Swiss Watchmakers Call on Central Bank to Act on Franc as Exports Slump

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

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.