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The USD’s outlook is sensitive to the Fed’s data-dependent rate-cutting outlook. The DXY Index appreciated by 0.4% to 101.62 on the better-than-expected jobs data. The Automatic Data Processing (ADP) Research Institute reported that the private sector added 143k jobs in September, beating the 125k consensus. August was revised to 103k from 99k. However, the ADP institute noted that stronger hiring was not accompanied by stronger pay growth. Today, pay close attention to the ISM Services PMI employment index, which consensus expects to moderate to 50 in September from 50.2 in August on lacklustre activities. ISM Manufacturing employment fell to 43.9 in September, near its 4-year low of 43.4 in July. Initial jobless claims will also be important given its (4-week moving average) decline to 225k from a high of 241k since early August. While consensus sees Friday’s nonfarm payrolls rising to 150k in September, falling claims suggest a possible upward revision in August data from 142k.
Richmond Fed President Thomas Barkin’s comments did not push the DXY above the 101.69 high hit after the ADP data. Echoing Fed Chair Jerome Powell, Barkin explained that the Fed’s 50 bps cut in September was not a response to a troubled US economy but a recalibration to a less restrictive monetary stance. Since the final hike to 5.25-5.50% in July 2023, US inflation declined closer to the 2% target amid a cooling labour market. Barkin was not ready to declare victory on inflation; he did not expect 12-month core inflation to drop much further until 2025. Although the unemployment rate increased to 4.2%, it remained near most estimates of its natural rate. Heeding the corrective nature of the Fed’s narrative, the futures market is no longer looking for another 50 bps but a 25 bps cut at the FOMC meeting on November 7.
USD/JPY’s tone is firm after rising 2% to 146.47, its highest close since the start of September. Japan’s new Prime Minister Shigeru Ishiba said the conditions were not right for more interest rate hikes following the two increases earlier this year. Economy Minister Ryosei Akazawa said the new administration’s top priority was ensuring Japan completely exited from deflation. During his meeting with the prime minister, Bank of Japan Governor Kazuo Ueda assured that the central bank will be cautious in its commitment to normalize monetary policy i.e., hiking again only if the economy and inflation meet the BOJ’s forecasts. The OIS market expects the BOJ to keep the target rate unchanged at 0.25% for the rest of the year.
With the BOJ seen going slow on hikes and the Fed slow on rate cuts, USD/JPY likely returned into a higher 145-150 range ahead of the BOJ meeting on October 31. Interest may return to JPY carry trades, especially AUD/JPY, which closed above the psychological 100 level for the first time since end-July. However, AUD/JPY still needs to overcome a major resistance at 101.40 or its 100-day moving average.
Quote of the day
“Most of the energy of political work is devoted to correcting the effects of mismanagement of government.”
Milton Friedman
October 3 in history
In 1997, Japan's maglev train broke world speed record for a manned train.
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