A week of numerous Central Bank rate decisions kicks off with a stronger USD, weaker Treasury yields, and unchanged US equity futures. Wednesday’s dual Federal Reserve and Bank of Japan rate decisions are set to take center stage, followed by Thursday’s Bank of England equivalent. In addition, a series of US employment statistics will be released over the course of the week highlighted by Friday’s Non-Farm Payrolls report.

Mid-summer liquidity and de-risking ahead of the aforementioned central bank events seems to be the driver behind the unusual correlation breakdown of the USD with other risk assets this morning. While it isn’t a major unwind, seeing the dollar net strengthen while other asset classes move in more logical directions, given the expected aggregate central bank dovishness, is worth noting.

With respect to the Fed, as no cut is expected this week, all eyes or on how the statement will acknowledge improvements in price pressures in tandem with some signs of employment slowdown and how they both pertain to a cut in September, which is now fully priced in...again. In fact, since the start of this month the market is now expecting two full rate cuts by year end and has 70% odds for a 3rd cut. However, much of the “Fedspeak” leading up to the quiet period ahead Wednesday’s meeting has been cautious and balanced as the inflation and jobs data mentioned above has been positive but far from groundbreaking.

In the interest of market stability, the Fed may need to be more balanced than usual given the next meeting is 1.5 months away. As such, Jerome Powell’s speech in August at The Jackson Hole Economics Symposium will be the next major Fed event risk.

Additional thematic highlights as well as this week’s event calendar:

• USD/JPY is now 5% lower from the highs seen at the beginning of this month as speculation that Wednesday’s Bank of Japan rate decision will provide enough hawkishness to keep all the Yen sellers at bay. The market is expecting either a cut in bond-buying or a rate hike, with some even expecting both. This has led to a major unwind in many carry trades such as that of MXN/JPY and BRL/JPY
• According to data from political betting sites, Vice President Harris’ odds of winning the presidential election have been steadily increasing over the last several days, putting some “Trump-trades” at risk (higher Treasury yields and stronger dollar amongst others)
• Donald Trump’s crypto-friendly speech over the weekend complemented his recent comments on the need for a weaker USD in order to help US manufacturers, an idea that current Treasury Secretary Yellen openly disagrees with

Event Calendar:

• Monday: ---
• Tuesday: US JOLTS Job Openings; Eurozone GDP; Mexico GDP; Brazil FGV Inflation; Microsoft quarterly earnings
• Wednesday: US Federal Reserve rate decision & ADP Employment Change; Canada GDP; Eurozone CPI; Brazil SELIC rate decision; Meta quarterly earnings
• Thursday: US Weekly Initial Jobless Claims; United Kingdom BoE rate decision; Eurozone Unemployment & ECB Economic Bulletin; Apple & Amazon quarterly earnings
• Friday: US Non-Farm Payrolls 

EUR/USD is 0.3% lower on the day and 0.55% lower versus this time last week as the pair hovers near its 200-day moving average to the downside. While GDP and CPI in the common currency will be released this week, all attention remains to the Fed and its effect on the USD this week. While realized volatility in the pair has shrunk given the summer holiday season that same quiet can lead to exaggerated market moves on low liquidity levels as well, particularly near popular sources of resistance and in this case support via the 200-day moving average.

USD/CAD is slightly higher on the day and 1% higher versus this time last week, touching a 2024 year high this morning. While Canadian GDP is to be released this week, the market has focused on the rate differential between the two trading partners. While the US & Canada of course don’t move in perfect synchronicity with one another, the BoC has already cut two times while the Fed is looking to wait until September. Some are growing concerned about the possibility of a 3-cut differential and while that is currently rather unlikely, this theme has put pressure on the loonie over the course of the last week, more so than peers.

GBP/USD is essentially unchanged on the day and -0.5% versus this time last week as the market waits for the dual Fed & BoE decisions this week. The consensus is for the first cut of the cycle for the Bank of England although there are a number of analysts that remain in the “unchanged” camp. The lack of strong consensus implies potential price volatility to come. The pair has drifted 1.5% lower from the highs seen in the middle of July but is still 1.85% above the lows seen at the start of the month.

USD/MXN is 1% higher on the day and 3.35% higher versus this time last week, one of the worst performers amongst its peers. Two primary themes have emerged regarding peso weakness as of late:

1. A potential Trump victory would create a “round 2” of confrontation given the renewed issues at the border
2. More recently, the reversed weakness of the Japanese Yen has made a popular carry trade (sell JPY, buy MXN) rather crowded and less profitable than in the past Unusually, the Bank of Japan meeting on Wednesday may have just as much effect on the peso as the US Fed decision.

USD/BRL is flat on the day but 1.1% higher versus this time last week, largely due to one of the same themes as in USD/MXN, the strength of the JPY (described above). Recent JPY strength has unwound many popular carry trades, BRL/JPY included. The high domestic rates in Brazil have been an attractive place to lend while borrowing in JPY which has effectively maintained a 0 interest rate policy while the rest of the developed world hiked rates to counter runaway inflation. Now that there is risk that the Bank of Japan raises rates this week the trade has unwound very fast causing a week BRL across multiple pairs, not just the JPY. The Brazilian real has one of the largest sensitivities to event risk this week as the Fed, Bank of Japan, and the Brazilian Central Bank all update their rate policies this week.