The Japanese Yen (JPY) retraces its losses against the US Dollar due to rising expectations of a 50 basis point Federal Reserve (Fed) rate cut on Wednesday. Traders will shift their focus on the BoJ policy decision on Friday, with expectations of keeping rates unchanged while leaving the possibility open for further rate hikes.

Japan’s Merchandise Trade Balance Total recorded a larger trade deficit of ¥695.30 billion in August, up from ¥628.70 billion the previous month, but well below market expectations of a ¥1,380.0 billion shortfall. Exports increased by 5.6% year-over-year, marking the ninth consecutive month of growth, but fell short of the anticipated 10.0%. Imports rose by just 2.3%, the slowest pace in five months, significantly underperforming the projected 13.4% rise.

The US Dollar remains under pressure amid rising expectations that the Federal Open Market Committee (FOMC) may announce a substantial 50 basis point rate cut on Wednesday. The CME FedWatch Tool indicates that markets are assigning a 33.0% probability to a 25-basis-point rate cut, while the likelihood of a 50-basis-point cut has risen to 67.0%, up from 62.0% just the previous day.

Daily Digest Market Movers: Japanese Yen appreciates due to the dovish Fed policy outlook

Japanese Finance Minister Shunichi Suzuki stated on Tuesday that rapid foreign exchange (FX) fluctuations are undesirable. Suzuki emphasized that officials will closely monitor how FX movements affect the Japanese economy and people's livelihoods. The government will continue to assess the impact of a stronger Japanese Yen and respond accordingly, according to Reuters.

Rabobank economists Jane Foley and Molly Schwartz highlighted on Monday that JPY net long positions were at their highest level since October 2016. While there is minimal expectation for a rate hike by the Bank of Japan at its policy meeting on September 20, traders will be closely watching for any hints that October could potentially be a more active meeting.

Commerzbank FX analyst Volkmar Baur anticipated that the Bank of Japan will remain on the sidelines this week. Baur noted that the Federal Reserve's actions are likely to have a greater impact on the USD/JPY pair, suggesting that the JPY could have a strong chance of falling below 140.00 per USD even without a rate hike from the BoJ.

On Friday, Fitch Ratings' latest report on the Bank of Japan's policy outlook suggests that the BoJ might raise rates to 0.5% by the end of 2024, 0.75% in 2025, and 1.0% by the end of 2026.

The University of Michigan’s Consumer Sentiment Index rose to 69.0 in September, exceeding the market expectations of 68.0 reading and marking a four-month high. This increase reflects a gradual improvement in consumers' outlook on the US economy after months of declining economic expectations.

The hawkish BoJ policymaker Naoki Tamura stated on Thursday that the central bank should raise interest rates to at least 1% as early as the second half of the next fiscal year. This comment reinforces the BoJ's commitment to ongoing monetary tightening.

The US Producer Price Index (PPI) rose to 0.2% month-on-month in August, exceeding the forecasted 0.1% increase and the previous 0.0%. Meanwhile, core PPI accelerated to 0.3% MoM, against the expected 0.2% rise and July’s 0.2% decline.

Technical Analysis: USD/JPY falls to near 141.50; next support at 14-month lows

USD/JPY trades around 141.40 on Wednesday. Analysis of the daily chart shows that the pair is trending downward within a descending channel, confirming a bearish outlook. The 14-day Relative Strength Index (RSI), a momentum indicator, has risen above the 30 level, suggesting the potential for an upward correction in the near future.

In terms of support, the USD/JPY pair may encounter immediate support at 139.58, the lowest level since June 2023. This is followed by the lower boundary of the descending channel around 138.20.

On the upside, the USD/JPY pair may first face resistance at the nine-day EMA near the 142.14 level, followed by the 21-day EMA around 143.72. A break above these EMAs could weaken the bearish sentiment, potentially driving the pair to test the upper boundary of the descending channel at 145.10.

Source: FXSTREET

The Australian dollar hit a two-week top on Sep 18 due to wagers that the Federal Reserve could kick-start its easing cycle with a big move, although that is far from certain and those gains could easily evaporate.

The Aussie climbed to as far as US$0.6773, the highest since Sep 3, although it is battling sellers at a key level of US$0.6767 after three sessions of gains.

The kiwi dollar rebounded 0.3 per cent to US$0.6202, having slipped 0.2 per cent overnight. Support comes in at US$0.6155 and US$0.6107, with resistance at US$0.6253 and US$0.6298.

Both have benefitted from bets the Fed could cut rates by half a point on Sep 18, with futures pricing in a chance of 64 per cent for such a move. That came despite strong retail sales data that failed to move the needle much on the size of the imminent rate cut.

“The USD may receive a small, temporary bump if the Federal Open Market Committee delivers a 25bp cut,” said Carol Kong, a currency strategist at the Commonwealth Bank of Australia (CBA). “The USD’s reaction to a larger 50bp cut will depend on the FOMC’s communication.”

“A 50bp cut that scares markets about US economic prospects could increase the USD because it is a safe haven currency. However, a 50bp cut that eases concerns about US economic prospects could undermine the USD.”

How big the Fed goes will have bearings on the interest rate path in Australia. Markets see scant prospect of a cut in the 4.35 per cent cash rate at the Reserve Bank of Australia (RBA)’s meeting on Sep 24 given policymakers have been sounding consistently hawkish.

However, analysts are tipping the monthly inflation report for August, due one day after the RBA decision, is likely to show headline inflation has slowed back to the target band of 2-3 per cent. Both CBA and Westpac expect it to come in at 2.7 per cent due to the government’s electricity rebates.

In New Zealand, data showed the current account deficit widened in the second quarter by more than expected. That prompted Goldman Sachs to lower their estimate for gross domestic product, due on Sep 19, to an annual drop of 0.5 per cent.

That compared with analyst expectations for a decline of 0.4 per cent, a reason that the Reserve Bank of New Zealand may cut aggressively and by 83 basis points by the end of the year.

Source: Straitstimes

The GBP/JPY cross struggles to capitalize on a two-day-old recovery from the vicinity of a one-month low retested earlier this week and meets with a fresh supply during the Asian session on Wednesday. Spot prices drop back closer to the 186.00 mark in the last hour amid the emergence of fresh buying around the Japanese Yen (JPY), though the downside seems limited ahead of the release of the UK consumer inflation figures.

The headline UK Consumer Price Index (CPI) is expected to rise 0.3% in August following a 0.2% fall in the previous month and the yearly rate is seen holding steady at 2.2%. Meanwhile, the core CPI – excluding the volatile components of food, energy, alcohol and tobacco – is anticipated to climb to the 3.5% YoY rate from 3.3 in July. Against the backdrop of a slowdown in the UK wage growth and a flat GDP print for the second straight month in July, a softer CPI print will lift bets for more interest rate cuts by the Bank of England (BoE) and undermine the British Pound (GBP). 

Conversely, the market reaction to a stronger report is more likely to be short-lived amid the hawkish Bank of Japan (BoJ)-led JPY strength. The recent comments by a slew of BoJ officials suggested that the Japanese central bank will hike interest rates again by the end of this year. This, along with the market nervousness ahead of this week's key central bank event risks, is seen benefiting the JPY's safe-haven status and exerting downward pressure on the GBP/JPY cross. This, in turn, favors bearish traders and supports prospects for a further intraday depreciating move. 

Meanwhile, the market focus remains on the BoE decision on Thursday, which will be followed by the latest BoJ policy update on Friday. This will play a key role in influencing the GBP/JPY cross and help in determining the next leg of a directional move. Hence, it will be prudent to wait for a sustained break and acceptance below the 184.50 horizontal support before positioning for the resumption of the prior downtrend witnessed over the past two weeks or so.

Source: FXSTREET

Headline CPI inflation edged lower in August to 2.0% year-on-year (y/y), versus 2.5% y/y in July, and just below consensus expectations of 2.1% y/y.

Goods prices have fallen into deflation at -0.7% y/y, with gasoline prices down 5.1% y/y. Additionally, Statcan noted greater discounting on clothing and footwear during the back-to-school shopping period.

Services prices were up 4.3% y/y, only down one tenth from July, as Canadians continue to pay up for shelter costs. Rent prices are growing 8.9% y/y, while mortgage interest costs are growing 18.8% y/y.

The Bank of Canada’s preferred “core” inflation measures decelerated to 2.4% y/y in August, down from 2.5% y/y in July. On a three-month annualized basis, the average moved from 2.8% in July to 2.4% in August.

Key Implications

Bullseye! Headline inflation is back at the Bank of Canada’s 2.0% target. At the same time, core measures keep grinding lower. These figures would be even lower if it weren’t for the outsized impact of high housing costs. Inflation excluding shelter is growing at a paltry 0.5% y/y! This exemplifies how still high interest rates have weighed on the Canadian economy and slowed the pace of growth.

Inflation continues to validate the need for the Bank of Canada to continue cutting its policy rate. We calculate that the current policy rate is still nearly 200 basis points above where it should be based on the current state of the economy. And that is after 75 bps in cuts over the last few months. No wonder odds of larger 50 basis point cuts are growing in futures markets. Over the next few weeks, we will be getting a number of BoC members speaking on the economy. This will provide the central bank plenty of opportunity to move market pricing towards its intended path.

After more than two years of currency pain, Asia’s central banks are in for some relief as the Federal Reserve (Fed) is set to cut interest rates by a quarter-point Wednesday. The path for the region’s own monetary policy, though, will be bumpy from here.

Lower rates in the US frees up space for officials in Jakarta to Seoul and Mumbai to move lower too. The prospect for the Fed kicking off a regional cutting cycle has attracted investors, who’ve poured money into emerging Asian debt and equities, helping strengthen currencies in the region.

The question now for Asia’s central bankers is how much they need to cut in the coming months, or whether they even need to cut at all. Places such as India and the Philippines face inflationary risks, while South Korea may prioritise financial stability.

“It would be an error to think the region’s policymakers are chomping at the bit for their chance to commence monetary policy easing,” said Brian Tan, Barclays plc senior regional economist. “It’s not obvious that the economy is just crying out for policy easing and that policymakers need to shift as soon as possible.”

The wake-up call may arrive as soon as this week, with central banks in China, Taiwan and Japan all expected to hold rates, though there’s some chance of a cut in Indonesia. They’re followed by the Reserve Bank of Australia Sept 24, which is also expected to keep rates steady.

Then, in a 10-day spree mid-October, a swath of peers from India to the Philippines issue their own diverging decisions. Markets and economists are at odds on what that will look like.

Swap markets are pricing in a benchmark reduction of 50 basis points for the Reserve Bank of New Zealand on Oct 9, with some chance of easing also expected for the Reserve Bank of India on the same day.

While New Zealand is likely to cut through the rest of 2024 as the economy teeters on the edge of a third recession in two years, analysts see a different picture playing out for the rest of the region.

Inflationary pressures in India and the Philippines are likely to keep policymakers there more cautious, with analysts forecasting only one 25 basis point cut in the fourth quarter, surveys show. Bangko Sentral ng Pilipinas Governor Eli Remolona signaled a quarter-point cut in October or December.

Economists also see only one cut in the final three months of the year from the central bank in South Korea, where officials are keeping tabs on financial imbalances associated with home prices and household loans.

Economists expect the central bank to cut its key rate as soon as it sees signs that the property market is cooling, particularly in Seoul. In Taiwan, as well, real estate market trouble is likely to make officials wary of cutting rates.

The Bank of Thailand will perhaps be the longest holdout, with expectations that the conservative institution will resist government calls to cut until next year at the earliest.  

“Now, central banks are able to focus more on the domestic idiosyncrasies when they are contemplating their monetary policy action,” said Khoon Gho, head of Asia research at Australia and New Zealand Banking Group. “For the last two years or so, when the Fed was hiking aggressively, central banks here were really responding to that pressure on their currencies.”

Two factors may change the picture: A US recession that would strengthen the greenback in a flight to safety or a November presidential election outcome that heralds protectionist policies, hurting trade-reliant countries in the region.

The former isn’t the base case for economists, and the latter isn’t likely to halt the flow of funds into Asia assets just yet.

If Fed Chair Jerome Powell and his colleagues reduce interest rates and signal more cuts are in the offing, that “will keep the party going and we’ll see more money coming to Asia”, said Taimur Baig, chief economist at DBS Group Holdings. “Investors have voted with their feet” for a shallow easing cycle in Asia, he said.

Source: Theedgemarkets

Bridgewater Associates founder Ray Dalio said the overall picture of the economy probably warrants a smaller interest-rate cut by the US Federal Reserve (Fed) this week.

“The Fed has to keep interest rates high enough to satisfy the creditors that they are going to get a real return without having them so high that the debtors have a problem,” Dalio said in an interview on Bloomberg Television in Singapore on Wednesday.

“Whether it’s 25 or 50 basis points, 25 basis points would be the right thing to do if you look at the whole picture,” Dalio said on the sidelines of the Milken Institute Asia Summit 2024. “If you look at the mortgage situation, which is worse and that affects more people, then it’s probably 50 basis points.”

The Fed is widely expected to lower interest rates later Wednesday after holding borrowing costs at a two-decade high for more than a year. Investors and forecasters are split over whether it will cut by a quarter percentage point or a bigger, half-point move.

But Dalio said that ultimately what the Fed does this week “doesn’t make a difference” over the longer term. Policymakers will need to keep real interest rates low to enable the servicing of mounting debts, he said.

Source: Theedgemarkets