echoed recent comments by BOJ Governor Ueda and cautioned that financial markets “remain unstable”. This suggests the bar for a follow-up rate increase by year-end is high, limiting JPY upside traction. The swaps market implies a 44% probability of a 25bps BOJ rate hike by December.
AUD is outperforming most major currencies. Australia headline inflation cooled slightly less than expected in July supporting the RBA’s hawkish policy guidance. The monthly CPI indicator eased to 3.5% y/y (consensus: 3.4%) from 3.8% in June partly reflecting the government’s cost-of-living subsidy measures (electricity rebates and increases to rent assistance). The policy-relevant annual trimmed mean CPI printed at 3.8% y/y (matching the January low) vs. 4.1% in June. Underlying CPI
Following its August policy-setting meeting, the RBA warned “it was unlikely that the cash rate target would be reduced in the short term”. Nevertheless, the swaps market continues to imply over 90% probability of a 25bps rate cut by year-end. We also expect RBA to join the global easing cycle later this year as Australian household spending slows. Timely transaction-based spending data and the RBA’s liaison discussions point to subdued consumption growth.
NZD/USD retraced some of its recent gains on broad USD weakness. New Zealand business demand for labour contracted for a fourth consecutive month in July. Filled jobs dropped -0.1% m/m following a revised -0.3% decline in June (prior: -0.1%). The swaps market continues to fully price-in 75bps of additional RBNZ policy rate cuts by year-end which is a headwind for NZD.
Bank of Israel is expected to keep rates steady at 4.50% (2:00pm London). At the last meeting July 8, the bank stood pat at 4.50% and warned again that “there are several risks of a potential acceleration in inflation.” Since that meeting, inflation quickened to 3.2% in July, the highest since November and back above the 1-3% target range. As such, another hold this week seems warranted. The swaps market is pricing in 50bps of total easing over the next 12 months that would see the policy rate bottom near 4.00%.
