US
Crude oil prices and USD continue to get whipsawed by swings in Iran war sentiment. Yesterday, both crude and USD fell to session lows on reports the US and Iran are close to reviving their Memorandum of Understanding. That optimism faded quickly and crude oil prices jumped by nearly 5% after Iran launched multiple ballistic missiles on US forces based in the Middle East. We continue to see this as another round of managed escalation keeping Brent crude oil prices within a broad $70 to $100 range.
The rout in the Kospi index continues to dominate the headlines. The Kospi slid as much as -12.6%, triggering a circuit breaker for a second straight day, before closing down -6.0%. Today’s decline was sparked by weaker-than-expected Q2 earnings results from SK Hynix Inc and amplified by leveraged single-stock ETFs. The Kospi is down -40% from its June 19 high, but still up +35.6% year-to-date.
Meanwhile, KRW extended its broad outperformance, with the currency up 5.5% since the Kospi’s peak on June 19. The logic is that as Korean equities underperform and their weight in global portfolio declines, the need for foreign investors to trim positions and repatriate funds diminishes, reducing KRW outflows.
USD is holding on to most of yesterday’s dip ahead of the FOMC policy decision (7:00pm London, 2:00pm New York) and Fed Chair Kevin Warsh’s press conference 30mins later. We expect the FOMC to keep the target range for the funds rate at 3.50%-3.75% for a fifth straight meeting. The US labor market is in balance, wage growth is consistent with the Fed’s 2% inflation target, and Fed policy is restrictive, assuming a neutral rate of 3.00%.
Fed funds futures price in over 30% odds of a 25bps rate increase today. USD risks a modest immediate kneejerk pullback if the Fed holds steady as markets unwind rate hike bets. Still, we anticipate USD to rebound quickly as a hawkish hold restores its policy support.
Consensus is for a 10-2 FOMC vote split, with Cleveland Fed President Beth Hammack and Dallas Fed President Lorie Logan dissenting in favor of a 25bps hike. The risk is a more hawkish 9-3 outcome as Fed Governor Lisa Cook could also join the dissent. In a July 15 speech, Cook stressed “the risks continue to be strongly weighted toward higher inflation” citing persistent AI-related capital expenditures and supply shocks from tariffs and the Middle East conflict.
AUSTRALIA
AUD is down against all major currencies, with AUD/USD eyeing key support at 0.6906, the 200-day moving average. Australia June and Q2 CPI undershoot forecast, slashing RBA rate hike bets. The monthly headline CPI unexpectedly fell to 3.8% y/y (consensus: 4.0%) vs. 4.0% in May while trimmed mean CPI remained at 3.6% y/y (consensus: 3.7%) for a second straight month. The policy-relevant quarterly trimmed mean CPI also rose less than expected by 0.6% q/q (consensus: 0.7%) vs. 1.4% in Q1 to be up 3.6% y/y (consensus: 3.7%, RBA projection: 3.8%) vs. 3.5% in Q1.
RBA cash rate futures have all but priced out an August 11 rate hike and slashed odds of a 25bps increase in the next twelve months. The RBA has room to pause its tightening cycle which is a headwind for AUD. First, the RBA projects real GDP growth to be below potential over the next two years. Second, RBA cash rate at 4.35% currently sits near the top of the range of model-based central estimates of the nominal neutral rate.
CHILE
USD/CLP is down near 932.50 after reaching a multi-month high of around 949.00 last week. As was widely expected, the Board of the Central Bank of Chile voted unanimously to keep the policy rate on hold at 4.50% for a fifth straight meeting. Chile’s central bank is in a good place to keep rates steady for some time. Two-year inflation expectation surveys remain close to its 3% inflation target and the policy rate is near the top of the bank’s neutral range estimate (3.75-4.75%).
USD/CLP is like a stretched string waiting to snap lower once crude oil prices normalize with the cross trading well above the level implied by copper prices, Chile’s main commodity export.
