USD weaker as US yields slip ahead of CPI – Scotiabank

The USD is trading defensively, notes Shaun Osborne, chief FX strategist at Scotiabank.

The USD is generally trading lower

“US yields continue to retreat, with 2Y yields falling to a two-year low today as US equity futures trade in the red. Losses in US yields – and the USD – rose in overnight trade around the US presidential debate which VP Harris appears to have won. Markets may also be somewhat on top of this morning’s US inflation data. US CPI data for August is expected to show some further moderation in core prices, but stalled progress on core measures.”

“Headline CPI is forecast to rise by 0.2% M/M and 2.5% over the year (down from 2.9% in July – note that Scotland is slightly higher than consensus at 2, 6%). Core prices are also forecast to rise 0.2% this month, but remain at 3.2% for the year. A modest upside surprise is unlikely to move markets significantly, with the Fed’s focus clearly on the labor market. The price action suggests markets may be concerned about the risk of weaker data, which would likely price markets back to some risk of a more aggressive Fed rate cut next week.

“JPY outperformed in the session, boosted by lower US yields and comments from BoJ board member Nakagawa, who noted that the central bank will continue to adjust policy if the economy develops in line with forecasts. Lower US yields and tighter US/Japan spreads generally support a firmer JPY, with the exchange rate now showing a stronger – and more typical – correlation to (10Y) spreads than earlier this year. Spot appears headed for a test of major support just below 140. More broadly, a lower close for DXY today will tip short-term technical risks to renewed softness.”