FOREX: USD/JPY Testing Above 150.00, Options Volumes See 151-155.00 Strikes
Yen weakness has been the standout today, with USD/JPY breaking above 150.0, off 1.75% so far today for the session. The surprise Takaichi election win from Saturday's LDP leadership race has driven sentiment (with market odds of her victory very low on Friday per Polymarket). BoJ tightening risk has fallen dramatically for Oct just 6bps of tightening priced in against recent highs of 17bps), with Takaichi stating the government and BoJ should be coordinated on economic policy. Takaichi has been a critic of BoJ hikes in the past (but her rhetoric wasn't as strong during this most recent LDP leadership campaign).
- For USD/JPY technicals, a clean break above 150.00, will see focus shift to 150.92, the Aug 1 high and key resistance.
- Positioning focus will rest with asset managers and whether they go back a short position (with leveraged contracts already net short). Asset managers were last net long to the tune of +79.3k.
- The 1 month risk reversal is highs last -0.30, fresh highs back to 2022. So far today we have seen close to $7.4bn in options volumes go through in USD/JPY (63% of total volumes per DTCC on BBG). The larger volume transactions have been skewed towards USD/JPY calls with strikes in 151-155.00 region.
- USD/JPY looks too high relative to US-JP rate differentials, but further position adjustments could still play out in the near term.
- Elsewhere, EUR/USD is back slightly lower at 1.1720/25, with French politics likely to come back into focus.
- The kiwi has outperformed the G10 today with NZDUSD up 0.1% to 0.5836, close to the intraday high at 0.5840, helped by stronger US equity futures even though the NZX was lower.
- AUDUSD fell to 0.6582 in early trading as USDJPY rose following news that Japan’s conservative Takaichi won the LDP leadership. The pair has recovered to be up 0.1% to 0.6609, close to the intraday high of 0.6612, aided by better risk appetite with equities generally stronger. The USD index is 0.3% higher. BBDXY last near 1204.25.
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LOOK AHEAD: US Macro: PPI (Wed) and CPI (Thu) Inflation
US PPI inflation is released on Wednesday before CPI inflation on Thursday, an unusual ordering that should see core PCE implications dialled in after the CPI release rather than the usual wide range waiting for specific PPI details. PPI will be watched more closely than usual this month after a far stronger than expected jump in last month’s July report fired a warning short over tariff-based cost pressures starting to feed through. That included a 0.6% M/M increase in our preferred core series of PPI ex food, energy & trade services, which strips out items such as the then booming portfolio management & investment advice category following the strength in equity markets. It's too early to gauge an accurate sense of analyst expectations for August.
CPI inflation on Thursday will then be the last major release ahead of the Sep 17 FOMC decision. Consensus looks for core CPI at 0.3% M/M after the 0.32% M/M in July, another monthly increase comfortably above a pace consistent with 2% inflation. August should in theory start to see the largest tariff impacts along with September and possibly October. Returning to July’s report, core goods inflation was softer than expected, at a still solid (by core goods standards) 0.2% M/M for a second month running but about half that of 0.4% expected by analysts. Instead, non-housing core services surprised higher. The latter was a “dangerous” development in the words of a usually dovish Chicago Fed’s Goolsbee (’25 voter), who speaking after Friday’s payrolls report is still undecided on a September cut whilst looking for August inflation data “to get more information”.
LOOK AHEAD: US Macro: Payrolls Preliminary Benchmark Revisions (Tue)
- The BLS on Tuesday will publish preliminary estimates of benchmark revisions, based off QCEW data for Q1.
- These will give an indication of the actual benchmark revisions on the Mar 2025 level of payrolls due with the Jan 2026 payrolls report released in early February.
- Bear in mind that the final benchmark estimate tends to nearly always be more negative than the preliminary figure – see historical values to the right.
- That doesn’t mean they can’t be large again after last year’s historically negative revision that lowered the level of payrolls by ~600k. Initial estimates we’ve seen look for another large downward revision, with the smallest being worth -550k but with wide ranges higher.
FED: Barclays Adds A Cut To 2025 Fed View
Barclays analysts now expect three Fed cuts in the remainder of the year, adding October to their pre-existing call for 25bp reductions in September and December. "Given the disappointing August employment report, we expect the FOMC to see more elevated downside risks to the employment side of the mandate."
- As for a 50bp September cut, "we think that the FOMC will view [that] as sending too strong a signal that labor market conditions are deteriorating. Indeed, we think that participants such as Powell understand that the slower pace of payroll employment reflects at least, in part, slower labor supply, which does not translate into increased labor market slack."
- For 2026 they continue to expect 25bp cuts in March and June to 3.00-3.25%, but "we do not think the FOMC will be able to cut rates more than twice next year, as we think that activity will show some slight acceleration, with the economy adapting to the new tariff environment and fiscal policy providing some support, and the unemployment rate will revert down amid limited increase in labor supply."
