C8 Currency Compass – September 2024

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. 
BY JON WEBB

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:

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%

Other posts

Thoughts From The Divide: Adjustments

BY JON WEBB
Last week’s excitement in bond markets came courtesy of Governor Waller offering a mechanical rationale for rate cuts. Simply, “If inflation goes down, you would lower the policy rate.” This came, of course, in the context of warnings about financial conditions and other caveats, but as is so often the case, what the markets heard was “so you’re telling me there’s a chance?”. That doesn’t mean that we disagree with the market’s read of where the Fed’s head is. Fed Governors don’t make too many boo-boos with their messaging, and when they do, it’s often an error of timing rather than content. The market has now priced cuts down to “around 4% by the end of 2024” and while that seems perhaps overdoing the enthusiasm a tad, we suspect that the market has gotten the gist about right.  Read more →

NDR Fixed Income Allocation Strategy September 2024 Update

BY BRIAN SANBORN
The NDR Fixed Income Allocation Strategy, Positioning Update Read more →

Thoughts From The Divide: If Then

BY JON WEBB
With another “most important Fed meeting of our lifetime” squarely in the rearview, and the first round of knee-jerk market moves pass to the side mirrors, it’s worth reflecting a little on the Fed Chair Powell’s “works”. The “biggest” move was the announced tapering of treasuries QT to roughly $25b from the previous rate of $60b of run off a month, but beyond that Fed confidence was conspicuous by its absence. The Chairman stated as much, admitting that “the data have not given us that greater confidence” that inflation was moving toward the 2% goal that Powell indicated necessary (how long is a piece of string?) for cuts. Read more →
Back to all posts →