AUSTRALIA DATA: Easier Q3 Labour Market Increases Rate Cut Chance, Q3 CPI Key

US Equities continue to march higher and seem to be pricing in a goldilocks scenario regarding what the potential upcoming cutting cycle could look like. This morning US futures have opened muted, E-minis -0.01%, NQU5 +0.05%. The JPY crosses are grinding higher; it still feels like fresh impetus is needed for them to extend. Could the FOMC or the BOJ this week give it the nudge it needs ? GBP/JPY is breaking 200.00, can it extend before we have had the FOMC and BOJ ?

• EUR/JPY - Overnight range 172.91 - 173.19, Asia is trading around 173.30. The pair is grinding back towards 173.50. The range looks to be 171.00-174.00 for now, a sustained break back above 174.00 would look bullish, but I'm not sure I would play it in the cash market until the FOMC and BOJ is out the way.
• GBP/JPY - Overnight 200.03 - 200.74, Asia trades around 200.40. This pair is now making an effort to push above 200.00, a clear sustained break above 200.00 should regain the momentum higher. Can this break accelerate before we get the FOMC and BOJ, tough ask.
• NZD/JPY - Overnight range 87.75 - 88.02, Asia is currently dealing 87.85. The pair continues to stall around the 88.00 area, a sustained move back above 88.00/88.50 and I will have to reassess my bias lower.
• CNH/JPY - Overnight range 20.6743 - 20.7192, Asia is currently trading around 20.7000. This pair has remained above its pivotal 20.30/20.40 support. The pair continues to trade comfortably within its recent 20.40-21.00 range.

Fig 1 : GBP/JPY 2H Chart

Source: MNI - Market News/Bloomberg Finance L.P

NZ food inflation stabilised at 5.0% y/y in August, its highest since November 2023, while increases for existing rents moderated 0.3pp to 2.1% y/y, the lowest since 2011. The stabilisation or moderation, especially travel-related prices, in August is likely to be welcomed by the RBNZ as it sees a risk that Q3 could print above 3%, the top of the band. Westpac believes that it will be below this level by year end.

• In line with RBNZ signalling, 25bp rate cuts are generally expected at its last two meetings in October and November bringing rates to 2.5%.
• The monthly series released today account for 46.5% of the quarterly CPI with Q3 to be released on October 20. 
• Westpac observes that while August prices were lower than it was expecting, inflation is trending higher and it is forecasting it to reach 3.1% y/y in Q3 up from Q2’s 2.7% y/y. There is “a little downside risk” to its Q3 forecast for inflation “due to the volatile travel categories, which can swing around sharply month-to-month”, so it’s keeping its “forecasts as they are for now but will watch how those costs shape up over the coming month”.
• Electricity and gas price pressures remain elevated at 11% y/y and 14.1% y/y in August respectively. Westpac notes that “household energy costs up more than 10% this year”.

The BBDXY range overnight was 1194.44 - 1198.95, Asia is currently trading around 1195, +0.03%. The USD continues to grind slowly lower, pressing and probing its recent support. A sustained break below 1195 is needed to regain the momentum lower and retest the year's lows towards 1180 where demand should return initially. A break sub 1180 would be extremely bearish, should the USD start another leg lower it would have big implications for FX and potentially see a lot of the recent ranges in G10 broken. The USD is trying to break its recent support ahead of the FOMC with the market pricing in a dovish outcome, there are obvious risks to this buy the rumour strategy. I would prefer to have optionality around FOMC and trade the event than going in naked short with a low bar to disappoint. 

• Bloomberg - “Investors Cut Dollar Exposure at Record Pace, Deutsche Bank Says. Overseas investors are slashing their dollar exposure at “an unprecedented pace” as they put on currency hedges when buying US stocks and bonds.“The FX implications are clear: foreigners may have returned to buying US assets (albeit as we wrote last week at a reduced pace), but they don’t want the dollar exposure that goes with it,” Saravelos wrote. “For every hedged dollar asset that is bought, an equivalent amount of currency is sold to remove the FX risk.” See Graph Below
• RenMac on X: “Fed Should Go 50… But Likely Won’t – Neil Dutta”
• “The risk, however, is that Fed Chair Jerome Powell could push back at his post-meeting press conference by indicating a more cautious approach and stressing the need to monitor data on employment and inflation. “Powell will offer balance,” Thierry Wizman, a global FX and rates strategist at Macquarie Group, said in a note. “He’ll highlight again the downside risk to employment growth, but refrain from signaling a long string of cuts after September.” - BBG
• Data/Events : Retail Sales, New York Fed Services Business Activity, Industrial Production, NAHB Housing Market Index

Fig 1: Hedged Inflows Into US Exceeding Unhedged

Source: MNI - Market News/Bloomberg Finance L.P/Deutsche Bank