US
USD is weaker, led by gains in KRW and JPY. Brent crude oil prices hit $100 a barrel for the first time since July 24, keeping global yields elevated. Equity markets are mixed with the semiconductor-heavy Kospi leading gains while September Fed funds rate hike bets remain steady around 60%.
Friday’s US August CPI report is the main 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. Today, the US ADP private employment change for the week ending August 22 will likely echo the rebound in August non-farm payrolls (1:15pm London, 8:15am New York).
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 tomorrow.
JAPAN
USD/JPY is trading heavy but holding above yesterday’s multi-month low at 152.89. JPY is also outperforming most other major currencies despite no meaningful hawkish BOJ repricing and a continued 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). The next support sits near 152.00, the January-February double bottom, with resistance offered at 155.00.
US Treasury Secretary Scott Bessent doubled down on his lower USD/JPY bet. Bessent said “I am the house now, so when we intervene with the Japanese yen, I have pretty good insight into what the Japanese, what the Bank of Japan is going to do, what Japanese policymakers are going to do…And you can bet against me if you want.”
We would not bet against the house, but the sustainability of the USD/JPY undershoot hinges on next week’s Fed and BOJ rate decisions. We see four scenarios, with the risks skewed towards a stronger JPY:
(i) Fed hold, BOJ +25bps: USD/JPY down
(ii) Fed hold, BOJ +50bps: USD/JPY sharply lower.
(iii) Fed +25bps, BOJ +25bps: USD/JPY rebound.
(iv) Fed +25bps, BOJ +50bps: USD/JPY down.
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, with 10-year breakeven inflation near historically high level above 2%. A larger hike could anchor inflation expectations, cap the long end of the curve, and turbocharge the JPY rally.
CHINA
USD/CNH continues to drift lower, reaching its lowest level since January 2023. China August CPI rises but inflation remains muted. Headline CPI matched consensus at 0.8% y/y vs. 0.5% in July driven by communication equipment and energy. Both core CPI and PPI exceed expectations in August at 1.0% y/y (consensus: 0.9%, prior: 0.9%) and 3.8% y/y (consensus: 3.6%, prior: 3.5%), respectively.
Subdued CPI relative to PPI inflation indicate firms have limited pricing power to pass higher costs onto consumers, squeezing profit margins, and underscoring still soft domestic demand. In our view, a continued appreciation in China’s currency can help the country shift its growth model towards consumer spending by boosting disposable income through cheaper imports. Bottom line: USD/CNH downtrend is intact.
CHILE
As was widely expected, the Board of the Central Bank of Chile kept the policy rate on hold at 4.50% for a sixth straight meeting. The bank is in a good place to keep rates steady for some time. Two-year inflation expectation surveys stand at the bank’s 3% inflation target, and the policy rate is near the top of the bank’s 3.75%-4.75% neutral range estimate. USD/CLP should be trading much lower given the rally in copper prices, Chile’s main commodity export.
POLAND
National Bank of Poland (NBP) is widely expected to keep the policy rate at 3.75% for a fifth straight meeting today. NBP delivered 200bps of cuts since July 2025 and the swaps curve implies 75bps of tightening to 4.50% in the next twelve months as inflation is gaining traction. Still, Poland’s positive real rates and favorable balance of payments backdrop continue to support PLN.
