Anika Begay
By Wayne Cole
SYDNEY (Reuters) – The dollar remained in mid-market territory on Tuesday as investors waited to see how U.S. economic data would weigh on the possibility of outsized rate cuts, while a rally in Japanese shares helped stem the bleeding in yen carry trades.
The greenback rose 0.33% to 147.72 yen, after briefly touching a weekly high of 148.23 overnight before profit-taking took place.
Government sources told Reuters that Japan’s parliament plans to hold a special session on August 23 to discuss the central bank’s decision last month to raise interest rates.
The euro is trading at $1.0938, after gradually rising overnight and approaching resistance at $1.0944 and $1.0963.
The pound was last bought at $1.2778, while it remained firm at $103.13.
Producer price data, due later, will be a prelude to Wednesday’s main inflation report and could influence markets as it impacts the Federal Reserve’s core measure of personal consumption expenditure (PCE).
Both the headline and core producer price indexes (PPI) are forecast to rise by 0.2%.
More important will be the July consumer price index and retail sales report, which could have a significant impact on the Fed’s decision to ease monetary policy by 25 or 50 basis points in September.
Futures are currently evenly split on the broader move, after briefly pricing it in as an absolute certainty last week when stock markets were in free fall.
“A high CPI and high sell-off would be the most volatile scenario and would see the bond market quickly reprice with a 25 basis point cut,” JPMorgan analysts wrote in a note.
“A cold CPI and cold selling could ease some concerns about stagflation risks, but bring new recession worries to the market,” they added. “We could see the bond market react quickly to this print, with pricing in 50 bps or more of September cuts.”
The former outcome would likely increase Treasury yields and support the dollar, while the latter would have the opposite effect. Talk of recession, in particular, has tended to strengthen the yen and Swiss franc as safe havens.
The futures market clearly still sees recession as a risk, with 101 basis points of Fed easing estimated for Christmas and more than 120 basis points for next year.
This appears to be at odds with much of the economic data, with the influential Atlanta Fed GDPNow estimating annual growth of 2.9%.
“July annual CPI rates are forecast at 3.0% yoy and 3.2% yoy for core,” ANZ analysts noted. “Although the trend is moderating, inflation is too high for the Fed to justify pricing in the market 100 basis points of rate cuts between September and year-end.”
“To achieve this result, either a substantial deterioration in the data or a more intense disinflation process would be necessary.”
In other currencies, the dollar rose 0.17% to $0.6597, while the New Zealand dollar strengthened 0.3% to $0.6036.
Data on Tuesday showed that Australian wages rose at their slowest pace in a year in the June quarter, missing expectations, while more modest gains in the private sector suggested the labour market was easing.
