The dollar is doing a little better as investors re-adjust their pricing for the 17 September FOMC meeting. 10 days ago, the market priced a 27bp rate cut. Today, just an 18bp cut is priced in. This adjustment has provided a little support to the dollar. Driving that most recent change in expectations was yesterday’s release of US S&P PMI data for August. Confidence rose both in the manufacturing and service sectors, pushing the composite PMI data to the highest levels since last December. On paper, then, the data doesn’t really support the President’s call for emergency rate cuts. The argument from the Federal Reserve doves, however, is that precautionary rate cuts are required to avoid a needless rise in unemployment.
That brings us to today’s keynote speech from Fed Chair Jerome Powell at 16:00 CET today. Speaking to ING’s US economist, James Knightley, earlier this week, James made the good point that Powell may want to stick to the script and keep the Fed’s options open for September. The script can be considered the Fed’s Summary of Economic Projections (SEP), which in June saw a median of Fed members expecting two rate cuts this year.
Powell can hang the Fed’s September decision on the forthcoming August data releases of jobs (5 September) and CPI (11 September). His equivocal remarks might come as a disappointment to those looking for full-throated support for a rate cut in September. However, he is going to have to acknowledge the sharp downward revisions to the jobs data in May and June, and it seems unlikely the market will start to price the probability of a September rate cut at less than 50%.
DXY has been a little stronger than we were expecting this week, but we imagine sellers would return if DXY got anywhere near the 99.00/99.10 area, which we would see as a near-term top.
Elsewhere, we note the continued decline in the amount of US Treasuries held in custody by the Fed on behalf of foreign official institutions. The weekly data released last night showed holdings dropping to the lowest levels of the year and down $100bn from early April. The US Treasury market, however, is doing fine, and one could argue that structural factors like adjustments to the Enhanced Supplementary Liquidity Ratio or the need to back Stablecoins with Treasury Bills are helping.
Yet the Fed custody holdings data suggests that foreign central banks may be continuing to reduce US Treasuries and potentially dollar exposure, too, in their FX reserves. In other words, while the Treasury market may be ok in that the US private sector picks up the slack from foreign official sales, the impact on the dollar may still be negative.
Chris Turner