It is realistic a Fed rate cut in July? The market doesn’t seem to be fully convinced

Oil Prices

Crude prices continue to consolidate near this week's highs helped by the absence of new negative economic news; the four weeks run in inventory drops, the continuing tension in the Persian Gulf region and the reported confrontation between Iranian vessels and a UK Royal Navy frigate.

Around 1Mbd of GoM oil production is shuttered as Tropical Storm Barry passes through and which may hit Category 1 hurricane status continue to keep a bid under markets. 

The temporary loss of production is not fundamental to the supply/demand balance, but it does foreshadow at a minimum another week of inventory drops.

Today will see the IEA publish its July OMR, completing the publishing cycle for the three leading agencies – but so far with their demand forecasts getting pushed lower, there has been little change in the market view although the aggressively bullish edge has dulled somewhat.


Gold is now the primary litmus test for the market Fed sentiment which has been stuck in a range most of the day with rallies getting sold as the market doesn’t seem to be fully convinced that a 50bp rate cut from the Fed in July is realistic, given the overall robust data. Market pricing is currently for 27bp of cuts, slightly off the high of 31bp following Fed Chair Powell's testimony on Wednesday


China June trade balance $50.98 bn surpluses vs $44.65 bn consensus, after $41.66 bn in May. June imports -7.3% y/y vs -4.5% consensus, after -8.5% in May. June exports -1.3% vs -2.0% consensus, after +1.1% in May

There was a worsening in both China's exports and imports in June, with the former dropping by  1.3%  less than consensus thanks to some front-loading of goods that are not on any tariff lists due to the fear of a full-on trade war, and the latter by 7.3% y/y.

The stronger-than-expected trade balance was mainly driven by the soft growth in imports, which adds further evidence to a softening in Chinese trade.

Spot USDCNH has raced higher with swaps moving lower in the standard market reaction function to a worse number than expected. Suggesting yet again a more aggressive policy move from the Pboc is just a matter of time after the next Fed interest rate cut in July

Bank of Thailand

The BoT is making best efforts to temper the appreciation of the THB after announcing measure to limit the outstanding balance of non-resident baht account, and non-resident baht account for securities to THB200 million from THB300 million. USDTHB is higher, and FX swaps are lower as banks need to clear holdings above THB200 million, i.e. they need to s/b THB (b/s USD).

So, on anticipation of THB outflows due to this tighter regulation, the USDTHB has moved higher against the grain of the general USD flow in Asia today.

Indonesia Rupiah

USDIDR gapped lower on the comments from Indonesian President Jokowi on plans to ease curbs on FDI and corporate tax cuts. USDIDR has moved down to 14085 from 14135.


The US CPI proved not to be the disaster print for the USD many had expected, but it's challenging to see, other than a run of extremely positive US economic data, what will shift the markets short term bearish view on the US dollar. And supporting that narrative is the EURUSD sitting at 1.1255-60 even as super-dovish speculation builds ahead of the July 25 ECB meeting, selling short the EURUSD remains a challenge in this environment.

But the market doesn’t seem to be fully convinced that a 50bp rate cut from the Fed in July is realistic, given the overall robust data. Market pricing is currently for 27bp of cuts, slightly off the high of 31bp following Fed Chair Powell's testimony on Wednesday, which could limit USD weakness into the weekend as trader book profits.

But for the markets “inflationistas” you get to do it all again when tonight’s US PPI is release.

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