DXY dips below 99 on yen carry trade unwind
The dollar fell for a second session, pushing DXY below 99 as USDJPY dropped on hawkish BoJ commentary and carry trade unwinding. Markets now focus on US payrolls and Fed rate expectations.
USD
The dollar fell for a second consecutive session yesterday, with the DXY index slipping below 99.0. The move owed more to the yen than to US developments after USDJPY collapsed towards 155 on hawkish BoJ commentary, triggering what to us looks like a carry trade unwind – intervention concerns appear unfounded for now. Domestically, Governor Waller added to the downside pressure, hinting that Fed rates would be left on hold this month. That has taken some heat out of hike pricing, with implied odds of a September move now a coin flip. Looking ahead, today's payrolls report is the week's decisive event. Consensus looks for a +55k August print after July's -23k, with unemployment steady at 4.1% and earnings growth easing to 3.1%. Admittedly, a firm report could rekindle September hike bets and put a floor under the dollar. That said, we look for a below-consensus set of readings, continuing to think the Fed leaves rates unchanged this year, even as the Hormuz closure keeps energy-led inflation risks alive.
EUR
The euro spent yesterday as a passenger, riding broad dollar weakness back above 1.16 to four-day highs with little domestic news as the ECB sits in its pre-meeting quiet period. We continue to expect the ECB to hike 25bps to 2.50% at next week's meeting, but the path beyond September is far less certain given the stagflationary nature of the energy shock, and with oil holding above $93 per barrel, that tension is unlikely to resolve soon. Today's domestic calendar of German factory orders and eurozone retail sales should play second fiddle to US payrolls, which will set the dollar leg of the pair. In our view, euro rallies built purely on dollar weakness remain vulnerable to fading without improved eurozone data or a durable de-escalation in the Gulf.
GBP
Sterling recovered to trade in the mid-1.35s against the dollar yesterday, but the bounce was almost entirely a dollar move. The domestic backdrop remains less than constructive, with fiscal risks top of mind. As we have argued since the summer, changing the PM does nothing to solve the UK's fiscal challenges, and we retain our bias towards sterling downside until the Budget delivers some clarity. Politics aside, today's calendar is light, with the BoE's Decision Maker Panel survey the only domestic release of note, albeit worth a glance for inflation expectations given elevated energy prices. More likely, though, direction into the weekend should come from US payrolls, with a soft print likely offering cable a further squeeze higher.
CAD
The loonie has had a constructive week. Wednesday's Bank of Canada decision saw rates held at 2.25% for a seventh consecutive meeting, but the accompanying guidance flagged hawkish risks from tariff- and oil-driven inflation, with headline CPI already at 3.0% YoY. USDCAD broke below 1.39 on the decision and extended toward 1.38 yesterday, albeit led by a softer buck. Today brings the week's real test: Canadian jobs land alongside US payrolls at 13:30 BST. After July's blowout +75.1k gain, Canadian hiring is expected to slow sharply, and with the Bank still stressing labour market slack, we think the bar for a hike remains some distance away despite a lower threshold set earlier this week. Given markets still price a meaningful chance of a Fed hike against a BoC on hold, rate differentials leave USDCAD risks skewed to the upside today, but beyond that, Canada's counter-tariffs beginning on the 8th pose a headwind.