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The USD has rebounded as UST 2Y yields edge higher, with the DXY index recovering towards 101. The US BEA will announce its annual revisions to US GDP today, and its third estimate of Q2 GDP. Modest revisions to historical growth are not likely to impact the USD, with both the Fed and markets more focussed on the job market.
USD/CHF is consolidating around 85, and remains near its lowest level since 2011. CHF strength may be an important factor in SNB’s monetary policy decision today. The strong CHF has prompted Switzerland’s two largest business groups, Swissmem and the Federation of Swiss Watch Industry, to publicly urge SNB to curb CHF gains. Unlike other economies, Swiss inflation had also fallen sharply below target to 1.1% (y/y) in Aug. With analysts largely expecting the SNB to cut by just 25bps, the CHF could soften if the SNB decides to follow the Fed in enacting a 50bps rate cut.
USD/CNH has inched back to 7.03, after briefly testing below the psychological 7 level yesterday. Sentiment towards China has improved after policymakers announced a co-ordinated wave of stimulus, including a 20bps cut to the 7D reverse repo rate and 50bps cut in the RRR. While rate cuts should weigh on the RMB, this may be offset by equity inflows, with the CSI300 index having climbed by over 7% from two weeks ago. Still, China’s economic outlook remains fragile, and sustained RMB gains are acceptable only if regional currencies continue their appreciation against the USD. There could be more two-way flows in the RMB ahead of the National Day holidays.
USD/JPY had rebounded to mid-144 levels amid USD strength, and with BOJ not signalling the possibility of a near-term rate hike in its policy meeting last Friday, even as it upgrades the consumption outlook. BOJ’s patience is officially attributed to increased uncertainty over the US economic outlook, but it could also be due to domestic political uncertainty. Japan is preparing for the outcome of the LDP presidential election scheduled on 27 Sep, and a new Prime Minister from the very diverse slate of candidates. Meanwhile, Japan’s CPI inflation rose to 3.0% y/y in Aug (Sep: 2.8%), while the core-core measure also bumped up to 2.0% (Sep:1.9%). Underlying inflation still looks supportive of BOJ’s policy normalization.
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