How Will the USD Perform During August After a Huge Drop on NFP

The recent market activities have been a rollercoaster, highlighting just how unpredictable financial markets can be. After a sharp drop, Japanese equity indices bounced back impressively with a 9-10% increase, which has brought some relief to investors worldwide. This rebound has boosted global investor confidence, influencing the performance of the foreign exchange (FX) market.

Yen and Swiss Franc Movements

With the improved risk sentiment, low-yielding currencies like the yen and Swiss franc, which had previously gained strength, have weakened. The USD/JPY pair, for instance, climbed back above 146.00 after falling to a low of 141.70. In response to these fluctuations, Japanese officials from the Ministry of Finance, the Bank of Japan (BoJ), and the Financial Services Agency met to discuss the situation. They remain cautious but optimistic about their economic recovery outlook and are keeping a close watch on FX movements.

Japan's latest cash earnings report for June showed better-than-expected wage growth, with the BoJ’s preferred measure jumping to 5.4% from 2.6% in May. This increase was largely due to “special cash earnings,” likely from base salary hikes after shunning to wage negotiations. This data supports the BoJ’s recent rate hike decision and suggests more hikes could be on the horizon, despite some market concerns. However, volatility in the equity market and a stronger yen could temper these expectations.

US Economic Data and Yield Movements

In the United States, yields on both Japanese Government Bonds (JGBs) and US Treasuries have risen, reflecting a cautious improvement in global investor sentiment. The 10-year JGB yield went above 0.90%, while the 10-year US Treasury yield surpassed 3.80%. This rise in US yields was influenced by the ISM services survey for July, which showed modest improvements in business confidence, new orders, and employment.

The latest ISM services data has prompted market participants to reassess their expectations for Federal Reserve rate cuts. Currently, about 43 basis points (bps) of cuts are anticipated by September, with around 200 bps expected over the next year. San Francisco Fed President Daly highlighted the need for policy adjustments in the coming quarters, aiming to manage a slowing labour market without triggering a downturn. Future rate decisions will heavily depend on incoming economic data.

The outlook for the US dollar in August 2024 is shaped by a complex mix of global market volatility, economic indicators, and central bank policies. While the improved risk sentiment and positive economic data offer some hope, caution is still warranted due to ongoing market uncertainties and the potential for further policy adjustments. Investors should stay vigilant and closely monitor these developments to navigate the changing financial landscape.

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