With US CPI inflation easing to 2.9% y/y for July and reaching its lowest since Mar 2021, a Sep Fed rate cut is likely a done deal. We expect the USD to be on an easing path as US short-term rates fall. Globally, central banks with high rates are now beginning to pare back their restrictive policy. RBNZ is the latest to enact rate cuts, reducing rates by 25bps yesterday and triggering a 1.3% fall in NZD/USD towards 0.60. Markets had only partially anticipated a cut, and Governor Orr compounded the dovish surprise by saying that the Bank was even mulling a 50bps cut. RBNZ sees more pronounced economic weakness, and expects inflation to stay near the midpoint of its target range in the near future. Governor Orr also said in parliament today that future rate decisions will be either a cut or a hold, with no possibility of rate hikes.
Spot USD/CNY has finally converged with the USD/CNY fixing, closing at 7.1411 and falling below the fixing for the first time since July 2023. We had anticipated the CNY spot-fixing gap to close given an improving RMB mood, and also expect the PBOC to allow the fixing to become more market-driven. With USD strength having dissipated, we expect pressures on the RMB to be substantially alleviated. China will report industrial production and retail sales today, and any signs of improvement could support modest RMB gains. USD/CNH has also eased below 7.15 since Tuesday, with RMB depreciation expectations in the offshore market clearly easing.
USD/JPY has stabilized around the 147 level, with risk appetite improving and the unwind of carry trades having ceased. PM Kishida announced that he will be stepping down and not seeking re-election as LDP leader in September. Amongst the potential PM candidates, Kono has notably been critical of the weak JPY for exacerbating cost of living issues. The excessively weak JPY has been a bugbear for Japan and is one reason for Kishida’s low approval ratings, and it could be dealt with more concretely by his successor. Meanwhile, Japan’s GDP delivered a positive surprise, with the economy expanding 0.8% on a q/q sa basis in Q2 (Q1: -0.6%), with consumption showing particularly strong growth of 1.0% q/q (Q1: -0.6%). Given the Q2 GDP print, BOJ’s decision to hike rates in July does not look imprudent, with worries over weak consumption now fading.
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