Forex follows new leaders
|- AUD confidently leads the currency race.
- JPY is getting help from capital repatriation.
The US Dollar has stalled amid anticipation of the important January labour market report. Non-farm payrolls are expected to add 69K, while the unemployment rate is set to remain at 4.4%. According to Dallas Fed President Lorie K. Logan, if hiring stabilises and inflation continues to slow, the current Fed rate level is appropriate for achieving the dual mandate. However, derivatives are anticipating two rate cuts this year, which is putting pressure on the US dollar.
The greenback was hit by retail sales, which failed to grow in December, missing forecasts of a +0.4% increase. Americans usually spend a lot at the end of the year, and their restraint exacerbates fears of a cooling labour market and raises the chances of a federal funds rate cut. The futures market gives a 42% chance for lower rates in April and 77% in June.
The US dollar's downbeat mood was exploited by its Australian counterpart. The AUDUSD reached 0.71 for the first time in three years on hawkish comments from RBA Deputy Governor Andrew Houser, saying that inflation is too high. The Reserve Bank raised its key rate by 0.25 p.p. to 3.85% earlier this month. Westpac cannot rule out a repeat of this move in March. As a result, the Aussie is confidently leading the race among the 30 most liquid currencies on Forex.
The Yen is attempting to compete with it in February. USD/JPY is falling steadily after the parliamentary elections. The Liberal Democratic Party's spectacular victory was initially perceived by investors as a path to fiscal profligacy by the government. However, markets now believe that Sanae Takaichi will be a fiscally responsible prime minister. If so, the repatriation of capital to Japan will lead to a strengthening of the yen. According to Nomura, USD/JPY could catch up with the bond yield differential and fall to 150.
Gold continues to seek equilibrium and is trying to return to its old drivers after the rollercoaster ride at the turn of January and February. If gold is not helped by geopolitical factors, perhaps monetary policy will lend a helping hand? The increased likelihood of three, rather than two, Fed rate cuts in 2026 could be a tailwind for the precious metal.
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