The USD teeters at the brink ahead of August CPI

US dollar at the brink – but shouldn’t it already be lower still?
The US dollar has weakened since last Thursday, with Friday’s weak August US jobs report sparking most of the move, as expectations for a 25-basis point cut at next week’s FOMC meeting firmed up and the odds of a 50-basis point cut, if still low, are rising. Thursday’s US August CPI print is the next event risk of note ahead of the FOMC meeting next Wednesday. The combination of lower treasury yields all along the US yield curve and at least stable risk sentiment should be the sweet spot for a weaker US dollar. But the recent focus on the very long end of global yield curves and whether further stress would prompt a policy response – seen needed first in Japan and the UK and even in France, has likely kept some residual safe haven bid in the US dollar that is offsetting much of the negative pressure on the currency. That’s a working theory, at least. For now, while the US bears are in control and the US dollar looks on the technical brink, visibility is poor unless we get a significant bid into global long bonds outside of the US – a bit more color on USDJPY in the look at the chart below.

The French Prime Minister Bayrou lost yesterday’s confidence vote in the National Assembly by a resounding margin, as widely expected, and President Macron looks set to appoint the fifth prime minister in two years, as he is seemingly running short of appropriate candidates for the unthankful position. Germany-France 10-year yield spreads have blown wider in early trading today to absorb the news, but are only a few basis points beyond the recent highs, currently at 82 basis points as of this writing, only about a single basis point higher than the highest daily close of the cycle from late August. France’s debt mountain remains a structural issue, but does it fade to a slow burn rather than sparking any imminent further uncertainty?

Chart: USDJPY
Traditionally, the recent collapse in US 10-year yields would have driven a sharp sell-off in USDJPY, but the recent stress in bond yields at the longest end of the Japanese yield curve (the benchmark 30-year JGB hit all-time highs within the last week and is still only a few basis points below those highs, contrasting with the benchmark US 30-year yield, which has tumbled over 30 basis points from recent highs in the last few trading sessions). That tension of the divergence in well tamed US yields versus Japan’s long yields still suggesting uncomfortable pressure on the longest JGBs (in part also on political turmoil in Japan as the PM is resigning and the opposition is clamoring for more welfare spending) keeps the “normal” signals of lower US yields from driving the USD lower here. Technically, we are none the wiser here in either direction until we close south of perhaps 146.20 or above 149.15.