Weekly FX Chartbook: China Stimulus Adds to Fed-Driven Risk-On Ahead of Jobs Day

Key points:

• USD: Downside pressures could persist if soft-landing expectations remain
• JPY: Hawkish PM adds to the bull case
• EUR: Growth headwinds to pave way for ECB’s October rate cut
• AUD: Boosted by China stimulus

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USD: NFP Data is a Key Input Fed’s November Decision

The narrative of a soft landing continues to shape the outlook for the USD, leaning on the weaker side. Recent US data has pointed toward this scenario, which is USD-negative, and the upcoming jobs report is likely to reaffirm this trend. However, the outlook remains uncertain, and market expectations may shift based on incoming data. The bar for a hawkish surprise is high, while a somewhat weak headline jobs growth could propel markets to price in another 50bps rate cut from the Fed in November. Meanwhile, China's stimulus measures are boosting global risk appetite, adding further downside pressure on the USD.

This week will also feature remarks from several Fed members, including Chair Powell and the dissent voter Bowman. However, with the dot plot has already laid out the variance of views in Fed's expected path forward, and the commentary may not significantly alter market expectations. Focus remains heavily tilted toward key data points, especially Friday’s nonfarm payrolls but also ISM manufacturing and services PMIs. September's NFP is expected to show 145k new jobs, with the unemployment rate steady at 4.2%, and average hourly earnings growth easing slightly. Before that, Tuesday's ISM Manufacturing and Thursday's ISM Non-Manufacturing PMIs will be scrutinized for signs of how the US economy wrapped up Q3.

For the USD to sustain any gains, both the jobs report and ISM data would need to exceed expectations. However, current market sentiment leans toward a balanced but dovish outcome, meaning the dollar may struggle to hold ground if the data confirms the soft-landing narrative. Investors should be mindful that these views are subject to change based on evolving data and policy signals.

JPY: New PM’s Hawkish Vibes Add to Yen’s Bull Case

In Friday's election, Shigeru Ishiba emerged victorious as the ruling party leader in a run-off against dovish candidate Sanae Takaichi, signaling a potential shift in Japan’s economic stance. Ishiba has voiced support for the Bank of Japan’s independence and its normalization strategy, suggesting a firmer focus on tackling deflation. While his election could mark a turning point in monetary policy discussions, the impact on BOJ policy remains to be seen, and markets will closely monitor developments. The new Prime Minister is reportedly planning a general election on October 27, adding further uncertainty.

This leadership change introduces an additional factor for JPY, as markets will watch Ishiba's approach to monetary policy and how it aligns with the BoJ's potential hawkish shift. While politics and central banks should remain independent, Ishiba-san’s hawkish comments could influence market sentiment regarding the BOJ’s policy trajectory. We still expect caution on further policy hikes after August’s Black Monday, but the wage-price spiral suggests that the BOJ has room to normalize policy further. However, risks remain, and the policy direction is not set in stone.

With the yen already benefiting from lower oil prices, the Fed’s 50bps rate cut pricing, and the possibility of BoJ rate hikes, Ishiba’s election win could accelerate bullish sentiment on JPY. This is especially relevant against currencies like the EUR, where expectations for further rate cuts are firmer. However, market conditions remain fluid, and investors should stay attuned to shifts in policy outlooks and risk sentiment.

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Commodity Currencies: CAD Could Extend its Underperformance

The outlook for commodity currencies like AUD, NZD, and CAD is being shaped by China's recent stimulus, adding to the positive narrative already building from the Fed's soft-landing scenario and market pricing of a 50bps rate cut at the September meeting. However, CAD has been the underperformer, with the Canadian economy facing hard-landing risks. Inflation returned to the 2% target in August, and markets still expect more rate cuts from the BoC, adding to CAD’s downside pressure.

Meanwhile, the RBA has pushed any potential rate cut discussion to 2025, while the RBNZ appears overpriced, with markets forecasting 90bps of cuts over the next two meetings before year-end. CAD’s underperformance may persist in the near term, particularly as US election risks could start playing a larger role in market dynamics. While CAD faces fewer tariff risks compared to other commodity currencies, its outlook could shift if a Republican victory in the US elections becomes more likely. However, geopolitical and economic conditions remain fluid, and investors should continue monitoring developments for potential shifts in sentiment.

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