US Dollar: Carry trades supported as Fed seen on hold – OCBC
OCBC’s Sim Moh Siong and Christopher Wong note that softer United States (US) Producer Price Index (PPI) and lower US Treasury yields have led markets to scale back expectations of a September Federal Reserve (Fed) hike, limiting US Dollar (USD) upside.
US Dollar traders are focusing on carry trades as the Federal Reserve appears likely to delay a September rate hike, according to OCBC's Sim Moh Siong and Christopher Wong. Weaker Producer Price Index and lower Treasury yields have reduced expectations of a September hike, tempering the upside potential for USD. The mixed performance of USD overnight, despite lower yields, is attributed to softer-than-anticipated July PPI, which has reinforced the belief that the Fed will stay on hold in September.
The probability of a rate hike next month has dropped to 35%, down from 55% prior to the labor market report, but the risk of further tightening persists if future inflation and employment data reveal slow progress in disinflation. Carry trades are still expected to benefit from a relatively stable USD and a constructive risk environment, although oil market volatility and potential FX intervention in JPY could pose challenges.
The most significant threat to this favorable scenario is a rise in long-term US yields, driven by AI-related investments, fiscal deficits, and sustained US economic growth.
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