We revised our currency forecasts after the FOMC meeting. In line with the Fed’s higher rate projections, our chief economist now sees the Fed Funds Rate rising to 4.5% this year before peaking and pausing at 5% next year. Earlier on 5 September, after the hawkish Jackson Hole Symposium, he forecasted the peak and pause at 4% in December. 
Hence, we see the USD topping out in 4Q22 instead of 3Q22. In YTD terms, DXY appreciated 18.3% last week, near the mightiest surges of 27.1% and 20.4% in August 1981 and November 1982, respectively. However, DXY corrected after it peaked for the year, leaving full-year gains lower at 15.8% and 12.1% in 1981 and 1982, correspondingly.
Meanwhile, brace for another week of USD strength and volatility. DXY appreciated 3% to 113.20 last week, its strongest close since May 2002. Fed officials are speaking from Monday to Friday. They will justify why the Fed Funds Rate needs to rise to 4.4% instead of 3.4% this year, the revised projections at last week’s FOMC meeting. Hence, the Fed can deliver a fourth 75 bps hike in November. Like CPI a fortnight ago, Friday’s PCE core inflation should rise by 0.5% MoM (consensus) in August from 4.6% in July.
However, the higher the DXY climbs, the greater the risk of a sharp correction. On 27 September, US recession fears may show up in US consumer confidence, especially if the present situation index falls sharply. DXY is expensive; its 14-day RSI closed at 77.5. With the Fed Funds Rate slightly restrictive at 3.25%, above its estimated 2-3% range, some Fed officials could also start talking about slowing the pace of hikes to 50 bps in December.
EUR depreciated 3.3% to 0.9687 last week, its weakest close since August 2022. EUR is oversold as per its 14-day RSI at 28.8. Many European Central Bank (ECB) officials speak from Monday to Friday. The highlights are ECB President Christine Lagarde on Monday and Wednesday and ECB Chief Economist Philip Lane on Thursday. On 30 September, brace for a surge in the CPI inflation estimate to 9.7% YoY (consensus) in September from 9.1% in August, and core inflation to 4.7% from 4.3%. Expect Lane to have a hard time convincing his colleagues to slow down the pace of hikes.
GBP is within striking distance of its lifetime low of 1.0520 in February 1985. Last week, GBP depreciated 4.9% to 1.0859, its weakest close since March 1985. GBP is under tremendous pressure as per its ultra-low 14-day RSI reading at 16.7. First, the Bank of England’s second 50 bps hike to 2.25% fell short of the Fed’s third 75 bps hike to 3.25% despite the greater inflation pressure in the UK. Second, the markets dumped GBP and propelled 2Y Gilt yield to almost 4% on Chancellor Kwasi Kwarteng’s mini-budget. The National Institute of Economic and Social Research (NIESR) estimated that the Truss government’s borrowing-to-spend plan would widen the budget deficit to 8% of GDP this financial year. US President Joe Biden criticized the plan to boost growth as “trickle down” economics that never worked. Others criticized the tax cuts for adding to inflation. The Telegraph newspaper reported that Tory MPs would vote against the tax cuts if the GBP breaks parity against the greenback.
Don’t expect Japan’s first intervention since 1998 to stop the JPY from depreciating on monetary policy divergences. Last Thursday, USD/JPY pushed above 145 to almost 146 on the Bank of Japan’s pledge to maintain its ultra-loose monetary policy, less than a day after the Fed forecasted a higher peak in US rates. The intervention sent USD/JPY down for less than five hours. USD/JPY recovered during the New York session to end the week at 143.31, still eyeing 1998’s high of 147.66. The US Treasury Department and the Swiss National Bank confirmed that they had not participated in the intervention. When Japan last intervened, from December 1997 to June 1998, USD/JPY kept rising on Japan’s deflation during the Asian crisis. It took financial stress from the collapse of Long-Term Capital Management to trigger US rate cuts to send USD/JPY down. Similarly, it was the hard landing in the US economy that lowered USD/JPY in 1980 and late 1983.
Quote of the day
“A new world order is being born and…the moment of delivery is actually the most dangerous.”
Singapore Minister for Foreign Affairs Dr Vivian Balakrishnan
26 September in history
In 1950, United Nations troops recaptured Seoul from North Korean forces.
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