The DXY Index consolidated overnight at 101.54-101.77, near the top of a three-week range of 100.5 and 101.9. The factors that led the DXY to fall from 106 to 101 in July-August have subsided but not evaporated. Today, USD bears want Vice President Kamala Harris to reenergise her campaign at the US Presidential debate and US CPI data to cement the 50 bps rate cut priced in at next week’s FOMC meeting. However, the DXY will unlikely repeat the rebounds from 101 to 106 witnessed since early 2023 because the Fed has shifted from a “higher for longer” rates stance towards paving ground for a rate-cutting cycle.
The US Treasury 10Y yield eased a seventh session to 3.64% ahead of today’s US CPI data. August US CPI and core inflation will likely repeat July’s 0.2% month-on-month increase, levels that support the Fed cut expected next week. In year-on-year terms, headline inflation will likely have declined to 2.5% in August from 2.9% in July, even as core inflation stayed unchanged at 3.2%. In the first ten days of September, WTI crude oil prices fell by 9.8% to USD66.33 per barrel this month, worse than the total monthly declines of 5.6% and 4.5% in August and July, respectively. Wednesday’s closing level was also the weakest since December 2021. Hence, it would not be a surprise if tomorrow’s US PPI inflation declines a second month to 1.7% YoY in August, below 2% for the first time since February.
Today, the second US Presidential debate will be about Vice President Kamala Harris winning over undecided voters in the crucial battleground states rather than beating Republican candidate Donald Trump. In the 2016 elections, Hillary Clinton performed better against Trump during the debates and won 48.2% of the popular vote vs. 46.1% for Trump. However, Trump secured 304 electoral votes to her 227 and entered the White House.
Regardless of who wins the race on November 5, economic policies will be constrained by the large federal debt accumulated over the last two presidential terms. We expect next year’s US growth to be less exceptional at 1.7% and the Fed to lower rates by 150 bps from September through 2025. Since the global financial crisis, the DXY tended to depreciate over the medium term on a steeper US bond yield curve. In the past three years, the DXY also has a higher correlation with (now lower) oil prices during the Fed’s fight to regain control of inflation.
Quote of the day
”You can’t go back and change the beginning. But you can start where you are and change the ending.”
C.S. Lewis
September 11 in history
In 1997, Scottish voters supported the creation of the devolved Scottish parliament in a referendum.
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