The media reported last night that Trump was seeking to remove Powell as Fed Chair soon, which triggered a swift decline in the USD and US stocks. The DXY index fell sharply from near 99 to below 98, and only staged a partial recovery after Trump denied that he is planning to fire Powell. The market’s negative reaction, and an unprecedented string of appearances and statements by US bank CEOs emphasizing the independence of the Federal Reserve, have likely put a stop to Trump from taking further action, even as he expresses dissatisfaction over Powell. This Trump-driven tempest follows a string of USD gains since the start of July, and Trump’s unpredictable attitude to the sanctity of central bank independence could keep a check on the USD’s advance now.
USD/JPY dipped from 149 towards 147 amid speculation over Powell’s fate, but the JPY is still broadly weaker ahead of Japan’s Upper House elections scheduled 20 July. Support for the ruling LDP has dipped amid rising costs of living, and the opposition is campaigning to lower the consumption tax, which could lead to a deterioration in the country’s fiscal position if enacted. Concerns over a poor electoral showing for the LDP, higher fiscal pressures, and lesser political space for trade negotiations with the US, have all acted to pressure the JPY and JGBs. Japan’s 20Y yield has surged over 20bps since the start of July, while the JPY has also been the worst performer across G10 and Asia on a month-to-date basis. But there could be a relief rally in the JPY next week if LDP successfully achieves its modest goal of keeping a majority of seats. Meanwhile, Japanese exports for June released today came in lower than expected, falling -0.5% y/y led by a 11.4% decline in exports to the US.
Australia’s June employment data today will be closely watched after the RBA surprised markets by keeping rates on hold last week. Continued resilience in job creation and an unchanged unemployment rate could buoy AUD/USD towards 0.66, as it would affirm the RBA’s cautious stance on rate cuts.
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