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. Crude Oil stays in the USD80s, and a constructive risk backdrop supports carry trades. However, they warn that higher long-term US yields driven by fiscal and financing pressures remain a key risk.

Fed path, yields and carry trade risks

"The USD was mixed overnight despite lower US Treasury yields, as softer-than-expected July PPI reinforced expectations that the Fed will remain on hold in September."

"Markets now price around a 35% probability of a rate hike next month, down from about 55% before last week's labour market report."

"However, the risk of further tightening remains if upcoming inflation and employment data show limited progress on disinflation."

"A broadly range-bound USD and a constructive risk backdrop should continue to support carry trades, despite ongoing oil market volatility and persistent FX intervention risks for JPY."

"The main threat to this favourable environment is a further rise in long-term US yields, driven by strong AI-related investment demand, persistent fiscal deficits, and continued resilience in US economic growth."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)