Revived Fed rate cut bets hurt USD – Scotiabank

The USD is posting broad, if mostly limited losses against the major currencies on the day (after falling in late trade yesterday). The AUD is the exception at one end of the scale, trading little changed as iron ore prices fall again, while the JPY is leading gains and rising nearly 1% on the session. USD/JPY losses are close to putting key support just under 140 under a little more duress, Scotiabank’s Chief FX Strategist Shaun Osborne notes.

USD eases as reports highlight Fed policy dilemma over scale of cut

“Stocks are broadly higher while bonds are firmer, with Treasurys outperforming. The root issue here is renewed speculation that the Fed could start off its easing cycle with a 50bps rate cut. WSJ Fed watcher Nick Timiraos’ article yesterday afternoon suggested the issue of a small or big move is still something of a dilemma for policymakers and the framing of the article seemed to make the case that a bolder move might be appropriate, citing a recent advisor to Powell.”

“Additionally, an FT report suggests today the Fed is ‘wrestling’ with how aggressively to cut rates while former NY Fed President Dudley commented that there was a case for cutting 50bps. I’m not that surprised. As I noted yesterday, the Fed’s focus is clearly on the labour market and labour market conditions have weakened further since July when, FOMC minutes suggested, the Fed was much closer to cutting than we perhaps appreciated. Swaps have added some 8bps of additional easing risk back in for next week since yesterday afternoon and are pricing in 37bps of cuts for next week—effectively halfway to pricing in an additional quarter point.”

“Market anxiety is likely to persist into the FOMC decison, keeping the USD tone defensive. USD/JPY support at 140.25 (major low from December) is at risk. A stronger JPY will likely pull the Asian FX complex higher with it and spill over into the other majors to some extent at least. US Import Prices are forecast down 0.2% in August. The preliminary U. Michigan Sentiment data for September is expected to show a small improvement (68.5) over August (67.9).”