US
USD is mixed and global equity markets continue to break higher. Crude oil prices have rebounded slightly after dropping overnight to its lowest level since July 13. Axios reported that the US, Iran, and Oman are closing in on an interim agreement to reopen the Strait of Hormuz. An announcement could come today.
We believe the USD rally from May has run its course, with DXY poised to consolidate with a 96.00-100.00 range. The tailwind to USD from resilient US economic activity is offset by Fed Chair Kevin Warsh failure to turn tough inflation rhetoric into a credible policy.
June JOLTS data remained consistent with a stable US labor market and does not move the needle on the Fed rate path. The job opening rate dipped one tick while the hiring rate rose one tick. Both the quit and layoffs rates were unchanged.
July ADP private payrolls expected to indicate resilient labor demand (1:15pm London, 8:15am New York). Consensus is for the economy to add +65k jobs vs. +98k in June.
July Services ISM to show solid growth momentum (3:00pm London, 10:00am New York). The headline index is expected to improve to 54.5 vs. 54.0 in June driven by an uptick in the New Orders. The Prices Paid index is seen easing to a five-month low at 65.0 vs. 67.7 in July, signaling diminishing upside risk to inflation.
FOMC participants broadly agree that the labor market is in balance but are more divided over the durability of the inflation threat. That leaves Fed fund futures more sensitive to inflation than employment data. As such, the Prices Paid index will be closely scrutinized.
Kansas City Fed President Jeff Schmid (non-FOMC voter) delivered hawkish remarks overnight. Schmid stressed that the US economy “appears to be performing well” but “inflation is too high”, requiring “tighter policy.” Fed Governor Lisa Cook speaks on the economic outlook later today (9:05pm London, 4:00pm New York). Cook also leans hawkish arguing last month that “the risks continue to be strongly weighted toward higher inflation.”
JAPAN
USD/JPY is holding just under its 200-day moving average (158.04). Faster Japan wage growth lifted BOJ rate hike bets. In June, total nominal wage growth matched consensus at 3.4% y/y vs. 3.2% in May, while the less volatile scheduled pay growth for full-time workers quickened more than expected to a four-month high at 2.9% y/y (consensus: 2.7%) vs. 2.5% in May.
Implied odds of a 25bps BOJ rate hike to 1.25% at the next September 18 meeting rose to 60% from a low of nearly 40% ahead of the wage data. While underlying inflation in Japan remains subdued, risks are skewed towards further hawkish BOJ repricing in favor of JPY. The policy rate is near the lower end of the bank’s neutral range (1.10%-2.50%) while the economy is operating above potential.
Yesterday, US Treasury Secretary Scott Bessent implicitly confirmed that as part of Friday’s joint intervention with Japan, the US bought yen for euros, rather than buying yen and selling dollars. Bessent said he assured Europeans the intervention was just a reallocation of the US reserves adding it “seems to me the euro is much closer to an equilibrium price.”
The interpretation makes sense given the composition of US FX reserves. The foreign currencies that are used to intervene come equally from FX reserves held in the Fed’s System Open Market Account (SOMA) portfolio and the Treasury’s Exchange Stabilization Fund (ESF).
These holdings currently are in euros and Japanese yen. As of Q1, the ESF had about $19bn in FX reserves, including roughly $13.3bn in euros and about $6bn in yen. SOMA holds a broadly similar mix.
While these FX holdings are too small to be a game changer for the yen given daily JPY turnover of $1.61 trillion, the policy signal is powerful. It significantly raises the cost of fighting a stronger yen and puts a much firmer ceiling on USD/JPY.
NEW ZEALAND
NZD and NZ yields slump. New Zealand’s solid Q2 job and wage growth mask ongoing labor market slack. Employment surged 0.5% q/q vs. 0.1% in Q1, well above consensus and RBNZ projection of 0.1%, while private regular wages were up 0.7% q/q (consensus & RBNZ: 0.6%) vs. 0.5% in Q1.
However, strong hiring was more than offset by rising labor supply (participation rate rose 0.2ppt to 70.7%), lifting unemployment and pointing to excess labor supply. The unemployment rate rose 0.2ppt to 5.6% (consensus & RBNZ: 5.4%), the highest since Q3 2015 and the underutilization rate increased 0.9ppt to 13.8%, the highest since December 2013.
Nevertheless, NZD has room to keep edging higher against most major currencies. Above target inflation, more favorable domestic growth outlook, and a policy rate near the lower-end of the RBNZ’s neutral range (2.20%-4.10%) argue for additional RBNZ rate hikes. The swaps curve price in nearly 100bps of cumulative tightening over the next twelve months to 3.50%.
INDIA
USD/INR if firmer after testing a one-month low near 94.9225. As was widely expected, the Reserve Bank of India (RBI) decided unanimously to keep the policy rate at 5.25% for a fourth consecutive meeting. The RBI maintained its neutral bias pointing out that the risks to growth and inflation are evenly balanced. The RBI projects real GDP growth of 6.4% in Q2 (up from 6.3% previously) and 6.5% in Q3 (unchanged), while core inflation is anticipated to decline after peaking in Q3.
Bottom line: positive real rates, RBI intervention to strengthen INR, and measures announced in June to bolster capital inflows bode well for INR. According to the RBI, India’s push to attract overseas capital has brought in nearly $41 billion since June, covering almost twice India’s current account deficit.
