USD Outlook
I don’t think this is a time to be structurally short dollars as global economy performance remains varied. While the Fed’s stance has been priced in, post-Fed periods are often unclear for the dollar. Staying flexible is key.
Yields have yet to move meaningfully higher, but bonds could sell off next week, pushing yields higher as markets digest steady growth alongside a dovish Fed. So far, investors have bought into the soft landing narrative offered by Chair Jerome Powell last week. The market is increasingly short USD, creating a high risk of reversal if bonds sell off due to the soft landing outlook. If this scenario plays out, there is a high risk of a USD reversal, as positioning is very short the dollar and any bond selloff could trigger unwinding.
USD/JPY Outlook
I think USD/JPY has bottomed for now. The BoJ has sounded less hawkish, the market remains short USD and long bonds, and Japan’s ruling LDP will pick a new leader at the end of the week, determining the country’s next prime minister. These factors create conditions for near-term JPY weakness.
While yields may initially rise, history suggests they ultimately decline following Fed rate cuts, often falling well below pre-cut levels. In the end there’s a risk employment data will eventually drive yields down.
BoJ Outlook
Governor Ueda’s recent remarks suggest that the BoJ is in no hurry to raise rates, though a December hike remains on the table. The yen’s recent appreciation has eased concerns about rising import prices, reducing the likelihood of an October move. However, demand-driven price increases are expected in the coming months, with October inflation data set to confirm this trend.
The BoJ appears focused on financial market stability. While short-term volatility will not prevent policy normalisation, the pace of JPY appreciation and its impact on inflation remain key concerns. The Fed’s efforts to avoid a recession provide room for the BoJ to move cautiously.
Going forward, October inflation, wage growth, and household consumption data will be critical in shaping BoJ policy. Governor Ueda’s statement that upside risks from yen weakness are fading suggests the BoJ may be less sensitive to USD/JPY strength than earlier this year.
For now, the dollar’s direction remains tied to yield movements, with bond market positioning and BoJ policy developments playing a critical role in shaping FX flows.
-William Lun
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