The DXY Index appreciated a second day by 0.28% to 101.38 overnight. The greenback’s initial boost came from a weaker EUR on negative monthly inflation readings for Germany’s regions in August and later from resilient US consumer spending that lifted the US Treasury 10Y yield by 2.7 bps to 3.86%. The US Bureau of Economic Analysis revised 2Q24 GDP growth to an annualized 3.0% QoQ saar vs. the advance estimate of 2.8% a month ago, and personal consumption expenditure growth to 2.9% from 2.3% previously. EUR/USD depreciated by 0.4% to 1.1077 from markets increasing odds for a 25 bps rate cut at the European Central Bank meeting on September 12 and reducing bets for a 50 bps cut at the FOMC meeting on September 18.
Today’s US PCE deflators should lead the markets to further align their expectations to the 25 bps cut telegraphed by the Fed. Consensus expects PCE inflation to increase to 0.2% MoM in July from 0.1% in August but remain at 2.5% YoY for a second month. Conversely, it sees PCE core inflation unchanged at 0.2% MoM but rising to 2.7% YoY from 2.6%. Next Friday’s US monthly jobs report will be more critical given the Fed’s priority to avert a further cooling in the labour market. An easing in the unemployment rate to 4.2% in August from 4.3% in July should ease recession worries, as would an increase in the nonfarm payrolls to 165k from 114k. With the jobless rate above 4% and payrolls below 200k, the Fed will likely proceed with the rate cut, even as it reminded markets that they were still working on returning inflation to the 2% target.
Overall, markets will remember August when the DXY returned to the level it ended in 2023 from the Fed flagging a rate cut in September. Three out of the five top beneficiaries were the Southeast Asian currencies – the MYR (+6.5%), the IDR (+5.5%), and the THB (+5.1%). The MYR appreciated 6.6% YTD and overtook the GBP (+3.4% YTD) to become the best currency this year. USD/SGD tested its psychological support level at 1.30 this week, levels not seen since January 2018 and December 2014. Following its plunge to 141.70 on August 5, USD/JPY rebounded to 149.39 on August 16 before retreating to 144.82 yesterday. NZD and AUD rebounded by 5.2% and 3.9%, respectively, this month, regaining their composure after speculators unwound most of this year’s yen carry trades, followed by receding fears of a weak labour market portending a recession in the US.
In September, two events will divide the attention between the Fed’s rate cut outlook and the US presidential elections in November. First, presidential candidate Donald Trump and Vice President Kamala Harris will face off at the US Presidential Debate scheduled on September 10. Next, the Fed will deliver its first rate cut and trajectory at the FOMC meeting on September 18.
Quote of the day
”If your actions inspire others to dream more, learn more, do more, and become more, you are a leader.”
Sixth US President John Quincy Adams
30 August in history
In 1924, the Reichsmark replaced the Rentenmark as legal tender in Germany.
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