US
USD is consolidating yesterday’s gains while US equity futures steadied after two small down days. USD rallied across the board yesterday as the US swaps curve realigned with the Fed’s more measured easing guidance. We expect USD to stabilize within its August range until next week’s US jobs data. The labor market data is the most important driver for the Fed and the most critical data for monitoring downside risks to the economy now.
Worsening US labor market conditions will lead to a downward adjustment to the swaps curve against USD. But if the labor market proves resilient, upside for USD is limited, because the swaps curve already implies a cautious Fed easing cycle. Beyond the near-term, the fundamental downtrend in USD is intact, weighed down by US protectionist trade policies.
Second-tier US economic data are due today and unlikely to generate much volatility: the third Q2 GDP estimate, goods trade balance, durable goods orders, existing home sales, weekly claims, and Kansas City Fed manufacturing index.
Fed speakers include: Miran, Goolsbee, Williams, Schmid, Bowman, Barr, Logan and, Daly. Of note, the New York Fed is hosting today its annual conference on the international role of the US dollar. Our take is that US protectionist trade policies, political interference with the Fed’s independence, and doubts about the impartiality of key economic data following the sacking of the Bureau of Labor Statistics (BLS) head undermine the dollar’s global role.
SWITZERLAND
CHF underperformed after the Swiss National Bank (SNB) left the policy rate at 0%, as expected. The SNB signaled that the bar for negative rates is high but cannot be ruled out. In fact, SNB President Martin Schlegel reiterated that the bank is prepared to cut further if required.
Otherwise, the SNB’s medium-term inflation forecast remains unchanged and within the range of price stability. The SNB downgraded its 2026 GDP growth projection to “just under 1%” from for 1% to 1.5% previously due to significantly higher US tariffs. Therefore, any settlement of the trade dispute with the US would lower the risk of the SNB resorting to a negative policy rate.
The swaps market continues to imply nearly 50% odds of a 25bps SNB rate cut to a low of -0.25% in the next 12 months. Regardless, CHF safe haven status more than outweighs the drag to the currency from the likelihood of negative rates.
JAPAN
USD/JPY broke above its 200-day moving average (148.51) yesterday and clutching its gains. The Bank of Japan’s (BOJ) July 30-31 policy meeting minutes offered a preview of the bank’s September hawkish hold which saw two members vote in favor of resuming rate hikes. According to the July minutes one member noted that the BOJ “should not become overly cautious and miss the opportunity to raise the policy interest rate,” while another member argued that it was possible for the BOJ “to exit from its current wait-and-see stance, perhaps by the end of 2025 at the earliest.”
The swaps market price-in 54% odds of a 25bps BOJ rate increase to 0.75% at the next October 30 meeting. Our base case is for the BOJ to resume normalizing rates in October. Japan’s Tankan business survey points to an ongoing recovery in real GDP growth and underlying inflation is making good progress towards the BOJ’s 2% target. Bottom line: we expect USD/JPY to hold under 150.00, especially considering that it’s trading well-above the level implied by US-Japan 2-year bond yield spreads.
MEXICO
Mexico’s central bank (Banxico) is widely expected to trim the policy rate 25bps to 7.50% (8:00pm London, 3:00pm New York). Mexico headline inflation (3.57% in August and 3.51% in July) is tracking below Banxico’s Q3 projection of 3.8% and argues for additional easing. At the last August 7 meeting, Banxico voted 4-1 to cut the policy rate 25bps to 7.75%. The dissenter, Jonathan Heath, favored keeping rates on hold for a second consecutive meeting. The bigger picture remains positive for MXN. Mexico has positive real interest rates, a current account that is roughly in balance and solid net FDI flows.
