The DXY Index is within striking distance of returning this year’s gains. In depreciating a third session by 0.4% to 101.44, the DXY is converging to 101.33 or level at the end of 2023. The DXY’s decline is consistent with the US Treasury 10Y yield dropping farther below 3.88% or 2023’s closing level. The 10Y yield eased for the third session by 6.5 bps to 3.807% overnight. The greenback has been under pressure from the Fed flagging a rate cut at the FOMC meeting this September. At its Jackson Hole Symposium on August 22-24, the Fed will likely push back recession fears in favour of a soft landing in the US economy. We view the rate reduction as removing top-level restriction to support the Fed’s full employment mandate now that the inflation has fallen significantly from its peak and below the Fed Funds Rate. The shift towards generalised USD weakness was also evident in the appreciation of the AUD and GBP amid more unwinding of yen carry positions reported by the CFTC.
Breaking down the DXY’s movements, the EUR joined the GBP in reversing this year’s losses on Monday. EUR/USD appreciated a third session by 0.4% to 1.1130, its best closing level since July 2023. GBP remained the best-performing component this year, appreciating 2.4% ytd vs. the 0.8% ytd gain in the EUR. The CHF has significantly narrowed this year’s losses to -1.4% ytd from -8.5% at the end of April. Although the European Central Bank, Bank of England, and Swiss National Bank lowered rates before the Fed, they did not provide a trajectory on their easing intentions. In its June Summary of Economic Projections, the Fed projected 100 bps of rate cuts in 2025, followed by another 100 bps reduction in 2026. We reckon the CAD, the least volatile DXY unit, will not be left behind if the weakest components (JPY and CHF) continue to recover more of this year’s losses.
Following the unwinding of carry trades, the JPY has reduced this year’s losses to -2.8% ytd on Tuesday vs. -13% in early July. On August 23, Japan’s parliament will hold a special session regarding the Bank of Japan’s monetary policy decisions on July 31. BOJ Governor Kazuo Ueda should stand by the plan to raise rates again if the median forecasts set out on July 31 are met or exceeded. Ueda will unlikely expect the “Black Monday” sell-off in early August to derail the upgrades to the BOJ’s economic and inflation forecasts announced on July 31. The Nikkei 225 has recovered to around 38,000, or near the level at which it plunged to the 31,156 low on August 5. The 10Y yield differential between the US and Japanese bonds sees USD/JPY closer to 140 instead of 150.
Quote of the day
”Every artist was first an amateur.”
Ralph Waldo Emerson
21 August in history
The "Mona Lisa" was stolen from the Louvre in 1911. It was recovered in 1913.
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