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Higher for Longer Lifts the Dollar, while SNB Surprises Many by Standing Pat–Over to the BOE

Higher for Longer Lifts the Dollar, while SNB Surprises Many by Standing Pat--Over to the BOE

Overview: The Federal Reserve's hawkish hold, which included 50 bp less of cuts next year than it had signaled in June, has lifted the dollar against most currencies today. The notable exception is the Japanese yen. The greenback did extend its advance to new highs for the year before the market turned cautious ahead of the outcome of the Bank of Japan meeting tomorrow. The Swiss franc is the weakest of the G10 currencies after the Swiss National Bank defied economists' expectations and left rates unchanged. The Swedish krona and Norwegian krone are little changed after their central banks delivered a quarter-point hike. Attention turns to the Bank of England which will announce its decision shortly. Ahead of it, sterling has traded below $1.23 for the first time in five months.

Rising rates have weighed on equities. Most of the large bourses in the Asia Pacific region fell by more than 1%. Europe's Stoxx 600 has given back yesterday's 0.9% advance, and US index futures are trading modestly lower. The yield of the 10-year JGB rose to a new high near 0.73%. European benchmark 10-year rates are mostly 4-5 bp higher, though Gilts and Italian and Greek yields are up a little more than six basis points. The 10-year US Treasury yield is near 4.43%, up a couple of basis points, while the two-year yield is off a couple of basis points to 5.15%. The prospect of higher rates for longer and a strong US dollar has seen gold return to around $1922 after approaching $1950 yesterday. November WTI reversed lower on Tuesday after reaching almost $92.45. It has been sold to a five-day low today near $88.35, where it is trying to steady. 

Asia Pacific

Ahead of tomorrow's Bank of Japan meeting, Japan will report August CPI. Just like the US CPI tends to give a good preview of the PCE deflator, which the Fed targets, and the preliminary EMU CPI is a good estimate of the final report, Tokyo's CPI, which precedes the national report by a few weeks, contains most of the new information. Hence, we can be reasonably sure that headline and core CPI slipped a little in August, while the measure that excludes both fresh food and energy was steady or nearly so. The weekly MOF portfolio flow report will also be released. Recall that last week's report showed that Japanese investors bought the most amount of foreign bonds in three years (~JPY3.6 trillion, or ~$24.5 bln). That brought the year-to-date purchases to about JPY17.4 trillion (~$126.5 bln). This underscores an important point we have tried to make. The doubling of cap on the 10-year JGB last December and again at the end of July has not prompted Japanese investors to repatriate funds as conventional wisdom argued. It means that the backing up of US and European bond yields cannot be attributed to Japanese investors. Ahead of the BOJ meeting outcome, the preliminary September PMI will be reported. Although manufacturing has been contracting (below 50) since last October with one exception (May), services have held in better, and the composite has held above 50.

Judging from the price action, the market does not think BOJ intervention is imminent. After being sold to session lows, slightly below JPY147.50, in the hour before the FOMC meeting concluded, the dollar rebounded to new session and year high around JPY148.35 and to nearly JPY148.50 in early Asia Pacific turnover. The next technical area of note is closer to JPY148.85, the secondary high after the multiyear peak was set last October (~JPY152). Support was found around JPY148.15 in the European morning. The market may turn cautious ahead of the outcome of the BOJ meeting. In the pre-FOMC position squaring, the Australian dollar pushed above $0.6500 for the first time in nearly three weeks. After the FOMC is reversed and tumbled to new session lows near $0.6445. Follow-through selling saw it approach $0.6400 today. Further selling would signal the risk of a return to the year's low seen earlier this month close to $0.6355. Initial resistance now is around $0.6425. The dollar is trading at eight-day highs against the Chinese yuan and is trading near CNY7.3060 in late dealing. It is poised for the highest close since the year's high was recorded on September 8. The fix was set at CNY7.1730, continuing the slightly lower (than previous day) reference rate. The average in Bloomberg's survey was CNY7.3024. The gap between the two also appears to be a record. The greenback is allowed to trade 2% above the reference rate, which caps it near CNY7.3165 today. The offshore market most often respects the onshore band, but today, the dollar traded to CNH7.3215. 


Both Sweden's Riksbank and Norway's Norges Bank hiked key lending rates to 4.00% and 4.25% respectively. The Riksbank's future guidance suggested the door is ajar for another move, but it sees the peak at 4.10%. However, it also indicated it would sell a quarter of its reserves (~$8 bln and 2 bln euros) after the krona fell to record lows against the euro yesterday. The sales ae set to start on September 25 and take four-six months to complete. We had thought the Norway was a closer call, but the central bank signaled that it was likely to hike rates again by a quarter-of-a-point in December. Its projections put the lending rate at 4.44% in Q1 24 and Q2 24. Economists thought the Swiss National Bank would also hike 25 bp, but the swap market did not. We favored the market over economists. The SNB stood pat, and the Swiss franc weakened by the most in six months against the euro and to its lowest level since mid-July.

The Bank of England is next. Yesterday's softer than expected UK August CPI made many doubt the Bank of England would hike rates today. The swap market has slightly less than half discounted. This seems like an overreaction and hike, arguably, remains the most likely scenario. Moreover, the BOE may also announce it would reduce is balance sheet at a quicker pace from the current GBP80 bln this fiscal year. Top officials have suggested GBP100 bln would be max, so the prudent thing to do is increase it to GBP90 bln. If the BOE does not hike rates, sterling will likely be sold. But as we saw last week with the euro, a hike does not necessarily prevent a further decline. 

The euro posted a bearish outside day. It rose to a four-day high slightly above $1.0735 before selling off hard after the FOMC meeting and settling below Tuesday's lows. Follow-through selling today took it below last week's three-month low ($1.0635) to almost $1.0615. The $1.0610 area corresponds to the (38.2%) retracement of the euro's rally since last September's multiyear low. There are 1.8 bln euro options at $1.06 that expire today. A break of $1.06 would initially target $1.05 and possibly $1.04. Sterling was the weakest of the G10 currencies yesterday, falling by about 0.5%. Unlike the euro, it could not muster the strength to rise above Tuesday's high, and in the dollar's post-FOMC surge, sterling tumbled to almost $1.2330, a new four-month low. Today, it has been sold through $1.2300. Some of the selling pressure may be options related. There were two clusters of sterling options expiring today:  GBP475 mln at $1.2330 and GBP700 mln at $1.2300. The next target is near $1.2200 and could be seen if the BOE stands pat. That said, the short-term market is ill-prepared for a hawkish hike by the Bank of England today, where it hikes, does not rule out another hike, and boosts the pace of the unwinding of its balance sheet. Note that despite the sustained decline in the euro and sterling, the speculators in the futures market are still net long.


Consensus expectations were met by the Federal Reserve that a delivered a hawkish hold. The Fed funds target range was held steady 5.25%-5.50%. The median GDP projection for this year was raised to 2.1% from 1.0% (0.4% in March) and next year to 1.5% (from 1.1%). The median projection of unemployment was shaved by 0.3% this year and next (to 3.8% and 4.1%, respectively). The median forecast for the PCE deflators was tweaked up to 3.3% from 3.2%, but next year was left at 2.5%. The core deflator was reduced to 3.7% from 3.9%), with next year's left unchanged 2.6%. In terms of policy, 12 officials anticipate another hike this year, while seven think the Fed is done. That said, the median dot now looks for two cuts next year rather than four. The takeaway is the Fed's forecasts are full-throated endorsement of the soft landing, which also means the Fed expects rates to remain higher for longer. The risk is that headwinds are accumulating impact of elevated rates, the tightening of credit conditions, the drawdown in the previous build-up of savings, resumption of student loan debt servicing, the UAW strike, and the risk of a partial government shutdown next month.

With the FOMC meeting behind us, attention turns to today's US high-frequency reports. The current account deficit does not typically draw much attention from the markets, though it is interesting to note that assuming a Q2 shortfall of around $221 bln, the deficit in H1 23 would be about $440 bln. It has largely been covered by portfolio flows. The Treasury's International Capital (TIC) report shows a net inflow of near $360 bln in the first half. In the half of last year, the US recorded a current account deficit of about $532 bln and net portfolio capital inflows of about $690 bln. Initial weekly jobless claims cover the week of the monthly jobs survey. The median forecast in Bloomberg's survey is for a small increase from the previous week's 220k initial claims, which is a bit lower than the survey week last month and the four-week moving average is also a bit lower. Still, the early call is for nonfarm payroll growth to slow to around 155k from 187k in August. The September Philadelphia Fed survey is expected to deteriorate from the 12.0 reading in August. Existing home sales fell 2.2% in July but are expected to have stabilized in August. Lastly, the index of Leading Economic Indicators most likely extended their decline, which has been uninterrupted beginning April 2022. The six-month annualized decline has begun subsiding. It bottomed at -9% in March and was a -7.8% in July. It may have remained there in August, which are levels which in the past have been seen during recessions. 

Mexico reports July retail sales and repeating the 2.3% monthly gain in June is highly unlikely. The average monthly gain in H1 was 0.4% compared with an average of 0.7% in H1 22. The median forecast in Bloomberg's survey sees a 0.2% increase. Tomorrow, Mexico reports CPI for the first half of September. The year-over-year rates of both the headline and core are seen extending their normalization. The central bank meets next week and no change in the 11.25% target rate is expected. Still, with price pressures falling, the real rate is increasing. Nevertheless, the market has pushed out into next year the first cut. Separately, as expected, Brazil's central bank cut the Selic rate by 50 bp yesterday to 12.75%. It also signaled that it was prepared to cut by another 50 bp at both the November and December meetings.

The US dollar was confined to Tuesday's range against the Canadian dollar. But for the second consecutive session, the market bought the greenback on a dip below CAD1.3400. It finished above previous support around CAD1.3465. It looks like the leg lower from the high near CAD1.37 is complete. It has been flirting with CAD1.3500 in Asia and Europe and a convincing break targets the CAD1.3575-CAD1.3600 area. Yesterday, the greenback briefly traded below MXN17.00 for the first time since September 1, but the broad post-FOMC dollar recovery saw it return to session highs a little below MXN17.10. The high so far today is about MXN17.1480. Initial resistance is seen around MXN17.18. Except for that brief foray below MXN17.00 yesterday, the dollar has been confined to Monday's range (~MXN17.03-MXN17.1820). The dollar tested the lower end of its range against the Brazilian real yesterday (~BRL4.84). The seems to be scope for the dollar to rise toward BRL4.90 today. 

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Marc Chandler
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.
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