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Carry trades look supported as USD stays range-bound

OCBC said Fed pricing shifted modestly after the US CPI, with September hike odds easing to 40% from 50%.

Reported · Written up by our desk · Major Pairs

OCBC strategists Sim Moh Siong and Christopher Wong said the US dollar is broadly range-bound, supported by in line US inflation and a modestly lower probability of a September Fed hike. In their view, that backdrop, combined with improving risk sentiment, should keep carry trades supported even as markets remain volatile.

They pointed to a relatively muted reaction after the inflation release, noting that US CPI data prompted only a small change in Fed pricing. Specifically, they said the probability of a September rate hike eased to 40% from 50% after the CPI report, and that most FOMC members are likely to treat the July CPI print as acceptable while watching August inflation closely.

The note also described short lived market moves, saying Treasury yields initially fell and the dollar weakened after the report, but the move reversed quickly. The yield curve twist steepened, and the broad USD finished the session little changed as risk assets continued to rally.

Still, OCBC flagged risks, including a potential rise in long end US yields tied to AI related financing needs and persistent US fiscal deficits. The team also cited ongoing volatility in oil markets and lingering FX intervention risks for JPY as factors that could disrupt carry trade conditions, according to FXStreet.

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