USD Short Cover Lifts – Scotiabank

A big week ahead for the markets. There’s plenty of US data to digest, but the week-end NFP update is the main focus for traders looking for guidance on how aggressive a Fed rate cut will be on September 18, notes Shaun Osborne, strategist head of FX at Scotiabank. .

Last week’s USD recovery builds ahead of NFP data

“The US dollar (USD) recovery that started last week extended a bit today after a quiet session on Monday while North America was away. USD short coverage is the main driver behind USD gains, although the risk context looks weak today amid broad losses in global equities. Expectations for a Fed rate cut have not changed – swaps still reflect the risk that the Fed will cut by more than 25 basis points at next week’s meeting and continue to price 100 basis point cuts for the rest of the year. “

“Short-term interest rates have moved back significantly in favor of the USD. The situation leaves the DXY looking moderately overvalued based on weighted 2Y interest rate differentials, according to my model. The charts suggest that there is a chance for the DXY’s rally to extend a bit further after last week’s firm (technically bullish) close. In the longer term, lower US interest rates and a slower pace of growth are likely to weigh on the USD.”

“In the session so far, USD is posting gains against most majors except JPY and MXN. The JPY is broadly outperforming after BoJ Governor Ueda delivered a report to the government reiterating that the central bank will further tighten interest rates if the economy develops as expected. Doubts about further BoJ tightening came amid volatile reaction to July’s rate hike.”