USD
The broad dollar’s slide at the back end of last week continued through Monday morning and into early afternoon, propelled by yen carry trade unwinds and fears that overly tight Fed policy would tip the US economy into recession. However, as we noted yesterday morning, the sense of market panic looked overdone to us. While last week’s jobs report was disappointing, it is not signalling a recessionary slowdown just yet. This leaves the market-implied path for cuts looks too aggressive in our eyes, with five cuts priced for the remainder of this year versus our house call for three, while hyperbolic calls for emergency rate cuts that appeared yesterday were just silly. All told, the sense of panic left equities to trade under pressure, with the S&P 500 shedding more than 3% on the day. But the greenback has now retraced much of its early Monday losses, with the broad dollar’s grind higher continuing this morning, as traders begin to pare back their Fed easing bets. Barring any surprises, this theme should continue throughout today’s session, with traders left to wonder what Monday’s fuss was about.
JPY
Alongside worries about overly tight Fed policy, the yen carry trade was front and centre to start the week. Continued positioning unwinds combined with a ramp up in cross asset volatility and a broader risk off tone saw the Nikkei shed -12.4% and the yen rally more than 3% against the dollar by midday Monday. The sense of panic that gripped markets yesterday has already begun to dissipate, however. The Nikkei rallied more than 10% this morning to largely erase yesterday’s losses, while USDJPY is once again trading above 145 – around levels it started the week. All told, while we are inclined to think the longer-term trend favours a stronger yen, yesterday’s market action looked more like a flash in the pan to us. USDJPY is now trading around levels implied by fundamentals, having previously scanned as rich. We continue to expect the pair to hover around the 145 until a combination of Fed rate cuts and further BoJ hiking sees the pair embark on a more sustained appreciation path towards the end of Q3.
AUD
While Fed policy and carry trades have been the focus to start the week, it would be remiss of us to not mention that the RBA kept policy on hold overnight. While the decision to maintain the cash rate at 4.35% was widely expected, we do think subsequent comments from the RBA’s Bullock suggesting that “near term” rate cuts are not on the agenda, are worthy of note. This confirms our base case, that the RBA is highly unlikely to ease policy until 2025, likely the last G10 central bank to do so. This hawkishness has seen the aussie making gains through this morning’s early trading, up 0.25% against the dollar, even as the greenback is climbing more broadly against other G10 FX.
EUR
Cross asset dynamics and broader risk conditions were front and centre for the euro on Monday, a dynamic that saw EURUSD posting marginal gains. As noted above however, we suspect this should through the remainder of the week as markets unwind the recent dollar selloff. There is little on the domestic front that looks likely to disrupt this narrative given a dearth of top tier data prints and ECB speakers, a dynamic that is likely to continue as a theme through the quiet summer period.
GBP
Sterling traded under pressure to start the week as risk conditions weight on the pound. Today, with markets taking a more sanguine view of events, this should begin to reverse. Granted, our view of the dollar suggests that GBP/USD is unlikely to recoup yesterday’s losses. But we do expect GBP/EUR to retrace its Monday slide as traders unwind the early week selloff for the cross.
CAD
Having briefly spiked through 1.39 early morning, USD/CAD traded lower on Monday in the wake of the broad dollar’s selloff. The key dynamic for the pair today, like much of the G10 FX complex, is likely to be the dollar’s retracement higher. All told, we expect this to see USDCAD recoup yesterday’s losses through the remainder of the week, before a jobs report on Friday, which could see the pair stabilise around 1.39 heading into next weekend.