Soft-landing narrative can slow the dollar rally
Data over the next few weeks, including this week’s ISM services print for August, will likely continue to support the case for no further rate hikes from the Fed. However, Q3 data will still be supported by one-off spending items such as entertainment spending, and unlikely to show a marked deterioration in economic momentum for now. This means soft-landing hopes could continue to gain traction for now, which could be bearish for the dollar. Deeper recession or stagflation concerns, or a safety bid for the dollar, will have to wait for more evidence of a downturn in the US economy. Central bank narrative, meanwhile, will also shift towards the scope of rate cuts from the potential for more rate hikes. Growth differentials, therefore, could be a key driver in the next phase of the cycle.
Emerging markets have been the first movers in the easing cycle, with Chile and Brazil having announced rate cuts. However, the rate cut path may remain slow, despite a hefty start, amid Fed’s higher-for-longer message. Historically, the Fed is quicker and more aggressive to cut rates and that also leaves the dollar prone to some downside. The sticky core inflation issue in the UK and Eurozone suggest that BOE and ECB will likely work with a lag in the easing cycle, although how quickly economic data in Europe and UK turns sour will have to be on watch. Also, dollar’s carry advantage continues to offset concerns of a decline, but gold upside is likely as Fed pause expectations get entrenched.
Market Takeaway: The USD bias is shifting to neutral/negative in the short run as soft-landing hopes are bolstered. Fed usually leads in an easing cycle, further suggesting scope for some short-term pressure on dollar. XAUUSD stands to gain if Treasury yields slide further.
Central banks of Australia and Canada meet this week, China stimulus remains key
Canada’s Q2 GDP unexpectedly fell by 0.2% QoQ, falling well below the central bank’s expectation of 1.5% gain, and suggesting that the risks for the Bank of Canada meeting this week may be titled dovish and support for the CAD may be tough to come by even if oil prices continue to rise.
Australia’s July CPI slid below 5% for the first time since early 2022, and July labor data was also weaker-than-expected. This has strengthened the case for a pause from the Reserve Bank of Australia (RBA) at Tuesday’s meeting. But the RBA may still need to leave the door open at this week’s meeting for some more tightening amid risks of another spike in CPI later in the year. AUD may remain supported with a hawkish hold, as long as the positive risk sentiment continues and further focus from China on supporting the yuan and its economy.
Market Takeaway: AUDUSD needs to close above 0.6522 triple top and break above 0.6640 is key for a clearer uptrend. USDCAD could continue to rise towards 1.3650. AUDCAD could see upside risks on central bank divergence in the week and target 0.264 retracement at 0.8844 in the short-run.