USD broadly stable with focus on the Fed

USD: Waller signals a cut but only what’s priced

The US dollar is moderately stronger this morning but at weaker levels relative to earlier in the week with Fed Governor Waller’s speech seeing as balanced and broadly in line with current market pricing. There were no surprises in the speech and Governor Waller repeated his call for a rate cut arguing that the case for a cut was stronger today than at the last meeting in July when he voted for a cut but was in the minority with Governor Bowman. Importantly, Waller did not up the pressure for a larger cut stating that a 25bp cut was all that was required although caveated that with his view being dependent on the US jobs report next week implying that a weak report could see him vote for a 50bp cut at the FOMC meeting in September. That prospect does seem quite plausible given his strong views on the need for a cut highlighted by the fact that his speech was titled “Let’s Get On With It”.

Waller certainly seemed to suggest that the jobs data next week could very well be weak as he believed the sharp downward revisions could mark a “reflection point” describing recent months of payrolls data as “ugly”. Still, the rates market in the US were broadly stable in response and given the 2-year UST note yield is already down 10bps this week, the market now is nearly fully positioned for a 25bp cut from the FOMC on 17^th September and then another by year-end. Essentially, Fed Chair Powell’s Jackson Hole speech already indicated the high probability of the FOMC favouring the views expressed by Waller last night. Given the weak jobs report in August for July, next week’s data is very significant. It would take a very strong report to get the market reducing notably the pricing for a September cut but the data will be critical in the pricing for the November/December FOMC meetings. The market is currently giving little consideration to consecutive cuts at each of the remaining three FOMC meetings (5bps currently).

The PCE inflation data today will also be important especially in the context of the ongoing focus on the threat to the Fed’s independence. Any upside surprise today will only exacerbate the fears over inflation risks given Trump’s ongoing attempts to pressure the FOMC to cut rates. The 10-year US breakeven rate has been steadily drifting higher. Governor Lisa Cook’s yesterday filed a lawsuit in the federal district court in Washington and the hearing is today at 10am EST and Cook will argue that Trump does not have “cause” for firing her. Whichever way this goes we can expect an appeal and this will very likely go all the way to the Supreme Court. In normal circumstances this process in reaching the Supreme Court could take many months although the significance of this case could see the process quickened although this could still drag on for weeks.

That won’t be good from a markets perspective and the threat to Fed independence will curtail risk appetite. The US dollar is set to remain vulnerable to the downside and this specific issue of the threat of Fed independence means we will be lowering our US dollar forecasts when our Foreign Exchange Outlook monthly report is released next week.  

US 10-YR BREAKEVEN DRIFTING HIGHER ON FED INDEPENDENCE THREAT

Source: Bloomberg, Macrobond & MUFG GMR

CNY: Grabbing some attention

The broader US dollar depreciation in 2025 left USD/CNY behind for good reason – the tariff uncertainties and in particular the fears of much more aggressive tariffs for China – but easing concerns over any worsening of trade relations between China and the US looks to be now prompting a pick-up in demand for CNY as worst-case scenarios are dismissed. While DXY is down by close to 11% from the highs in January, USD/CNY is down closer to 2.5%. But USD/CNY selling momentum has picked up and as always market participants are taking their cue from signals clearly being provided by the PBoC.

After Friday’s Jackson Hole speech, there was a marked drop in the USD/CNY PBoC fix on Monday (down from 7.1321 to 7.1161) and the fix has continued to decline to today’s level of 7.1030. While yields in China are considerably lower than in the US, a signal from the PBoC allowing renewed CNY appreciation can certainly prove enough for some switching back into CNY. Corporates that have held US dollars may well be enticed by the prospect of some renewed CNY appreciation. While there may be greater clarity at least for the coming months on US-China trade policy, this PBoC action likely is indicative of the broader deteriorating prospects for the dollar. If the Chinese authorities are serious about boosting domestic demand, currency appreciation is consistent with that goal.

The Chinese authorities may be of the view that the TWI drop in CNY has been enough for now. Since January’s divergence between USD/CNY and the broader US dollar move, the CFETS RMB Index dropped 6.7% to the beginning of July. Since the low point then, the RMB Index has rebounded just 1.3%. Jackson Hole could well have convinced the Chinese authorities that there is capacity to allow USD/CNY to fall given the building US dollar risks and the high chance of a Fed rate cut in September. On top of that we will likely see the Trump administration push further for greater influence in Fed decision-making which is bad news for the dollar – a risk that we believe is not fully priced at all.

The renewed decline in USD/CNY is a bearish signal more generally for the dollar. This will be supportive of a move lower in USD/Asia and adds to our bearish view on a renewed decline in USD/JPY. Look out for a speech next week by BoJ Deputy Governor Himino on Tuesday. He may well give some stronger guidance on a rate hike that could add to US dollar bearish sentiment more generally, especially if it coincides with continued falls in the PBoC’s USD/CNY fixings.

5-DAY CHANGE IN PBOC USD/CNY FIX GIVES A CLEAR GREEN LIGHT SIGNAL TO THE MARKETS

Source: Bloomberg, Macrobond & MUFG GMR

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com