Synopsis:

ANZ anticipates a critical week for USD and JPY markets. USD direction will largely depend on whether the market’s 50bp rate cut expectation for the Fed can be disproved by upcoming labor market data. For JPY, the focus is on whether USD/JPY will maintain its current range ahead of significant data releases and potential policy changes from the Bank of Japan (BoJ).

Key Points:

• USD Outlook:

  • Labor Market Data: Key to USD direction; recent data indicate easing in the labor market. The PMI composite employment index fell to 48.9, and other metrics suggest slower employment growth.
  • Economic Resilience: Despite potential softness in the August NFP report, economic activity appears resilient with revised Q2 GDP growth and a 2% forecast for Q3 from the Atlanta Fed GDPNow gauge.
  • Fed Rate Cut Expectations: ANZ expects a 25bp rate cut in September rather than 50bp. Historically, the USD weakens before the first rate cut but steadies afterward. The USD may see some upside risk around ISM data next week due to relatively better US economic performance.
  • Current Bias: Neutral on the USD until further labor market data is available.

• JPY Outlook:

  • USD/JPY Range: Likely to remain between 145-150 ahead of the August NFP report.
  • BoJ Policy Expectations: ANZ predicts a BoJ rate hike in October, supported by strong July services PPI and positive wage data. The upcoming July wages data will be crucial for further policy adjustments.
  • JPY Trading Range: The JPY has established a range against most G10 currencies. Significant moves are expected closer to the Fed and BoJ meetings. ANZ is considering a short CHF/JPY position but advises waiting until after the September 26 SNB meeting.

Conclusion:

The USD's near-term direction will hinge on labor market data's ability to challenge the market's 50bp rate cut expectations. The JPY is likely to stay within its current range until further clarity from the Fed and BoJ. ANZ maintains a neutral stance on the USD and anticipates potential JPY movements closer to upcoming policy meetings.