Big In Japan

JPY strength is likely to extend as hawkish BOJ repricing contrasts with an expected dovish repricing of the US dollar.

• The dollar weakened mainly against JPY and CHF, while Brent crude approached $100 a barrel; BBH expects USD to stabilize near term except against JPY.
• Markets reduced the probability of a September 16 Fed hike from 72% to 60% after John Williams cited a slow decline in inflation, while BBH expects no hike because wage growth remains consistent with the Fed’s 2% inflation target.
• US labor signals were mixed: ADP private payrolls rose by only 38,000 in August versus 47,000 expected and 46,000 in July, while the correlation between ADP and NFP changes has been just 0.26 since 2010 and nearly zero year to date.
• JPY broke below USD/JPY’s 200-day moving average at 158.46 toward the post-intervention low near 155.00; swaps briefly priced a 40% probability of a 50-basis-point BOJ hike on September 18 before reversing to 0%.
• Swiss CPI accelerated to 0.8% year over year in August from 0.4% in July, above the 0.5% consensus and the SNB’s 0.6% forecast, while Malaysia and Canada delivered hawkish holds at 2.75% and 2.25%, respectively.

Takeaway: Investors should favor JPY over USD in the near term if the Fed avoids a hike and the BOJ delivers a forceful move, while remaining cautious on CHF because Swiss rates can stay at 0.00% despite the inflation surprise and on CAD because markets have priced excessive tightening.