The debate around the September FOMC meeting remains focused on the magnitude of the next rate cut. Markets are currently balancing two scenarios. Here are the justifications:
1️⃣ 25bps Cut:
- No signs of inflation deanchoring or economic crisis justify a more cautious approach.
- The Fed remains on track but does not feel pressured to move aggressively.
- This aligns with a soft landing narrative, where easing remains gradual and measured.
2️⃣ 50bps Cut:
- Would represent a catch-up move following July’s cut.
- The Fed has emphasized that the totality of labor market data matters, not just NFP. The openings-to-unemployment ratio remains low, indicating persistent labor market tightness.
- Policymakers have indicated they no longer want to see labor market weakness and may aim to stay ahead of deteriorating conditions.
Underestimating the USD?
Markets had been positioning for a short USD narrative throughout August, but this framework appears weak. US rate cuts into a recession historically do not trigger sustained USD weakness, and a US economic rebound or higher-for-longer Fed stance would likely support the dollar. Sustained USD selloffs typically require a strong global growth backdrop, which is currently absent:
- Germany: VW shutting down plants signals industrial weakness.
- China: Facing a balance sheet recession, reducing global growth spillovers.
- Brazil: Market conditions deteriorating, seen as uninvestable by major investors.
- Mexico: Institutional instability, with judiciary concerns adding risk premium.
With the US maintaining relative economic outperformance, USD remains a preferred global safe-haven. DXY seasonality also favors long positions in September.
Political Considerations
Kamala Harris is perceived as a more dollar-negative candidate, which could influence medium-term positioning depending on election developments.
Short AUD?
The combination of a weak China backdrop and bearish iron ore fundamentals continues to pressure AUD. With China facing a balance sheet recession and slowing industrial output, demand for Australian exports remains under pressure. Given these factors, AUD remains vulnerable to further downside, particularly against the USD.
-William Lun
Leave a comment