Currencies Rise, Ringgit at 19-month High Ahead of Fed Decision

GBP/USD inches higher to near 1.3160 during the Asian hours on Wednesday. Traders await the release of August Consumer Price Index (CPI) figures from the United Kingdom (UK). Traders will shift their focus on the Federal Reserve (Fed) interest rate decision scheduled later in the North American session.

The UK CPI is anticipated to have increased at an annual rate of 2.2% in August, consistent with the July figure. The core annual CPI is expected to rise to 3.5%, up from the previous 3.3%. Additionally, monthly inflation is projected to grow by 0.3%, following a decline of 0.2% in July.

The Bank of England is set to announce its monetary policy on Thursday, with inflation levels potentially influencing their decision. Financial markets expect the BoE to maintain its current interest rate at 5%, with a more aggressive approach anticipated starting in November. The BoE forecasts inflation could rise to 2.75% in the coming months before gradually declining and potentially falling below the 2.0% target by 2025.

The US Dollar faces challenges 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.

On Tuesday, US Retail Sales rose by 0.1% month-over-month in August, following a revised 1.1% increase in July, surpassing expectations of a 0.2% decline and indicating resilient consumer spending. Meanwhile, the Retail Sales Control Group increased by 0.3%, slightly below the previous month's 0.4% rise.

Source: FXSTREET

Japan's export growth slowed sharply in August as shipments to the US dropped for the first time in three years, while machinery orders unexpectedly shrank in July in a worrying sign for an economy struggling to mount a solid recovery.

The frail external demand undermines Japan's quest to drive sustainable economic growth, analysts say, especially given a growing risk of a slowdown in the US and further weakness in China's economy, two major trading partners.

"Japan's exports are bound to struggle as the global economy is failing to pick up momentum, with growth in both the US and China economies seen slowing down next year," said Takeshi Minami, chief economist at Norinchukin Research Institute.

He said a boost from the weak yen to exports has faded as the Japanese currency rebounded sharply in August.

Total exports rose 5.6% year-on-year in August, up for a ninth straight month, data showed on Wednesday, well below a median market forecast for a 10% increase and following a 10.3% rise in July.

Exports to the US dipped 0.7%, the first monthly decline in nearly three years, as auto sales slumped 14.2%.

Those to China, Japan's biggest trading partner, rose 5.2% in August from a year earlier.

The overall picture in terms of volume also provided for sombre reading, with shipments down 2.7% last month from the year-ago period, the seventh consecutive month of declines.

The value of imports grew 2.3% in August from a year earlier, versus a 13.4% increase expected by economists.

As a result, the trade balance stood at a deficit of ¥695.3 billion (RM20.9 billion), compared with the forecast of a deficit of ¥1.38 trillion.

Separate data from the Cabinet Office showed core machinery orders unexpectedly declined 0.1% in July from the previous month, confounding a 0.5% rise expected by economists in a Reuters poll.

Compared with a year earlier, core orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, rose 8.7%, blowing past a 4.2% increase seen by economists.

The government stuck with its assessment on machinery orders that recovery is at standstill.

A rise in personal consumption helped Japan's economy rebound strongly in the second quarter from a slump at the start of the year, but the growth was revised down slightly last week.

The Bank of Japan is expected to keep monetary policy steady at a two-day meeting that ends on Friday, but signal that further interest rate hikes are coming and highlight progress the economy is making in sustaining inflation around its 2% target.

Norinchukin's Minami said economists generally expect consumption to support Japan's growth but "with little hope for a boost from exports, the momentum of recovery would be weak".

Source: Theedgemarkets

Swiss watchmakers urged the central bank and the government to support exporters by curbing the strength of the country’s currency as overseas sales slump.

“With inflation currently well below 2 per cent, the Swiss National Bank (SNB) has room to manoeuvre and act on the foreign exchange market,” the Federation of the Swiss Watch Industry and the Employers Federation of the Swiss Watch Industry said on Tuesday (Sep 17). “An ad hoc and more reactive approach would also make it possible to reduce the volatility of the franc.”

The nation’s watchmakers are grappling with a drop in demand for costly timepieces. After record shipments by value in the past three years, watch exports dropped by 2.4 per cent in the first seven months of 2024. Some brands and several components makers have resorted to government-supported work reductions to avoid permanent job cuts, Bloomberg News has reported.

With brands ranging from Rolex to Patek Philippe and luxury conglomerates including Swatch Group and Richemont that each own a slew of brands, the industry includes some 700 companies employing about 65,000 people. It is a key pillar of the Swiss economy, where exports account for 55 per cent of GDP.

The watchmakers are the second prominent Swiss industry lobby to call on the central bank for measures to weaken the franc. Early last month, technology manufacturers’ association Swissmem said the sudden appreciation in the currency is threatening a vulnerable recovery for overseas sales seen in recent months.

Two interest rate cuts by the Swiss National Bank have so far failed to prevent the franc from again approaching an all-time high against the euro that was last reached in the final days of 2023. Officials have repeatedly said that the currency’s strength was crucial in restraining Swiss inflation, which peaked at about a third of the eurozone’s highest level.

SNB officials will meet for the next rate decision on Sep 26.

Subcontractors and makers of entry-level and mid-range priced watches are being hurt the most by the drop in demand, the watch trade group said. “The negative forecasts for the end of 2024 could prove highly problematic for some players in the sector.”

Faced with the sudden drop in demand, many watch companies have had to resort to short-time working, extended summer closures and job cuts, the industry group said. 

Source: The edge markets

Confidence among US home builders rose in September for the first time in six months, just before the US Federal Reserve is expected to cut interest rates from the current two-decades high.

A gauge of housing market conditions from the National Association of Home Builders (NAHB) and Wells Fargo climbed two points to 41 this month, matching the median estimate of economists surveyed by Bloomberg. All regions saw an increase.

Measures of prospective-buyer traffic and present sales rose off their 2024 lows. And an outlook index for the next six months increased four points to 53, its biggest gain since January.  

“With inflation moderating, the Federal Reserve is expected to begin a cycle of monetary policy easing this week, which will produce downward pressure on mortgage interest rates and also lower the interest rates on land development and home construction business loans,” NAHB chief economist Robert Dietz said in a prepared statement. 

Shares of builder stocks have been soaring, largely in anticipation of falling interest rates, according to Bloomberg Intelligence analyst Drew Reading. Lennar Corp is trading at record levels ahead of its earnings report later this week, as is the iShares US Home Construction exchange-traded fund, comprised of builders and related firms. 

The anticipated interest rate cut by the Fed this week is expected to help bring down mortgage rates over coming months. Home borrowing costs have already fallen to their lowest levels since February 2023 ahead of the Fed’s move, and the Mortgage Bankers Association sees the 30-year fixed rate dropping to 5.9% by the end of 2025 from 6.29% currently. 

Builders have said customers are taking a wait-and-see approach to buying, partly as they wait for lower borrowing costs and partly because of uncertainty over the US presidential election, Reading wrote in a research note last week. Home sales typically rise in the year after a presidential election, he said.

The share of builders cutting prices fell to 32% this month, down from 33% in August, according to NAHB. The average price reduction also decreased, to 5%, the first time it’s been below 6% since July 2022. And, the share of builders that reported using sales incentives declined as well.

Data releases this week will provide further insights into the housing industry during August, with housing starts from the government on Wednesday and existing-home sales from the National Association of Realtors on Thursday.

Source: Theedgemarkets

U.S. August Retails Sales

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