The USD is trading defensively, Scotiabank’s Chief FX Strategist Shaun Osborne notes.
“US yields continue to retreat, with 2Y yields slipping to a two-year low today, as US equity futures trade in the red. Losses in US yields—and the USD—picked up in overnight trade around the US presidential debate which VP Harris appears to have won. Markets may also be front running this morning’s US inflation data to some extent. US CPI data for August are expected to show some further moderation in headline prices but stalled progress on core measures.”
“Headline CPI is forecast to rise 0.2% M/M and 2.5% over the year (down from 2.9% in July—note Scotia is a little higher than consensus at 2.6%). Core prices are also forecast to rise 0.2% in the month but remain at 3.2% over the year. A modest upside surprise is unlikely to move markets significantly, with the Fed’s attention clearly on the labour market. Price action suggests markets may be concerned by the risk of weaker data which would likely result in markets pricing back in some risk of a more aggressive Fed rate cut next week.”
“The JPY is out-performing on the session, boosted by lower US yields and comments from BoJ board member Nakagawa who remarked that the central bank will continue to adjust policy if the economy develops in line with projections. Lower US yields and narrower US/Japan spreads are supportive of a firmer JPY broadly, with the exchange rate now showing a stronger—and more typical—correlation with (10Y) spreads than earlier this year. Spot looks to be heading for a test of major support just under 140. More broadly, a low close for the DXY today will tilt near-term technical risks towards renewed softness.”
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