Welcome back to Market Movers, the opening bell.
We've seen volatility across global FX markets this week, with the U.S. currency losing ground against the majors, while the dollar index rose to begin the week, but it lost that strength yesterday.
And after the jobs report this morning, we are looking at the dollar index pairing gains and trading just above the 99 level.
Meanwhile, the Japanese yen had its best two-day stretch since the U.S.
Treasury Department intervened to strengthen the currency.
We also saw the Canadian dollar climb against the U.S. dollar as Canada's central bank kept rates unchanged.
Well, joining me to provide some more background on what's happening across the FX market is Karl Schamotta, Chief Market Strategist for Corpay.
Karl, good morning.
Thank you so much for joining us.
It has been quite the weekend.
We got that jobs report out this morning, but there are a lot expectations when it comes to global central banks.
So first and foremost, what is your reaction to this morning's NFP as well as unemployment?
And what do you think it means for the U.S. currency?
Yeah, so I think the clear takeaway from this morning's number is that the Fed can now focus on inflation in its next decision.
There's no evidence of softness in U.S. labor markets.
Job growth is holding up very well.
Unemployment is stable.
Earnings growth is rising.
All of that means that when we look at how Fed officials are going to weigh the risks you know, going into the September decision, they're really going to be able to focus on whether inflation is holding firm.
And so, you know, on one hand, this sort of raises the stakes ahead of next Friday's inflation report.
But on the other hand, it does mean that that, you know, all other things being equal, the likelihood of a rate hike in September is now much, much higher than it was earlier today.
Yeah, and indeed, Carl, we have been watching rate expectations for the Federal Reserve this weekend.
After hearing from Kevin Warsh, the Fetcher, as well as Fed Governor Chris Waller, we have seen those fluctuations in rate expectations.
But following this morning's jobs report, as you mentioned, we are looking at odds creeping higher with a rate hike expected. odds in terms of 60% as of now.
But given rate differentials and everything that's happened when it comes to geopolitics and global inflation and energy, how has all of this affected other central banks in the world, including the BOJ as well as the BOC, and what does it mean for their respective currencies?
Right.
So, you know, clearly the U.S. is preserving a very wide rate differential relative to all of its major counterparts.
And, you know, this morning's data has widened that again.
We did see a bit of a dip, of course, there yesterday when Governor Waller sounded somewhat dovish on the outlook ahead of the September meeting.
But, you know, that has largely been unwound at this point. and what this means is that other currencies relative to the dollar are on the defensive.
If you're a central banker in Japan, the euro area, even the UK, Canada, the course that had been set a couple of months ago, still looks intact.
Virtually every major central bank is expected to tighten very gradually over the next year.
But to some extent, the Fed is expected to outpace them.
And so what this is doing is gradually putting more support behind the US dollar and sort of eliminating that dip that had been anticipated by many observers going into the autumn months.
And Carl, we are here on a Friday and we're looking ahead here in the U.S. to a long holiday week and markets will be closed in the U.S. for Labor Day on Monday.
But as you mentioned, we have key inflation figures coming out from the U.S., including PPI and CPI at the end of the week.
So what is your outlook for how global FX markets will trade over the next week?
So we have a European Central Bank meeting that will also attract a lot of interest there next week.
So next Thursday, the ECB is expected to raise rates.
The question in markets is what are they going to say about the future?
What are they going to say about the path forward for inflation and for policy?
The expectation at this point is that they're going to sort of pull their punches and not articulate a clearly hawkish path ahead.
But there's considerable uncertainty and there is the possibility that we see the euro move fairly dramatically in the aftermath of that.
But no question, as you mentioned, the inflation report is the biggie.
The assumption that markets are sort of running on at this point is that we should see continued disinflationary pressure in the US economy, that we should see a headline that is not terribly alarming. and that that should give the Fed essentially 50-50 odds going into September's rate decision.
However, there's clear evidence of course that energy prices have remained high.
Today's non-farm payrolls report suggests that labor markets remain tight and so there's clearly inflation pressure building underneath the U.S. economy that could force that number up and so I would certainly be looking out for a major surprise coming out of that decision. and a major impact on the dollar in one direction or the other.
Yeah, and as you mentioned, we'll continue to monitor geopolitics, especially in the Middle East.
But tell us how investors are positioned in FX markets and how market expectations could potentially shift moving forward.
So we've seen a pullback in bullish bets on the US dollar.
Net long positioning among speculators has pulled back a little bit in the last couple of weeks.
We may see that continue in the data released later today.
But one thing that we would definitely caution here is that typically volatility increases as we go into the autumn months in financial markets, in the geopolitical environment, in the investing environment more generally.
And that tends to put a bit of a bid behind the dollar.
So we could see traders moving back to the safe havens, moving back to the dollar, moving back to the Swiss franc a little bit.
And to me, that means that we're looking at a little bit more of a supportive backdrop for the greenback over the coming weeks.
Yeah, and expanding on what you just said, for our viewers who might not be familiar with the debasement trade, can you explain it to us and tell us what you expect as we head into the rest of the autumn?
So this was a big trend, I guess, during two different episodes, one during the post-liberation day aftermath last year, and most recently when Scott Besson, Treasury Secretary, intervened in the long end of the yield curve.
Basically, what it entails is the idea that US policymakers are going to in the long run. out of the dollar into assets like cryptocurrencies and into other currencies more generally.
This did put some downward pressure on the dollar.
It is likely to continue to some extent.
We are in a situation in which the global environment is changing.
The world's appetite for funding U.S. government deficits, for funding the U.S. trade deficit, is beginning to erode along a number of different vectors.
And so it is becoming clear that in the long run, investors should be diversified, that they should be holding a range of currencies, not just the dollar.
However, in the near term, those rate differentials that we were talking about, they are a more powerful driver.
It is much more likely that in the short term, investors do continue to push cash into the US markets. and into the dollar more generally.
Well, Karl, we will have to leave it there for today, but thank you so much for joining us on this Friday morning and have a great weekend.
You as well.
Thank you.
