During Tuesday’s Asian trading session, there wasn’t much news, but a few important updates emerged. Mary Daly from the Federal Reserve Bank of San Francisco took a softer approach, suggesting that while a rate cut in September isn’t guaranteed, the trend seems to lean in that direction. The minutes from the Bank of Japan’s June meeting were released, but nothing surprising came out since updated forecasts were shared in July. China reported a stronger-than-expected July services PMI, showing increased demand and a rise in export orders.

Foreign Exchange Markets

In the foreign exchange markets, the US dollar was generally stronger, while the euro, Australian dollar, and New Zealand dollar weakened. The USD/JPY pair fluctuated but was mostly stable. Japan’s trade negotiator, Akazawa, is returning to the US, hinting at more trade talks. Asia-Pacific equity markets rose, boosted by Wall Street’s positive start to the week. Australia’s S&P/ASX 200 increased by 1%. Hong Kong’s Hang Seng had a slight bump of 0.02%, Japan’s Nikkei 225 gained 0.6%, and the Shanghai Composite rose by 0.4%. Watch for upcoming appearances by Trump on market television. Mary Daly’s recent softer comments from the Fed are changing expectations about a September rate cut. Fed funds futures are adjusting, with the CME FedWatch Tool now showing a 65% chance of a 25 basis point cut next month. This is an increase from the 50/50 odds just a week ago. Looking back at the Fed’s shifts in late 2023 may give us clues on how markets may respond as the easing cycle starts. Currently, equity markets are calm, with the VIX around 14, but such a policy change can lead to more volatility. Traders should be aware that this low volatility may not last as the market processes new information.

China’s Economic Signals

The strong private survey of China’s services sector points to positive domestic demand. However, this is at odds with last week’s official manufacturing PMI, which showed a slight contraction at 49.8. This uneven recovery might create trading opportunities in Chinese stocks, leaning towards consumer-focused companies instead of industrials. The current strength of the US dollar, especially against the Aussie and Kiwi, seems at odds with the Fed’s softer stance. This difference suggests that short-term positions may be driving currency markets rather than long-term fundamentals. With G7 currency volatility indices close to three-month lows, the market seems comfortable but could face a sudden correction. We should also consider Trump’s scheduled television appearance later today. His comments on trade or the economy often cause sudden market volatility. Buying inexpensive, short-term options, like weekly puts on the SPY or calls on the VIX, could be a smart way to protect against unexpected remarks. Create your live VT Markets account and start trading now.

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