Our bias is for the DXY Index to test the floor of its three-week range between 97.6 and 98.8.

Markets may not pay as much attention to tariff headlines. On August 29, the US Court of Appeals for the Federal Circuit voted 7-4 to uphold a lower court ruling that US President Donald Trump did not have the authority to impose sweeping reciprocal tariffs under the International Emergency Economic Powers Act (IEEPA). However, the court allowed the tariffs to stay in effect until at least October 14, to allow the Trump administration time to appeal the decision to the Supreme Court.

Markets are about a fortnight away from the US Federal Reserve resuming its interest rate-cutting cycle. The widely expected 25 bps cut at the September 17 FOMC meeting will lower the Fed Funds Rate to 4.00-4.25%, but the bigger debate is how many cuts will follow in the next 12 months. With the Fed grappling with its dual mandate, upcoming data will be key in shaping expectations. The Fed’s Beige Book on September 3 and the US monthly jobs report on September 5 will help ascertain whether the Fed places greater weight on demand-side weakness in the labour market or on supply-side inflation pressures from tariffs. The case for deeper easing will strengthen if the August nonfarm payrolls remain below 100k for a fourth consecutive month and the unemployment rate climbs to 4.3%, its highest since October 2021.

US bond investors are also in a bind. While the prospect of more Fed cuts enhances the appeal of duration, Trump’s efforts to bend monetary policy to his will risk undermining the Fed’s independence. Trump’s push to fire Fed Governor Lisa Cook is targeted at gaining a majority in the seven-member Board of Governors, which is scheduled to approve the reappointment of 12 Fed Presidents, whose five-year terms are up for renewal in February 2026. US Treasury Secretary Scott Bessent will start interviewing candidates for Fed Chair Jerome Powell’s successor this month, possibly paving the way for Trump to nominate Powell’s replacement this fall, well before his term ends in May 2026.

Although the passage of the One Big Beautiful Bill mitigated debt default risks, the US government faces shutdown risks if the Republican and Democratic parties cannot find common ground to approve new spending for FY2026, which begins on October 1. A political brinksmanship toward a last-minute deal or a continuing resolution could compound the sense of dysfunction responsible for past losses of the US’s triple-A ratings. Hence, it was unlikely that the Fed’s flagging of potential funding market stress in late September was a coincidence. However, the Fed is better prepared to address such challenges with the standing repo facility set up after a similar funding stress in September 2019.

CNY and trade talks

The Trump administration is maintaining a conducive environment for a US-China trade deal. President Trump has consistently signalled interest in a meeting with Chinese President Xi Jinping to sign a trade deal, preferably by the end of the second trade truce in early November. His recent move to relax quotas on Chinese student visas while risking backlash from MAGA supporters could be framed as a deliberate goodwill gesture.

In August, the Shanghai Shenzhen CSI 300 Index surged 10.3%, driven by a rotation out of low-yielding Chinese bonds and markedly slower gains in US equities. China has been guiding the USD/CNY parity rate lower since the first trade truce in May, with the spot rate catching up in late August. Letting the CNY appreciate projects that China is not pursuing a weak currency policy to gain export advantage. Moreover, the MAGA economic blueprint considered currency adjustments as necessary to complement the tariffs in addressing trade imbalances.

IDR and protests in Indonesia

Last Friday’s IDR sell-off, triggered by widespread protests across Indonesia, may stabilize.

On August 31, President Prabowo Subianto directly addressed the people’s outrage over rising living costs and inequality by cancelling several controversial parliamentary benefits – most notably the hefty monthly housing allowance – and ordered a moratorium on overseas travel by MPs. He also sought accountability by ordering an investigation into the death of the motorbike driver allegedly killed by a police vehicle. He announced plans for the House leadership to engage in direct dialogue with community groups, student representatives, and civil society groups, to open formal channels for expressing public concerns.

His decision to cancel his planned visit to China on short notice sought to reassure the people that their grievances mattered most. Having the leaders of the coalition parties visibly present during his national address demonstrated political solidarity behind him, reducing opportunities for opponents to exploit the situation. His instructions to the police were two-pronged – to respect and allow peaceful protests as part of constitutional rights but crack down on those who were violent and engaged in looting or arson. By having religious, military, and political circles flanking him, Prabowo also sought to project unity, legitimacy, and authority as a national consensus for his concessions to calm public anger, while maintaining a tough line to restore stability and maintain control.

If successful, USD/IDR should retrace some of its rise from the year’s low of 16115 to 16500 in the second half of August. 


Quote of the Day
“Yesterday is not ours to recover, but tomorrow is ours to win or lose.”
    Lyndon B. Johnson

September 1 in history
The wreck of the Titanic was discovered by an American-French expedition in 1985.