A sharp jump in the yen yesterday, potentially due to another intervention (more in the JPY section below), had a knock-on negative impact on the dollar across the board. But towards the end of the session, only currencies backed by positive domestic stories (AUD, CAD) had hung onto gains, with the move fading elsewhere.
On the data side, ADP payrolls came in at 38k, leaving few marks. Market conviction on a September hike decreased slightly yesterday, with pricing declining from 18bp to 15bp, but that was likely due to the oil rally stalling. Today, the ISM services report is in focus, and expected to flatten at 54.1. The bar to drive the Fed away from a September hike looks fairly high, especially for second-tier data.
We retain a preference for the upside in the dollar, as front-end rates and higher energy prices both point up. The main risk remains that higher back-end yields can prompt more interventionism by the Treasury and a revamp of the debasement trade.
Our macro team has published a preview of next week's ECB meeting, when a hike is widely expected. Our take is that policymakers may be more concerned about widening European bond spreads than second-round inflation risk at this point, which argues for a less hawkish message than what markets may be expecting.
The EUR swap curve is now embedding three hikes by April 2027, which seems overly hawkish considering core inflation has remained so well behaved. But energy price increases (European TTF gas touched €75/MWh yesterday) probably argue against any dovish repricing until receiving input from the ECB itself.
The near 1% fall in USD/JPY over a couple of minutes yesterday afternoon, and another slide overnight, sparked talk of another round of intervention. This follows the $96bn sold by the Bank of Japan in late July/early August. Traders seemed to doubt that this was an intervention, given the lack of dislocation in the FX electronic matching systems at the time.
US and Japanese authorities must be satisfied by yesterday's price action and keen to encourage a sense of urgency for those long USD/JPY and EUR/JPY above 160 and 186, respectively. And the Swiss National Bank will probably be happy if those pursuing carry trade strategies choose to fund in Swiss francs rather than yen.
That said, a Fed hike in mid-September looks likely to keep USD/JPY relatively bid this month and any sustainable turn lower in USD/JPY now probably requires a much more hawkish Bank of Japan and some new initiatives to encourage domestic investment in Japan.