Synopsis:

ANZ expects the USD to rebound next week, particularly against low-yielding currencies, as market expectations for aggressive Fed rate cuts may be disappointed. The recommended trade is long USD/CHF, leveraging anticipated outcomes from the upcoming FOMC meeting and the SNB's likely dovish stance.

Key Points:

1. FOMC Rate Cut Expectation: ANZ anticipates a 25bp rate cut from the Federal Reserve on September 19, but not the 50bp or 100bp cuts priced into the market for the end of 2024. Historical easing cycles suggest that a 50bp cut is unlikely given the current economic conditions.
2. Economic Backdrop: The U.S. economy, while showing signs of softening labor market conditions, does not reflect a severe downturn. Consumer spending remains resilient, and stronger retail sales could support the USD by alleviating overly aggressive market expectations.
3. USD Rebound Potential: With the market likely to adjust its rate cut expectations, the USD is poised for a rebound, especially against low-yielding currencies like the EUR, CHF, and JPY. The upcoming Fed update and dot plot will be crucial, particularly if fewer rate cuts are projected for 2025.
4. Long USD/CHF Strategy: Given that the Swiss National Bank (SNB) is expected to take a dovish stance to counter CHF strength, long USD/CHF is seen as a particularly attractive trade.

Conclusion:

ANZ forecasts a USD rebound next week, driven by a more modest Fed rate cut than currently priced in and a dovish SNB meeting later in September. Traders are advised to consider long USD/CHF positions to capitalize on these anticipated shifts, while the USD may experience varying impacts across different currency pairs based on their sensitivity to risk and yield.