FX Weekly Strategy: N America, Sep 1-4
Is the Fed resigning itself to tightening? Seems so...
While offered a dollar fillip, ECB is also looking determined and some hawks there are looking for more and faster
BoE is currently looking the laggard and worth monitoring whether GBP starts to fall down the pack
BoJ also under pressure and G20 reinforces expectations for them to act
The much-awaited appearance from Warsh did indeed prove very interesting with the main take-away from his comments appearing to be some ‘coming together’ in Fed opinion out of its so-called family fight.
That is, Warsh's comment strongly echoed comments from some of his more hawkish colleagues, including some in the last few days run up: in particular, characterising conditions as not restrictive, credit markets showing few signs of constraint, and the focus as being on prices. He also stressed no real change in underlying trends even with the better summer prints (‘do not tell me underlying trends have changed’).
The probably of a Sep Fed hike was up to around 50-60% (now inching to 65-70%) as this consolidated message suggest the Fed board overall might see the onus of proof on developments to prevent the need for a hike rather than prove it, and tending to see the momentum on the growth side as positive.
You suspect that – depending on some other key events like this week’s big payrolls numbers – that the market might be tempted to start inching those probabilities back out north again as they chew on the whole state of play. Can Warsh be lured into backing the market and many/most of his colleagues, however politically awkward that might be especially so close to the elections? It seems so. Sep might be less awkward than October is one thought, if it appears the need to hike isn’t going to go away. And with US-Iran exchanges becoming physical again as well as verbal, pressure on rates, including the US, remains into this week.
EUR/USD step moved from the 1.1650~ area balance down to the 1.16~ lower balance point in reaction. Before getting carried away however with just the dollar side of the equation, it is also important to keep front of mind the fact that a Sep ECB hike is pretty much 100%. And more importantly, the Minutes last week suggested that some on the ECB were moving more hawkish, ready to back faster hikes last month and starting to look for restrictive rates rather than a move back to the band of neutral. How tight or easy ECB policy is is another very live topic and will be discussed separately in an upcoming report.
This is a battle of the hawkish pivots that maybe the BoE is the major central bank currently being left behind on. In this respect, this makes BoE’s Bailey speech this Friday particularly critical. If policy issues are addressed and he sticks to the ‘wait and see, more downside growth than upside inflation risks’ narrative Sterling could be the current tactical underperformer.
1.3525-00 is lower support on the GBP/USD side. EUR/GBP has close support at 0.8560/47 into its current mixed/consolidative performance, but higher is eventually favoured on the charts with a close above 0.8585 needed to turn sentiment positive and extend July gains towards 0.8600/10.
On the Japan side, comments from Bessent did indeed keep the pressure on Japan to react and odds on a BoJ hike in Sep are now up to around 75%. Many on the BoJ will be happy to have some political pressure to act, rather than political pressure to delay. But at present shifting BoJ odds may only be trying to keep up with the Fed rather than outpacing and the high initial requests for the next budget are also keeping the focus also on Japan's fiscal position
Data and events for the week ahead
The week ahead see focus turn to US payrolls and Eurozone HICP data as some of the last ingredients into the next key policy meetings.
USA
US data focus will be on Friday’s non-farm payroll for August. We expect a slightly stronger 75k increase, both overall and in the private sector, though we expect unemployment to correct higher to 4.2% from 4.1% and a subdued 0.2% increase in average hourly earnings. We expect private payrolls to outperform a 50k increase in Wednesday’s ADP report on private sector employment. Further labor market signals will come from Tuesday’s JOLTS report on job openings, and on Thursday weekly initial claims and Q2’s productivity and costs report.
August ISM surveys are due. We expect Tuesday’s manufacturing index to slip to 55.0 from 55.6 but Thursday’s services index to rise to 54.5 from 54.1. July data comes from factory orders on Wednesday, while on Thursday we expect the trade deficit to rise to $90.5bn from $73.3bn in June. Thursday will also see Fed’s Waller and Hammack speaking.
CANADA
Canadian focus will be on Wednesday’s Bank of Canada meeting. Rates look set to remain at 2.25% and we do not expect the BoC to suggest that a near term move is being seriously considered. Fresh US tariffs will increase downside risks to growth but Canadian retaliation will increase upside risks to inflation, while in neither case do the near-term risks yet look dramatic. This meeting will not see a Monetary Policy Report, so the BoC’s economic forecasts are not due for an update.
August PMI data are due, from the S and P on manufacturing on Tuesday and services on Thursday, while on Friday the Ivey manufacturing PMI is due. Thursday sees Q2 productivity and July’s trade balance. On Friday we expect a 20k rise in August employment to follow a strong July, with unemployment unchanged at 6.4%.
JP
Starting with retail sales on early Monday, there are a slate of tier two data throughout the week. Neither will be market moving.
AU
We have private inflation survey on Monday, so as ANZ job ads. The more important GDP will be released on Wednesday. It is widely expected to be arriving in expansion while being dragged by private consumption. There are also trade balance on Thursday.
NZ
All-important RBNZ rate decision is on Wednesday. The RBNZ is expected to hike by 25bps after tilting their forward guidance to be more hawkish in the past meeting. Would be a surprise if they hike 50bps instead, but odds are slim.
EZ
Eurozone focus will remain on the flash HICP prints, that were already showing a bounce back in France and Spain last week.
Data sees headline HICP come in at 3.3% from 2.9%, in line with expectations, to keep the ECB on track for its largely-signalled Sep hike, while the hawkish minority on the board still seem inclined for faster and more tightening to restrictive levels, judging by the recent meeting minutes.
Eurozone also see unemployment alongside and PPI on Thursday, while national and Eurozone final PMI prints are also out this week.
UK
The UK also minor data only with the final PMI prints and the July money and credit figures. BoE’s Bailey does delivers a speech on Friday at the LSE TRIUM Anniversary Conference and that could touch on some interesting topics.