FOREX: Dollar Enters Bearish Consolidation Phase
The US dollar is taking a bit of a hiatus this morning, with just a hint of softness, while the modest risk-off vibe in global equities seems to be skipping the FX market altogether. It’s like the dollar decided to hit the snooze button—no big moves here. The consensus on the street is that with 100bps of Fed cuts already baked into the cake and a terminal rate of 3.00% on the menu, the dollar’s not exactly poised for a dramatic fall. But let’s not get ahead of ourselves—there’s also no need for the greenback to make a heroic comeback.
Right now, we're treating this week's dollar action as a bit of a cooling-off period—a "bearish consolidation," if you want to sound fancy—after that sharp 5% drop since July. Think of it as the dollar catching its breath after running a marathon, waiting for the next big plot twist to shake things up.
One factor that is helping keep the US dollar under downward pressure is front-end yields. The 2-year UST note yield dropped modestly further yesterday in light of the equity market declines and hit the lowest level since April last year. Following Fed Chair Powell’s key speech in Jackson Hole on Friday, Fed President Bostic spoke yesterday and, while hinting that he could be prepared to vote for a cut in September, also stated that he would like to see further data as he wants to avoid the risk of cutting too soon and then having to raise rates again and if he needs to he will err on the side of waiting. The comment underlines the importance of next week’s jobs report.
The depreciation of the US dollar has had a noticeable impact on Japan's investment appetite for foreign assets. Last week, Japanese investors snapped up ¥899 billion worth of foreign equities, and over the past four weeks, they've bought ¥2,217 billion—the highest total since January 2023. But the real showstopper was in the bond market, where they purchased ¥1,543 billion worth of foreign bonds last week alone. Over a four-week period, their bond purchases totalled a record-breaking ¥5,613 billion, the largest in the history of the Ministry of Finance's weekly cross-border flow data, which dates back to 2001.
This surge in foreign securities purchases is largely driven by the sharp decline in USD/JPY, a renewed appetite for risk, and a global inflation environment that remains relatively benign. What's particularly intriguing is that despite these hefty outflows, USD/JPY hasn't staged a significant comeback. This points to the likelihood that banks and funds holding long US dollar positions were the primary buyers, not fully expecting the dramatic move lower in USD/JPY, while FX traders continued to aggressively sell the pair. It's a captivating tug-of-war in the markets, with the dollar staying on the defensive as Japanese investors go on a shopping spree abroad..
