The unwinding of JPY carry trades is showing signs of fatigue. JPY initially rallied 3.4% against the greenback (USD/JPY was 141.70) on Monday but retained 1.6% of its gains (144.18) by the end of the session. AUD/USD reduced its losses to 0.2% (0.6498) from 2.5% (0.6350) yesterday. Today, the Reserve Bank of Australia will likely push back against the market’s bet for a rate cut in November or December. USD/JPY and AUD/USD are back above 145 and 0.65 this morning amid profit-taking in the Asia ex-Japan currencies.
The Nikkei 225 Index had its worst sell-off since Black Monday in October 1987, another possible capitulation sign. The single-day 12.4% loss wiped out this year’s gains. Although the sell-off spilled over into the rest of the world including US equities, the futures market expects a positive US opening today. The DXY Index extended its sell-off to 102.2 before ending the session at 102.7, near Friday’s closing level. The US Treasury 10Y yield plunged to 3.66% before returning to Friday’s 3.79%; bond sellers emerged below 3.68%.
The Fed has no intention of delivering an emergency rate cut before the FOMC meeting on September 18. San Francisco Fed President Mary Daly reckoned markets overreacted to last Friday’s weaker-than-expected jobs report triggering US recession fears. In her opinion, monetary policy works as intended to lower inflation by cooling the economy and the labour market. As the Fed’s leading labour expert, Daly described the job market as slow and not deteriorating, citing no anecdotal evidence of widespread and permanent layoffs.
The Fed wants markets to view the coming rate cuts as preserving the soft landing and supporting jobs, not as a delayed response to a weakening economy. The better-than-expected US ISM Services Survey helped ease growth worries. The overall PMI improved to 51.4 in July, beating the consensus for a rise to 51.0 from 48.8 in June. The ISM employment index also strengthened to 51.1 from 46.1, while the prices index increased to 57.0 from 56.3.
Quote of the day
”Panic causes tunnel vision. Calm acceptance of danger allows us to more easily assess the situation and see the options.”
Simon Sinek
6 August in history
In 1965, US President Lyndon B. Johnson signed the Voting Rights Act prohibiting voting discrimination against minorities.
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