C8 Hedge – Currency Compass – Sep 2024
FX Market and Strategy
USDJPY remains the centre of attention after the BoJ finally raised rates at the end of July. The unwinding of a two year carry trade has had knock on effects across FX markets. Focus has turned to the USD, after comments from Fed Governor Powell at Jackson Hole in late August “The time has come for policy to adjust” and “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks”.
Over the past two months, expectations have swung as to whether the FOMC will cut rates by 25bp or 50bp at the September meeting (see chart below), with the USD driven by these sentiment swings. The stock market sell-off at the start of August raised expectations of a 50bp cut which then reversed during the month as share prices recovered. However, in the last week, expectations have become more mixed, now marginally in favour of 50bp, after Fed Governor Waller commented “I believe that the balance of risks has shifted towards the employment side of our dual mandate”.
We are firmly in the 50bp rate cut camp – if the Fed is worried about employment, they need to get ahead of the curve. This is likely to put further pressure on the USD in the near term. USDJPY has hit its downside target (see below) so the benefit is more likely to accrue to the EUR and GBP. We also see the BoJ on hold this week, which adds weight to this view. However, we note our systematic models still point to EURUSD and GBPUSD weakness over time, so any bounce may prove a good opportunity to add EUR and GBP hedges.
Currency Focus: USDJPY
Since 9 July, USDJPY declined from 162, at the start of July, to 141, a drop of 13%. The C8 Hedge platform has been highlighting the risks of buying USDJPY since the beginning of the year, with our macro model suggesting the risks were on the downside. C8 works with Macro Intelligence 2 Partners, a macro-economic research group, who published a number of pieces in the C8 Hedge Knowledge Hub on these risks:
- 12 February The FX Year Ahead – Turning Japanese
- 06 June JPY: Liftshaft Alert
- 29 July USDJPY and Gamma Trading
- 05 September USDJPY: Update and Strategy Observation
As the BoJ begins the process of normalising interest rates, there can, over time, be more downside for USDJPY. However, we note that this rate normalisation process will be slow. With USDJPY around 140, the currency pair has, in a short time, given back around nearly half the gains of the previous 2 years and this level was MI2’s initial target. We would be cautious about looking for further JPY gains in the near term.
Key Event Dates
18 September US FOMC Meeting Expect 50bp rate cut to 4.75-5.00%
19 September UK BoE Meeting Expect no rate change
20 September Japan BoJ Meeting Expect no rate change
17 October EU ECB Meeting Expect no rate change, after the 25bp cut in September to 3.50%
30 October UK Autumn Budget Expect higher capital gains and inheritance tax. End of non-dom and VAT on private education.
31 October Japan BoJ Meeting Expect no rate change
5 November US Presidential Election Market expectation remains near 50/50 split on Harris v Trump, current momentum with Harris
7 November US FOMC Meeting Expect 25bp rate cut to 4.50-4.75%
7 November UK BoE Meeting Expect 25bp rate cut to 4.75%
12 December EU ECB Meeting Expect 25bp deposit rate cut to 3.25%
18 December US FOMC Meeting Expect 25bp rate cut to 4.25-4.50%
19 December Japan BoJ Meeting Expect 25bp hike to 0.5%
19 December UK BoE Meeting Expect 25bp rate cut to 4.50%