As the USD trades broadly lower, Scotiabank’s Chief FX Strategist Shaun Osborne highlights key factors influencing the market. US yields are on the decline, with 2-year yields hitting a two-year low. This trend, along with red US equity futures, is contributing to losses in US yields and the USD. The recent US presidential debate, where VP Harris emerged as the apparent winner, has also impacted market sentiment. Additionally, anticipation of this morning’s US inflation data is influencing trading behavior.
Projections for the upcoming US CPI data indicate a potential moderation in headline prices, with an expected 0.2% monthly increase and a 2.5% year-over-year rise. Core prices are also forecasted to increase by 0.2% monthly and 3.2% annually. While a slight upside surprise may not have a significant impact on the markets, concerns about weaker data could lead to a reevaluation of Fed rate cut expectations.
Amidst these developments, the JPY is performing well, driven by lower US yields and supportive comments from BoJ board member Nakagawa regarding policy adjustments based on economic projections. The JPY’s strength is further bolstered by narrower US/Japan spreads, with the exchange rate showing a stronger correlation with spreads. The DXY is approaching major support levels, indicating potential near-term softness in the USD.
Analysis and Implications
The current market conditions suggest a defensive stance for the USD, driven by declining US yields and upcoming US inflation data. Investors should monitor the impact of these factors on currency exchange rates and consider potential shifts in Fed rate cut expectations. The strength of the JPY highlights the importance of global economic factors in currency movements, emphasizing the need for a diversified investment approach. Overall, staying informed about market developments and economic indicators is crucial for making informed financial decisions.