Global FX: Payrolls a setback to USD; still constructive on carry post-JPY intervention

**Patrick Locke** (0:03)
Hello, and welcome to this week's At Any Rate podcast. My name is Pat Locke. I'm the Global FX Strategy team, joined by my colleagues, Antonin Delair, James Nelligan out of London today. Thanks guys for joining.
Look, so we've just had US payrolls. It wasn't a particularly good number, dollars on the back foot. But to just frame that, if you rewind a month or so, there's been a lot of debate, I guess, on our team about the better contours of US data versus some of the more underwhelming parts. I think I've leaned a little bit more into the underwhelming side. So last month's NFP, missed consensus, some negative revisions. Obviously, CPI was very low below expectations, PCE the same, and now you've had another seminal NFP print coming in pretty markedly weak. Again, we recognize that there has been some decent data in between. I know James and I have been talking about that as a manufacturing data, and claims certainly stand out.
But from our perspective, I think today's NFP is a fairly material setback to the tactical dollar upside view. I mean, just breaking down what we actually saw. Obviously, the headline contracted, you can peg a decent amount of that on government. So looking through that noise a little bit, private payrolls, 30K, ostensibly not bad, also not great. And I still think generally below expectations. But more broadly, I just think the whole print screened to me weak on both a demand and a supply outlook. Because yes, unemployment rate did fall. But in the context of lower participation rate, when you have weaker labor supply and softest labor demand, that's not a very good signal, I think, in terms of overall growth activity and cyclicality for dollar supports. And so for that reason, that's obviously, to me not surprising that the dollars come off, even despite what I think is very interesting, pretty limited changes to September FOMC pricing. Maybe that is a little bit of a nod to having to get through a couple more inflation prints between now and then. So I guess a pretty decent backdrop of global growth, the carry trade still generally pretty well entrenched. US cyclical is okay, not obviously weak, just not hot in a way that should motivate obviously a major repricing in the US real yield space, the way we saw from April through the middle of July, stands to reason I think that the dollar can just be a little bit more rangy here. So our conviction on a range break higher in the dollar, I think is a little bit more constrained here. Otherwise, the other things I didn't mention in terms about the dollar setback were last week's FOMC, obviously, and of course, MOF intervention. Still dealing with the fallout from the intervention episode, at least, obviously, over the weekend.
We received confirmation that the US. Treasury was involved. There's been more discussion about trying to deploy alternative tools in support of Japan, like the FEMA Rebo facility. We've discussed that in various parts of our research over the last few days. I think what's interesting, though, is like, obviously, Japan has exceeded basically its intervention thresholds or sizes compared to 2024 by a pretty sizable margin. That's starting to, I think, stop in players like the Treasury. It's starting to generate more discussions about GPIF being a little bit more active. On the back of that, we actually have upgraded our BOJ hiking cycle. We're now looking for 3 next year at a slightly higher cadence. The market's still obviously attuned to potential offsets here for the yen. But for the time being, I think dollar yen is consolidated quite nicely here, really limiting the follow-through below 155 on Monday.
I think that's ultimately consistent with the strategy that we continue to put forth. I would just note that Junya, who was on this call last week, has not changed his 164-year-end target because I think at the end of the day, we still come back to this idea that intervention doesn't ultimately correct the more fundamental issues facing the yen from the domestic economy itself. Until you see more obvious policy pivot, the trend is ultimately we think for a weaker yen and not stronger one. Obviously, going to continue to keep an eye on any potential additional slugs of intervention. But for the time being, we're stuck on 157 handle even after the soft NFP.
Maybe that's a good segue, Antonin, to bring you into the conversation. I think it's been obviously pretty interesting that the carry trade has proven pretty resilient despite joint intervention this time around. I think a lot of people have kind of like horror story, nightmare kind of memories from 2024, when the Darien ultimately collapsed all the way to 140 There was more obvious kind of spillover impact, the cross-asset space via equities. That was also on the back of us kind of a surprise BOJ hike at the end of July as well. So I'm interested to see kind of like how and why you think the carry trades been more resilient and where do we go from here?