The USD has staged a return after the surprisingly resilient US data of late has lent credibility to the Fed’s hawkish message. The very strong Non-farm payrolls have further raised the possibility of a higher FOMC terminal rate. One important question for FX investors at this stage is whether, like in 2022, this is the start of a renewed USD bull run that would see the erstwhile King of FX reclaiming its crown. We believe, however, that this will not be the case and we may, instead, get to see the (somewhat underwhelming) sequel of “The Return of the King”.
For starters, different from 2022, we think that the Fed would remain of the view that US inflation is now gradually subsiding despite the persistent robustness of the US labour market. This should mean that the bulk of the Fed tightening is behind us and, taken together with the fact that other G10 central banks are hiking policy rates, should mute the scope of any boost to the USD’s relative rate appeal.
We further note that the US labour market data is usually seen as a lagging indicator that could still deteriorate from here if the economic outlook worsens under the weight of tighter financial conditions. Moreover, the US debt ceiling standoff in the USCongress could remain an important downside risk for the USD in coming months especially vs gold, the JPY and CHF. In all, while the USD could regain more ground as the US rates markets outlook converges to the Fed’s views, the currency should remain well below its 2022 highs.
Focus next week will be on the US CPI and retail sales as well as Fed speeches. The markets will focus on any evidence that there is a growing consensus for more aggressive tightening from here especially if US inflation proves to be ‘stickier’ than expected. Elsewhere, focus will be on the UK labour market, CPI and retail sales data with investors looking for a confirmation of the BoE’s less hawkish stance of late.
USD/JPY’s lurch lower on the reported BoJ leadership nominations reflects market speculations that Masayoshi Amamiya’s turning down of the job is signalling a structural break in monetary policy. But the governor nominee Kazuo Ueda is hardly a hawk and the deputy governor nominee Shinichi Uchida is definitely a dove. So, we doubt the nominations signal a big change at the BoJ. Also next week, investors will use Australian labour market data to assess whether or not the RBA will match its hawkish rhetoric with further rate hikes.
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I agree with most of that, however, DXY could easily run 5% higher from here if the Fed terminal rate keeps rising.
My best guess is we are primed for a further AUD correction but this week’s data will tell the tale.
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