We have lowered our forecast for the USD across all currencies. The moment we had waited for this year arrived last week. At the FOMC meeting on July 31, Fed Chair Jerome Powell reckoned an interest rate cut was “on the table” in September. In the previous meeting on June 12, Powell said the Fed was ready to respond if jobs weakened unexpectedly and considered the rise in the US unemployment rate as an important statistic. Last Friday, the jobless rate increased to 4.3% in July from 4.1% in June, above the Fed’s longer-run projection of 4.2%.
We expect more volatility from the market and the Fed perception gap. The futures market has priced in 125 bps of Fed cuts for the remaining three FOMC meetings of this year, including 50 bps reductions in September and December. The US Treasury 10Y bond yield plunged 404 bps to 3.79%, near the low at the end of 2023 when markets discounted seven cuts. After the jobs data triggered US recession fears, the S&P 500 index gapped below the critical 5400 support level. The expectations index in the US consumer confidence index held below 80 for six months, the threshold that usually flagged a recession ahead.
Fed officials will likely push back against criticism that it waited too long to lower rates. Echoing Fed Presidents Austan Goolsbee (Chicago) and Thomas Barkin (Richmond), Mary Daly (San Francisco) should warn against overreacting to one month’s data today. The Fed will get the PCE deflator data on August 30, two more months of CPI inflation data on August 14 and September 11, and another monthly jobs report on September 6 before its decision at the FOMC meeting on September 18. During the post-FOMC press conference, Powell said the economy was cooling and the odds of a hard landing were low. Advance GDP growth rose to an annualized 2.8% QoQ saar in 2Q24 vs. 1.4% in 1Q24 on better personal consumption growth of 2.3% from 1.5%. Today, consensus expects the ISM Services Index to rebound to 51 in July after the decline to 48.8 in June. Hence, the Fed’s Symposium on “Reassessing the Effectiveness and Transmission of Monetary Policy” on August 22-24 has become a significant event.
AUD/JPY remains vulnerable despite wiping out the year’s gains last week. AUD/JPY depreciated 5.2% to 95.4 last week, below the 96.1 level at the end of 2023. The sell-off that started on the slower-than-expected US CPI inflation on July 11 was fuelled by a disappointing Chinese economy pressurizing commodity prices, a more resolute Bank of Japan in normalizing monetary policy, the Fed flagging a potential rate cut in September, the Kishida Cabinet’s desire to arrest the yen’s decline hurting its approval ratings, and US Presidential candidate Donald Trump decrying the yen’s massive weakness.
AUD bears will pay close attention to the Reserve Bank of Australia meeting on August 6 to see how aggressively the central bank pushes back against the November or December rate cut discounted in the future market. Although Australia’s trimmed mean CPI inflation fell to 4.1% YoY in June from 4.4% in May, it remained above the 2-3% target. Pay attention to the Statement on Monetary Policy to see if the RBA brings forward the timeline for inflation to reach the 2-3% target from 2H25 and the 2.5% midpoint in 2026.
Quote of the day
”To lose patience is to lose the battle.”
Mahatma Gandhi
5 August in history
In 1981, US President Ronald Reagan fired 11,359 striking air-traffic controllers who ignored his order for them to return to work.
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