Marc to Market

Bessent Doubles Down, Dollar Slumps but Rates Little Changed

noreply@blogger.com (Marc Chandler) — Fri, 21 Aug 2026 06:52:36 -0400

The market is pushing against the US recent initiatives. Japanese investors themselves have continued to buy foreign assets in size in the first two weeks after the intervention. The Ministry of Finance data showed Japanese investors bought around $36.5 bln of foreign assets in the first two weeks of August. Treasury Secretary Bessent expressed puzzlement over yesterday’s 2% rally in October WTI, though its was the 10th increase in the past 11 sessions as the market does not accept US claims that it controls the Strait of Hormuz or that Iran has been defeated. After initially reacting by surprise to Bessent’s announcement that he was going to at least double the repurchases of US bonds, the market seemed unimpressed. Buybacks of $32 bln quarterly figure, twice the current pace, would have much lasting impact in $31.5 trillion market, with average daily turnover estimated to be around $1.0-$1.2 trillion. The 10-year yield returned to the 4.70% area where it was before Wednesday’s announcement.

Still, late yesterday Bessent indicated the administration will announce a new fiscal initiative to address the higher yields. This appears to have fueled dollar losses today. It does not appear to include plans to reduce the deficit, which may be around 6% of GDP this year. The US 2-10-year yield curve is twice as steep as it was before Kevin Warsh chaired his first FOMC meeting in mid-June. And now, market participants are now assessing the administration’s new overtures to North Korea, when the sister of Kim Jong-un indicated she was “unaware” of any communication with Washington. President Trump said the Korean dictator and responded to his outreach. The scaled-back military exercises with South Korea may add more pressure on Seoul for trade concessions and antagonize public opinion there more than thaw the relationship with North Korea. North Korea reportedly fired a “barrage” of short-range ballistic missiles late yesterday, the third weapons “test” this month.

Prices

G10

• The euro peaked near $1.1710 yesterday, slightly ahead of the North American open. It was sold to around $1.1665 before stabilizing. It has returned to yesterday’s highs, helped by a firm preliminary August PMI and US Treasury Secretary Bessent’s suggested a new fiscal initiative will be announced shortly to address the high US borrowing costs. The $1.17 area, as we have noted, corresponds to the (50%) retracement of the euro’s decline from the January high (~$1.2080). The next retracement (61.8%) is a little below $1.18.
• The drop in US yields saw the greenback fall to almost JPY158, which corresponds to the (38.2%) retracement of the post-intervention dollar bounce. The dollar recovered to a little above JPY159.15 yesterday in North America. A firm national CPI reading, in line with the Tokyo report a few weeks ago, a six-month high in the composite August PMI, and the Bessent’s hint pushed the dollar back to around JPY158.35 today, where the 200-day moving average is found. A break of JPY158 could spur a move to JPY157.50 initially.
• Sterling reached a six-month high yesterday, near $1.3660. It consolidated in North America and held above $1.3620. Follow-through buying today lifted sterling to $1.3675. The PMI was firm, but retail sales were soft and sterling appeared caught up in US dollar weakness. The next nearby technical target is $1.3700-10.
• The US dollar was initially sold almost CAD1.3755, its lowest level against the Canadian dollar in three months. The greenback stabilized in the North American session and held below previous support (CAD1.38). Today’s broad greenback decline took it to about CAD1.3745. Chart support is in the CAD1.3700-15 area.
• The Australian dollar made a marginal new high yesterday, almost $0.7135, its best level since June 5. It pulled back but bids emerged in North America ahead of $0.7100. It has come back bid today, despite the softer composite PMI. It reached $0.7165 today. It has approached a band of resistance seen in the $0.7170-$0.7200 area.

• The Mexican peso consolidated yesterday within the range set Wednesday when it rose to its best level since mid-2024 election run-up. The dollar held above MXN16.9425 but was unable to overcome MXN17.00. The greenback has been sold slightly below MXN16.89 today, as dollar-carry trades come back into favor. Yesterday, the dollar rose by about 1.1% against the Colombian peso, its best showing since in two weeks. The greenback was capped slightly above BRL5.20 yesterday as it also traded within Wednesday’s range. Look for yesterday’s gains to be retraced.
• The dollar recorded its three-and-a-half year low against the offshore yuan in Europe yesterday, near CNH6.72. During the consolidation in the North American session, the dollar was unable to rise above CNH6.7275. Although the PBOC set the dollar’s reference rate slightly higher today, for the first time in three sessions, the dollar has continued to fall against the offshore yuan. Today’s fix was at CNY6.7817 (CNY6.7808 yesterday and CNY6.7878 a week ago). The dollar was sold to CNH6.7180 in early European turnover.
• The dollar slipped ever so slightly against the Indian rupee today (-0.1%) but it was the first back-to-back decline since the start of the month. Reports suggest the central bank has continued to intervene to support the rupee, which fell a little more than 0.25% this week, settling at INR95.7050.

Other Markets

• Yesterday’s US equity losses were shrugged off in Asia and Europe today. Most of the large bourses in the Asia Pacific region rose, though Australia was a notable exception (~-0.25%) MSCI’s regional index appears to have posted its first weekly loss in five weeks. Europe’s Stoxx 60its losing is trying to snap a seven-day decline. The last time it fell for eight consecutive sessions was Nov-Dec 2016. US index futures point to a strong open. Nasdaq futures are up around 0.7% and S&P 500 futures are up about 0.35%.
• Benchmark 10-year yields rose the Asia Pacific region by 4-5 bp, dragged higher by the backing up of US rates yesterday. European yields are slightly lower today, while the 10-year US Treasury yield is off almost one basis point to a hair below 4.70%. It is off about 2.5 bp this week, while European yields are mostly 3-4 bp higher on the week. The 10-year Gilt yield is virtually flat. The 3.5 bp decline in the 10-year JGB yield this week is the best among the high-income countries.
• Gold recovered from the initial test yesterday on $4445. It reached the session high in North America ($4541). It has taken another leg higher today and briefly traded above $4600, its best level since mid-May. It has now retraced a little more than (38.2%) of the loss from the record high recorded in late January (~$5595). Settlement above $4575 would be constructive and the next retracement (50%) is near $4770. Silver rose to almost $70 today, its highest level since June 18. Its (38.2%) retracement target of this year’s loss is still some distance away (a little above $80).
• October WTI rose to almost $87.70 early in the North American session, its highest level since July 23, when it reached slightly above $88. It fell back around $85.70 where it found new bids. It is consolidating with a firm bias between about $85.80 and $87.50. After a 5.6% rally last week, the contract is up a little more than 7% this week.

Data

• The preliminary US August PMI is expected to slip a little, especially the services and composite measures. Recall that the composite surged to 54.5 in July from 51.9 in June to reach its best level since last October. It averaged 51.7 in both Q1 and Q2 26.
• Canada’s retail sales are expected to have risen by 0.4% in June after a strong 1.0% rise in May. That is StatCan’s flash estimate and the median in Bloomberg’ survey.
• Mexico also reports June retail sales. They may have stabilized after falling by 0.6% in May. Mexican retail sales rose an average of 0.1% in the first five months of the year compared with an average monthly gain of 0.4% in Jan-May 2025.
• The eurozone’s preliminary PMI ticked up in August, with the composite to 52.1 from 52.0, a nine-month high. Ironically, Germany and France’s composites slipped. Manufacturing rose in both. The ECB’s inflation survey slipped to 2.9% from 3% for the one-year outlook and 2.7% from 2.8% for the three-year outlook. Negotiated wage settlements were a little lower at 2.44% from a revised 2.56% in Q1.
• The UK ends a busy data week with a flurry of reports. The takeaway is that shoppers pulled back in July, and retail sales (reported on a volume not price basis) fell 0.5% after rising 0.7% in June (1.0% initially). The preliminary August PMI was firm, with the composite rising to 52.5 from 52.2. While the services PMI jumped to 52.8 from 52.1, the manufacturing PMI eased to 51.5 from 51.9. Separately, the government unexpectedly reported a GBP1.8 bln budget deficit in July. The Office for Budget Responsibility had projected a balanced budget.
• Australia’s preliminary August PMI fell to 52.5 from 53.2. The manufacturing PMI was unchanged at 52.0, while the services PMI eased to 52.9 from 53.6. When everything is said and done, the economy has held up after the central bank delivered three hikes earlier this year.
• As the Tokyo CPI hinted, Japan’s July CPI rose to 1.9% from 1.6%. The core rate, which the central bank ostensibly targets, rose to 1.8% from 1.6%. It has not been above the 2% target this year. Separately, Japan’s flash August PMI slipped. The composite now stands at 53.4 (vs 52.7 in July). The swaps market has about an 82% chance, which is virtually flat on the week but up from around 22% before the intervention at the end of last month.

Disclaimer

To Support the US Treasury Market, Bessent Sent the Greenback Reeling

noreply@blogger.com (Marc Chandler) — Thu, 20 Aug 2026 06:45:05 -0400

The US Treasury announcement early in North America yesterday that it would at least double the size of liquidity support buyback operations for longer-dated nominal coupon securities. The current maximum size is $16 bln a quarter. The stepped-up purchases will take effect on September 9. Treasury will provide more information about future buyback sizes at the next quarterly refunding, announcement scheduled for November 4, 2026. The announcement changed the tone of the capital markets. We suspect the timing and signal effect is more potent than the actual size relative to the daily turnover in the US Treasury market. It drove down long-term US yields, fueled a recovery in equities, and sent the greenback reeling.

The US 10- and 30-year yields are a couple of basis points firmer today, but the US dollar is softer against most currencies today. While Asia Pacific markets were pulled higher today by yesterday’s action, European markets are seeing little follow-through, and the Stoxx 600 is struggling to sustain upticks with a six-day drop in tow. Meanwhile, October WTI has advanced more than 2.5%, and is extending its rally for the fifth consecutive session and near $86.60 is at its highest level in a month.

Prices

G10

• What many saw as yield curve control or another US Treasury attempt to limit the increase in long-term rates, helped the euro gain the most since the end of March. At the end of the North American session, it was up about 0.90%, with new highs late, near $1.1680. Follow-through buying today lifted the euro above $1.17 for the first time since mid-May. The $1.17 area is the halfway mark of this year’s range. The next retracement (61.8%) is a little below $1.18, which also corresponds to the May highs.

• Our long-running argument linking the dollar-yen exchange rate to changes in the US 10-year yield was driven home yesterday. The JGB 10-year yield dropped five basis points as did the US 10-year Treasury. The dollar fell from around JPY159 before the US Treasury announcement to almost JPY158, a seven-day low. The low also corresponded to the (38.2%) retracement of the greenback’s recovery from the intervention-inspired low on August 3 (~JPY155.25). It is holding today and options for $1.3 bln expire there today. The US dollar recovered to almost JPY158.75, where sellers emerged. The low in the European morning was around JPY158.20.

• On the back of the dollar’s broad slump, sterling surged to $1.3630, its best level since May 11. It surpassed the (61.8%) retracement of the decline since the year’s high was recorded in late January near $1.3870. It has approached May’s highs (~$1.3650-60) today, reaching almost $1.3650 today, where options for about GBP360 mln expire.

• The three-day extension of the US tariff threat gave the Canadian dollar a bid before the US Treasury announcement. The greenback fell from around CAD1.3880 before the announcement to almost CAD1.38. The (61.8%) retracement of the US dollar rally from the May 1 low (~CAD1.3550) is found slightly above CAD1.3815. The US dollar has taken another leg lower today and approached CAD1.3760, a new three-month low. Nearby support is seen near CAD1.3700.

• The Australian dollar was underperforming before the US Treasury announcement, and it recovered smartly to test Monday’s two-month high near $0.7130. It posted an ostensibly bullish outside up day by trading on both sides of Tuesday’s range settling above its high. It has hardly traded higher today, but the market does not appear done trying. The next technical target may be in the $0.7175-$0.7200 area.

• The broad dollar sell-off and the recovery US stocks saw the Mexican peso reach its best level since the run-up to the 2024 presidential election. The dollar fell to about MXN16.9425, which is holding today. The next notable chart area is around MXN16.88. The Colombian peso, though, continued to lead the regional currency advance, with a 1.3% gain. It reached its best level since October 2018. The government declared an economic emergency late yesterday, adding new spending pressures on the strained fiscal situation.

• The dollar’s weakness saw it slump against the Chinese yuan. It fell to CNH6.7280 yesterday and to almost CNH6.72 today. It is a new low since February 2023, when it recorded a low slightly below CNH6.7060. The PBOC seemed to have little choice but to set the dollar’s fix lower, and indeed it did. Today’s fix as a new multiyear low (CNY6.7808 vs CNY6.7854 yesterday).

• Hawkish minutes from the recent central bank meeting helped lift the Indian rupee initially but the underlying weakness remerged that the rupee pared its gains. Helped by the broad sell-off, the dollar initially gapped lower and fell to a three-day low against the rupee (~INR95.5675) but over the course of the session, the greenback climbed back, closed the gap and settled near session highs (~INR95.7175).

Other Markets

• The recovery in US equities yesterday set a positive tone for today’s activity. Asia Pacific markets snapped a two-day slide today, led by South Korea’s 5.9% rally. Nearly all the large bourses were higher. Singapore and New Zealand were the notable exceptions. However, Europe’s Stoxx 600 is struggling. It is threatening to extend its losing streak for the seventh consecutive session. US index futures are little changed but mostly slightly softer.

• Benchmark 10-year yields tumbled six basis points after the US Treasury’s buyback announcement. It helped fuel a recovery of European bonds. Asia Pacific yields played catch-up, while European yields are narrowly mixed, and the 10-year US Treasury yield is up a little less than three basis points to 4.67%.

• Gold liked the decline in US bond yields and dollar slump. It jumped almost $188 (4.3%) to a little above $4523, its best level in a little more than two months. It settled above the 200-day moving average is a little higher, around (~$4511 today) for the first time since June 4. Follow-through was limited to about $4527 today before profit-taking set in and pushed the yellow metal to almost $4478. Silver recovered from an eight-day low (~$62.45) to almost $66.85 and posted its highest settlement since June 17. The bullish outside day saw limited follow-through buying today. It reached about $67.30 before pulling back to around $66.50.

• October WTI posted an outside day. While it traded on both sides of Tuesday’s range and settlement (~$84.35) was well within its range. The contract reached almost $85.85 and almost $86.85 today. Last month’s high was slightly above $88. While the average retail price of gasoline is creeping up, it was higher earlier this month. The average retail price of diesel is at its highest level since late May, according to AAA.

Data

• The August Empire manufacturing survey was reported earlier this week, and it jumped to 20.6 (from 15.6), its best level since the end of 2021. Today, the US sees the Philadelphia Fed’s August business outlook. Economists surveyed by Bloomberg expect it to fall, with the median projection at 25.0, down from 41.4 in July. That was its best level since November 2021. July Leading Economic Indicators are due, as well. The flat reading in Q2 was the best quarterly reading since the end of 2021. Still, the market has tended to pay little attention as 1) it simply aggregates selected data already released and 2) it has done a poor job catching movement of the broader economy. Lastly, weekly initial jobless claims for last week will be reported. They had dropped for a couple of weeks late last month to below 200k but have risen for the past three weeks and stood at 209k in the previous week. Continuing claims bottomed in April (1.758 mln) but at nearly 1.78 mln at the end of July suggest hiring is keeping apace.

• Minutes from this month’s Mexico’s central bank meeting typically do not move the markets. Policy has been on hold since the second quarter point rate cut this year was delivered in May. The central bank is expected to be on hold for the next several months, but the swaps market’s bias is that the next move is a hike late this year or early next. We suspect if the strength of the peso persists, it will allow the central bank to stay on the sidelines.

• EMU’s construction spending fell 1.3% and the Mas’s 0.4% gain was cut in half. It is lower year-over-year (-0.7%) for the first time since March. Recall that the ECB estimates the trend growth, or the non-inflationary “speed limited” to be 1.2%-1.3%, which is what the aggregate economy grew last year. The ECB expects growth to slow to 0.8% this year before returning to trend next year.

• Sweden’s Riksbank delivered a hawkish hold. While maintaining the policy rate at 1.75%, the central bank continued to indicate a rate hike later this year may still be needed. However, the swap market continued to pare the chance of more than one hike, and this may have contributed to the krona’s under-performance today. It joins the yen as the only G10 currencies not to have traction against the US dollar today.

• Australia’s labor market remains resilient in the face of the three rates hikes the central bank has delivered. It created a monthly average of 27.2k jobs in Q2 after 26.5k jobs in Q1. It created an average of 10.1k jobs a month in H1 25. It gained 16.3 full-time jobs in July and June’s full-time jobs rose 48.9k rather than the 29.3k of the initial estimate. Still the unemployment rate rose from 4.1% at the end of last year to 4.5% in April before slipping to 4.4% in May and June. It rose back to 4.5% in July. The participation rate hovered between 66.7% and 66.8% this year until jumping to 67% in June. It stood at 66.9% in July.

• Japan’s July trade deficit of almost JPY635 bln was the largest since January. The July 2025 trade shortfall was a little more than JPY156 bln. Despite the extreme undervaluation of the yen on most fair value models, Japan’s ongoing trade deficit means that at least for some countries the linkages between currency valuation and trade are difficult to generalize and vary over time. The war in the Middle East has disrupted Japan’s energy supplies. Tokyo has responded by boosting the value of oil imports from the US dramatically. In value terms (volume and price), Japan’s July imports were a 27.8% above a year ago and exports were up about 23.2%.

• As widely anticipated, Chinese banks kept their one- and five-year loan prime rates steady at 3.0% and 3.5%, respectively. While most countries are wrestling with higher bond yields, China’s benchmark 10-year yield is off 16 bp this year to almost 1.66%, its lowest level since July 2025. The low Chinese rates has seen borrowers swap dollar debt for yuan and Panda bond issuance is strong.

Disclaimer

Three-Day Reprieve for Canada from US Tariffs

noreply@blogger.com (Marc Chandler) — Wed, 19 Aug 2026 06:53:32 -0400

The US dollar remains on the defensive. It is lower against the G10 currencies but the Australian dollar, which is nursing a small loss. By a narrow margin, the Japanese yen is leading pack, though the greenback has held above JPY159 in Europe. The Canadian dollar is firm and testing yesterday’s high after a last-minute postponement of the US tariffs for three days pending continued talks.

The rout in tech stocks rippled through most of the Asia Pacific bourses and Europe’s Stoxx 600 is extending its losing streak for a sixth consecutive session today. US index futures are trading softer. Oil prices are firmer as the UAE cut economic relations with Iran, and many see this as a new escalation. October WTI is rising for the fourth consecutive session and is higher for the ninth session of the past ten.

Prices

G10

• Summer doldrums hit the euro yesterday and confined it to about 20-tick range. Still, it approached but held above Monday’s low (~$1.1565), which appeared constructive, even though the momentum indicators are stretched. The euro turned bid in the Asia and follow-through buying lifted a little above $1.1610 in Europe. Options for 1.7 bln euros at $1.1600 expire today. Monday’s two-month high was closer to $1.1615 and the 200-day moving average is around $1.1630.

• The dollar reached almost JPY159.80 yesterday, its highest level against the yen since the intervention at the end of last month. The JPY160 level is taking on greater psychological significance. The greenback is trading heavier today and approached JPY159. Monday’s low was around JPY158.85, and before last weekend, it found bids near JPY158.60.

• Sterling recovered from the decline spurred by the soft UK jobs report. It retested the $1.3520 low in early North American turnover and recovered to $1.3550, stopping a few hundredths of a cent below the session high recorded in the Asia Pacific session. It is better bid today and tested the $1.3565 area. The two-month high set Monday was slightly above $1.3570. Above there, $1.3590 corresponds to the (61.8%) retracement of sterling’s losses since the year’s high was recorded in late January (~$1.3870).

• The US dollar gradually worked higher yesterday against the Canadian dollar as the brinkmanship of the trade negotiators warranted caution. The greenback, which had recorded two-month low on Monday (~CAD1.3845), reached CAD1.3910 yesterday. No breakthrough in the negotiations was announced during the North American session. The US two-year premium over Canada rose for first time in three sessions. A three-day delay in the tariffs was announced. The White House says a tentative deal was reached, while Canada’s Prime Minister Carney said that while important progress was made, more work needs to be done. Details are elusive. Still, the US dollar has returned toward yesterday’s low (~CAD1.3860). Monday’s low and the 200-day moving average are a little below CAD1.3850. And the (61.8%) retracement of the greenback’s rally from May 1 (~CAD1.3550) is slightly above CAD1.3815.

• The Australian dollar straddled the $0.7100 area in quiet turnover yesterday, well within Monday’s range. It was sold to almost $0.7065 today, a new low for the week. Monday’s high of almost $0.7130 overshot by a little the (61.8%) retracement objective of the losses from the May 6 four-year high (~$0.7280). A move above $0.7090-$0.7100 would improve the technical tone.

• The dollar settled above its five-day moving average against the Mexican peso yesterday for the first time since July 27(~MXN17.05 today). The risk-off mood, exemplified by the roughly 0.6% loss in the S&P 500 and twice that for the NASDAQ composite, arguably weighed on the peso. It is testing MXN17.03 in Europe. Yesterday’s low was slightly lower. A near-term base may have been forged a little below MXN16.98. Initial resistance may be near MXN17.09. The Colombian peso re-opened after Monday’s holiday and it was easily the strongest currency in the world, rising almost 1.3% against the US dollar, helped by stronger than expected growth in Q2 (1.3% quarter-over-quarter after 0.6% in Q1). President De La Espriella cited private sector estimates of the August 10 earthquake damage at about COP30 trillion (~$9.6 bln). It activated the first tranche of a World Bank disaster loan of $200 mln. International aid has been in excess of $1.3 bln to date.

• The greenback reached a three-day high against the offshore yuan yesterday, near CNH6.7480. It has not traded above CNH6.75 since August 7. The dollar has traded on both sides of yesterday’s range but is holding above Monday’s low near CNH6.7375. The PBOC set the dollar’s fix lower today in what appears to be an unusually aggressive fix 0.08% lower (CNY6.7854 vs. CNY6.7905 yesterday). It was the largest decline in a month. The roughly three-and-a-half-year low fix was on Monday at CNY6.7873. Yet inexplicably the Bloomberg survey showed an average forecast of CNY6.7432 today.

• The Indian rupee continues to trade heavily despite reports of continued central bank dollar sales. The greenback rose to INR95.7637 today, a new high for the month. A move above INR95.80 sets up a test on INR96.00.

Other Markets

• The slide in US equities weighed on Asia Pacific trading today. The regional markets but Hong Kong and New Zealand fell. Europe’s Stoxx 600 is extending its losing streak for the sixth consecutive session. The S&P and Nasdaq futures are slightly lower.

• Benchmark 10-year yields rose 2-6 bp in Asia and Europe (excluding China), while the US Treasury yield and Canada’s bond yield slipped by around two basis points. Asia Pacific yield fell today, led by a 5 bp decline in Japan’s benchmark. European yields are mostly 1-2 bp higher. The 10-year Treasury yield is practically flat at 4.70%. The US will sell $16 bln of 20-year bonds today.

• Gold posted an ostensibly bearish outside down day by trading on both sides of Monday’s range and settled below its low. It made a marginal new low today slightly below $4325 before rebounding in Europe to almost $4370. Silver took out Monday’s high by less than a cent yesterday and then was pressed through Monday’s low (~$64.55) to approach last Friday’s low (~$63.50). It has recovered after falling to $62.45 today. It is trading near $63.40 late in the European morning.

• October WTI briefly poked above $85 yesterday for the first time since July 24. It has been pushed to about $85.40 today amid news that the UAE is cutting all economic ties with Iran, claiming that Tehran fired ballistic missiles at it. A line drawn from the contract high in mid-May ($91.25) and the July high (~$88.05) comes in today near $86.85.

Data

• The US highlight today are the minutes from last month’s FOMC meeting. Recall that three officials dissented in favor of an immediate hike. The statement was terse, and the minutes are unlikely to be much better. Even before the task forces have completed their assignments, the new communication style is being implemented.

• Earlier this month, the eurozone reported that its seasonally adjusted trade balance swung back into surplus in June for the first time in four months. The current account surplus through May is running on average about 2 bln euros more a month than in the first five months of 2025. In June, it rose to 35.1 bln euros from 31.2 bln in June 2025. The eurozone’s current account surplus in 2025 was about 1.7% of GDP and the ECB expects it to slip to 1.3% this year, the same as the IMF.

• The UK’s headline CPI accelerated in July. The 0.3% rise followed 0.1% in June, and the year-over-year rate rose to 2.9% from 2.6%. Service inflation rose 3.4% year-over-year, slightly slower than June’s 3.6% pace. It is moving gradually in the right direction and the high for the year was in March at 4.5%. Core inflation was steady at 2.6%. The chances of a change in policy next month, according to the swaps market slipped after the report. The market still has a quarter-point hike fully discounted before the end of the year.

• Australia’s wage price index rose by 0.8% in Q2 for s 3.2% year-over-year rate. The Q1 pace of 3.3% was revised to 3.2%. It stood at 3.4% in Q4 25.

• With Japan’s disappointing Q2 GDP in hand, today’s core machinery orders had little impact. They recovered by 9.7% after falling 12.4% in May. Recall that the GDP figures showed the third quarterly decline (annualized) in private non-residential investment in the past four quarters. Today’s report may trim that estimate but it still was a drag.

Disclaimer

The Dollar is Mostly Firmer but in Narrow Ranges

noreply@blogger.com (Marc Chandler) — Tue, 18 Aug 2026 06:49:00 -0400

The US dollar is mostly firmer against the major currencies. The Australian and Canadian dollars are the exception, but their gains are minor. Still, the Canadian dollar’s resilience in the face of the US tariffs it faces first thing tomorrow is notable. While some progress has been reported, it seems too close to call. October WTI is at a new high for the month, a little over $85. Bond markets remain under pressure. And the sell-off in stocks is broadening and deepening today.

The US has what appears to be a busy data schedule, but most of the reports pose little more than headline risk. However, US data has more often than not surprised on the downside recently. Meanwhile, the market has pushed the dollar to its best level since last month’s intervention against the yen. It approached JPY159.80 today. The market may draw cautious as the JPY160 level is approached.

Prices

G10

• Follow-though buying after the rally in response to the unexpected decline in US retail sales reported before the weekend lifted the euro to almost $1.1615 yesterday. That corresponds with the (38.2%) retracement of euro’s decline from the year’s high in late January near $1.2080. It consolidated from early in Europe through the North American session and found support near previous resistance $1.1580. The 200-day moving average, which the euro has not closed above since mid-May is near $1.1630. It is trading quietly in about a 10-tick range on either side of $1.1575, where options for 1.34 bln euros expire today. The momentum indicators remain stretched, and the slow stochastics are beginning to show a bearish divergence by failing to confirm the highs of the last couple of sessions.

• The market has not given up testing the official resolve to put a floor under the yen. For more than a week now, the dollar has been settling near session highs, which concentrated in the JPY159.36-55 area. True to form, the greenback recorded a low near JPY158.85 in late Asia/early European turnover yesterday and recorded the session high (slightly above JPY159.50) in North America. The greenback made a new post-intervention high, slightly shy of JPY159.80 today. The market seems to suspect that the JPY160 level could be spur official action. Despite the disappointing Q2 GDP that saw consumption and private investment contract and core inflation holding below target this year, the swaps market has 20 bp of tightening discounted compared with around seven basis points before the late July intervention.

• Sterling reached a three-month high yesterday, near $1.3570. After the high was recorded it remained in a narrow range and held above about $1.3550. The (61.8%) retracement of the loss from the late January high (for the year) comes in around $1.3590. The disappointing jobs report today capped sterling around $1.3555 and took it to $1.3520. It stretched the intraday momentum indicators, and it has consolidated in the European morning below $1.3535.

• The US dollar nicked the 200-day moving average against the Canadian dollar yesterday (~CAD1.3950) and recovered to about CAD1.3975, where it stalled. The momentum indicators are stretched and US tariffs (50% on ~$20 bln of goods) will come into effect tomorrow unless a last-minute agreement is struck today. The greenback is trading between about CAD1.3860 and CAD1.3880. Options for almost $750 mln at CAD1.3875 expire today. Canada’s July CPI was a bit firmer than expected (3.0% vs. 2.8% in June) and the underlying core measures also ticked up. Still, the data did not change views: The Bank of Canada will stand pat when it meets on September 2. Separately, Canada reported another strong month of foreign demand for its stocks and bonds in June (~CAD40.8 bln). In the first six months, foreign investors bought C$157.8 bln of Canada’s financial assets compared with net sales of C$22.7 bln in H1 25.

• The Australian dollar recorded the session high yesterday in the European morning, near $0.7130. It pulled back around a quarter of a cent in North America. It approached resistance in the $0.7135-40 area and congestion extends toward $0.7200. It is trading quietly today between $0.7995 and $0.7115. The failure to break $0.7200 could help form a large technical topping pattern, reinforced by the stretched momentum indicators.

• The dollar recorded a marginal new low yesterday against the Mexican peso (~MXN16.9765) but spent the North American session consolidating mostly within the pre-weekend range. The greenback briefly spiked above MXN17.04. As was the case before the weekend, this seemed to bring in new USD sellers. The greenback was bid to almost MXN17.0720 today, a three-day high. Initial resistance is seen in the MXN17.08-MXN17.10 area. So far this month, the peso is the strongest of the Latam currencies. The Colombian peso was the region’s best performer last month, with an 8.3% gain. The earthquake has seen the COP consolidate. Yesterday, local markets were closed for a national holiday.

• For the tenth consecutive session, the US dollar settled with a CNH6.74 handle yesterday. On an intraday basis, it fell to a marginal new low against the offshore yuan since February 2023 (~CNH6.7375). The greenback enjoyed a slightly firmer tone today but is holding below CNH6.7480. PBOC set the dollar’s reference rate at CNY6.7905 (CNY6.7873 yesterday, a new low since February 2023.

• The dollar rose against the Indian rupee today. It gapped higher and rose to a new high for the month, near INR95.6860. It gapped above the 20-day moving average (~INR95.6365) and settled about 0.07% higher.

Other Markets

• US equities failed to sustain initial gains yesterday. Most of the large bourses in the Asia Pacific region fell today, with the notable exception of Hong Kong. The Nikkei was tagged for 2.5%. Taiwan and South Korea fell 1.2%-1.5%. Europe’s Stoxx 600 is off around 0.5%. If sustained it would be the fifth consecutive loss. US index futures are heavy, led by the Nasdaq futures 1.2% loss. S&P futures are off about 0.5%, and the Dow is virtually flat.

• Benchmark 10-year yields rose yesterday. The roughly two basis point increases in Germany and France were sufficient to record new highs for the year. European yields are mostly 3-4 bp lower today. The disappointing employment data may be helping limit the rise in the 10-yer Gilt yield to a couple of basis points. The 10-year US Treasury rose almost two basis points, as well, to 4.71%. The high for the year was recorded at the end of July, slightly below 4.75%. It is now a little above 4.73%. The US 30-year yield is now at almost 5.32%, a new high since 2007. Despite the solid five-year bond auction, the 10-year JGB crept up two basis points and is closing in on 3%.

• Gold recorded the session high yesterday a few cents below $4429 near midday in North America. It reached $4436 today before reversing lower. It found support near $4286 but is struggling to regain the upside momentum Silver rose nearly 2.5% yesterday and reached $66.55 on an intraday basis. Last week’s high was nearly $66.80. However, it is trading heavier today but holding above yesterday’s low, near $64.55.

• The US-Iran 60-day memorandum of understanding struck on June 17 ended yesterday. Its significance seems questionable given the action of both sides. October WTI reached a three-day high almost $84.00 in North America and filled the gap created by the lower opening on July 27. It is trading firmly today and reached almost $84.90.

Data

• The US reports several data points for July today, including import/export prices housing starts/permits, and industrial output. Import/export prices have ceased to capture the market’s imagination. It is widely recognized that tariffs have been paid mostly by US importers who have passed them to consumers. Still, the idea that tariffs have a one-off impact may be a bit naïve. First, the US continues to impose new tariffs. Second, surveys suggest businesses intend to pass more of the tariffs to consumers. July housing starts will be reported. Through June, US housing starts have increased slightly more than in H1 25, but it is a volatile series, with monthly swings of more 10% in three of the past four months. Meanwhile, industrial output is expected to have risen by 0.3% in July after a 0.1% increase in June. While manufacturing output increased an average of 0.3% a month in H1 26, slightly faster than in H1 25, the US has added about 24k manufacturing jobs in H1 26. What does all this mean for Q3 GDP? The median forecast in Bloomberg’s survey sees growth improving to 2.1% this quarter after 1.5% in Q2. The Atlanta Fed GDP tracker has growth twice as fast as the economists surveyed but the model will be updated after today’s reports.

• Canada reports July existing home sales and housing starts. New home sales in H1 26 slipped a little. Housing starts are off about 6% in H1 26. More important than these data points are the 50% tariffs that US is threatening on about $20 bln of imports from Canada. Among other things, the US is annoyed by the audacity of Canada to retaliate marginally for the US tariffs and the sensitivity to the Trump administrations references to Canada as the 51st state. In addition, there is a petition that seeks to expel the US ambassador to Canada who seems not to understand why that bothers Canadians. US State Department officials have reportedly met activists who are seeking Alberta independence several times. A recent survey by PEW Research found 35% of Canadian view the US as a reliable partner, down from 82% in 2022.

• Germany’s ZEW survey improved in August. Expectations rose for the fourth consecutive month (34.2 vs. 26.3) but remain below levels that prevailed before the Middle East war (59.6 in January. The current assessment is at -61.1, improving from -77.6 in July. It was at -81 at the end of last year and -72.7 in January.

• The UK’s labor market report was mixed. June earnings growth slowed sequentially but not as much as expected (4.1% vs. 4.4%--revised from 4.3%--average weekly earnings, and 2.8% vs. 2.9% private sector earnings, excluding bonuses on a three-months year-over-year basis). The ILO measure of unemployment was unchanged 4.9%. It had been expected to slip. Payrolls shrank by 11k and the loss of jobs fell more than initially reported in June (-13k vs-4k) and job vacancies fell to a new five-year low. Tomorrow, the UK is expected to report a 03% rise in July CPI, which given the base effect, translates into a 2.9% year-over-year pace (from 2.6%).

Disclaimer

Dollar's Losses Extended, but Stabilizing Ahead of the North American Session

noreply@blogger.com (Marc Chandler) — Mon, 17 Aug 2026 06:46:59 -0400

The US dollar continues to trade heavily after the series of softer than expected data since the loss of US jobs in July. The stabilization of price pressures and the decline in retail sales have seen the market downgrade the chances of a rate hike next month. At the end of July, the market was discounted a little more than a 70% chance of a hike and now it is about 30%. In the current environment, changes in the short-term US rates appear to be the key to the greenback’s broad performance. Yet, we note that technically, the dollar’s momentum indicators are oversold. Perhaps the price action is setting up for a “turn-around Tuesday”.

Japan and China reported disappointing data. Japanese private consumption was flat in Q2 and capex fell by 1.2% (-1.0% in Q1 26). The build of inventories and exports appeared to account for the growth in the world’s third largest economy. China’s July macro data were weaker than expected following the disappointing Q2 growth. Meanwhile, Canadian negotiators have about 36 hours to strike a deal with the US to avoid a 50% tariff on around $20 bln of goods shipped to the US.

Prices

G10

• The decline in US retail sales reported before the weekend followed softer inflation gauges and the unexpected loss of jobs in July. The euro reached $1.1585 ahead of the weekend. However, after closing firmly after the disappointing US jobs data there was no follow-through euro buying until the retail sales report. And further buying emerging in Asia today, lifting the euro to almost $1.1615 in early European turnover. The momentum indicators are stretched, and we suspect the euro may peak ahead of the $1.1630-50 area.

• Before the weekend, the dollar tested the mid-week low against the yen, near JPY158.60. It held and the dollar recovered and closed a little above JPY159.25. The Japanese demand for foreign assets in the first week after the intervention, the most in a couple of years. The dollar rose last week, its second weekly advance after the intervention in late July, and this took place despite the swap market doubling the odds of a BOJ rate hike next month (from ~40% at the end of July to a little more than 80% at the end of last week). After today’s disappointing Q2 GDP, the odds of the September hike slipped slightly, while the greenback has been confined ~JPY158.85=JPY159.40, inside last Friday’s range. Options for $2 bln expire at JPY159 today.

• Sterling pushed a little above $1.3560 ahead of the weekend, a three-month high and posted its highest close since May 11. It has advanced to $1.3570 today. Resistance near $1.3600 may be sufficient to cap sterling in the North American session. It is a big week for UK data, starting tomorrow with labor market update, CPI on Wednesday, government finances on Thursday, and retail sales on Friday.

• At the end of last week, after the disappointing US retail sales report, the Canadian dollar rose to its best level in two-and-a-half months. The greenback was sold to ~CAD1.3865. Earlier in the week, it had support near CAD1.39. The 200-day moving average is near CAD1.3850, which it has approached today, and the next retracement objective (to the rally from the May low ~CAD1.3550) is found near CAD1.38. Ahead of the weekend, the greenback settled below slightly below the lower Bollinger Band (~CAD1.3850 today), and the momentum indicators are stretched. US 50% tariffs on ~$20 bln of Canadian goods take effect first thing Wednesday and negotiators apparently have their worked cut, according to reports, if they are to be avoided.

• The Australian dollar reached almost $0.7100 before the weekend, a two-month high and posted its highest settlement since June 4. Follow-through buying lifted it to almost $0.7130 today. The next chart of note is around $0.7170, but the momentum indicators are stretched after the Aussie advanced for six of the past seven weeks.

• The Mexican peso’s rally, which saw it reached its best level since June 2024 ahead of the weekend may have stalled. The dollar reached MXN16.9775 but turned higher and settled slightly higher on the day. It made a marginal new low today near MXN16.9765. The first confirmation may be a push above the five-day moving average (~MXN17.04), which has not happened this month.

• For nine sessions coming into today, the dollar settled on the CNH6.74 handle. The one-month implied yuan volatility reached almost 1.6%, the lowest since 2015, when China adjusted its currency policy, devalued the yuan by almost 2% and ostensibly gave the market more sway. The dollar fell to marginal new low today, near CNH6.7375. The PBOC set the dollar’s reference rate at CNY6.7873 today, a new low since February 2 (CNY6.7878 before the weekend and CNY6.7894 at the end of July).

• The broad US dollar weakness did not carry over to the Indian rupee today. Despite reports of intervention, the dollar rose to INR95.62, a new high for the month. Unexpectedly, the central bank announced it would end the special facility to attract foreign currency deposits a month ahead of schedule. Last week, it seemed to indicate that the program, which reported drew ~$52.3 bln as of August 13, would not end prematurely.

Other Markets

• US equities finished last week on a soft note and the Nasdaq Composite’s modest loss offset the gain it enjoyed coming the pre-weekend session. The Dow Industrials fell 0.6% last week, its biggest loss in four weeks. S&P and Nasdaq futures are trading firmly. Asia Pacific equities were mixed. The Nikkei rose but the Topix fell. China, Hong Kong, Taiwan and South Korean markets advanced. Most of the other large ones fell. The MSCI regional index rose 2.6% last week, the fourth consecutive weekly rise. Europe’s Stoxx 600 is trying to snap a three-day decline. Last week, it fell for the first time in five weeks.

• Benchmark 10-year yields jumped before the weekend. They rose mostly 7-10 bp in Europe and the 10-year US Treasury yield rose more than five basis points to 4.70%. That said, the US benchmark yield eased a single basis point last week, while European and Japanese benchmark yields rose. The 30-year French yield reached the highest since 2008, and Germany’s 30-year bond reached the highest since 2011. The US 30-year yield reached 5.27% before the weekend, its highest level since 2007. Despite the disappointing Japanese GDP, 10-year yields jumped 5.5 bp today to almost 2.91%. European benchmark yields are narrowly mixed, and the 10-year US Treasury yield is slightly softer, a hair below 4.70%.

• The jump in yields did not prevent gold from recovering after initial pre-weekend loss that saw it approach $4311. It set new session highs in the North American morning slightly below $4400. It reached a little above $4416 today but has pulled back and slipped below $4400 in late European morning turnover. Silver recovered from a four-day low near $63.50 and set the session high around $65.70 before European trading ended. It found support near $64.70 in the North American afternoon. Silver rebounded today a little above $66.20. Last week’s high was closer to $66.80.

• October WTI traded firmer ahead of the weekend. It rose to almost $82. Recall that a five-day rally ended last Thursday, when the contract was set back by 2.1%. It recovered almost 1.2% before the weekend. It settled the week with a 5.55% gain after dropping nearly 5.35% the previous week. It is firm today, and new session highs (~$82.40) ahead of the US open. Last week’s high was near $83.35.

Data

• The US reports June portfolio flows (Treasury’s International Capital or TIC data) today. Since the US runs a large chronic current account deficit, we never bought into the “sell America” meme. Indeed, the TIC data showed a net inflow of $1.39 trillion in 2025, improving on the $1.22 trillion in 2024 and $840 bln in 2023. The issue, as we argue, is what assets are bought (more equity these days) and at what prices. The data is reported as the equity market closes and tends not to have much market impact.

• Canada’s July CPI will be released today. It is expected to have reversed the 0.4% decline reported for June. Given the base effect, the year-over-year rate may firm to 2.9% from 2.8%. Inflation in H1 26 rose at an annual pace of 4.8%, though a slower in Q2 than Q1. The central bank puts more emphasis on the underling core rate, which averaged 1.85% in June. The Bank of Canada meets on September 2, and the swaps market is discounting practically no chance of a change in policy, though it leans toward a hike before the end of the year (69%).

• Japan reported its first estimate of Q2 GDP today. While the 0.3% increase in output disappointed expected. The annualized pace slowed to 1.1% from 1.9%, and defied expectations for a 2.0% pace. Consumption was flat after the first quarter’s 0.3% increase was revised to 0.5%. Capex fell by 1.2% (+0.5% expected) and Q1’s contraction was revised to 1% from 0.7%. Final demand was even softer. Inventory accumulation contributed 0.3% (-0.1% in Q1) and net exports contributed 0.5% (0.3% in Q1).

• China’s data were poor. Retail sales year-over-year slowed to 0.6% from 1.0%. Industrial output slowed to 4.5% from 5.3%. Capex deepened its contraction, falling 6.7% (year-over-year, year-to-date) after -5.7% in June. Property investment fell 19.2% (year-to-date, year-over-year) from -18.0%. The collapse in residential property sales moderated to -13.2% from -13.7%.

Disclaimer

Week Ahead: Downward Data Surprise Stretch the US Dollar's Momentum Indicators

noreply@blogger.com (Marc Chandler) — Sat, 15 Aug 2026 07:05:00 -0400

The combination of a loss of US jobs in July and softer inflation gauges, and an unexpected decline in July retail sales saw the derivatives market downgrade the chances that the three hawkish dissents last month will manage to convince their colleagues to hike rates at next month's FOMC meeting. The Fed funds futures finished last week with a little less than eight basis points of tightening next month discounted, down from 18 bp at the end of July. Market expectations may not be impacted much by the upcoming US data that features July industrial output and preliminary August PMI. The CPI and PPI remove most of the guesswork from the July PCE deflators, which are due a few hours before Fed Chair Warsh speaks at Jackson Hole on August 26 and the year-over-year headline pace is expected to have slipped to about 3.5% on the headline (from 3.7%) with the core rate steady at 3.3%.

While there is little doubt that China's movement into high-valued added production, like autos, chips, and robotics are changing trade patterns and challenging existing producers, a more potent threat is from the US, which is threatening to impose 50% tariffs on around $20 bln of Canadian goods as of Wednesday, August 19. The US threatens more tariffs when its investigations, such as for chronic "excess capacity", which will ostensibly hit US allies, not only Beijing. The continued disruption stemming from the Middle East war, with Iran seemingly going on the offensive, which the International Energy Agency assessed was the large disruption "in the history of the global oil market" exacerbates stagflationary pressures, especially in Europe, which is also being hard hit by the powerful heatwave. Meanwhile, since the Tokyo-Washington intervention at the end of July, officials have been unusually quiet, and the market has sold the yen in the past two weeks. Japanese investors took advantage of the yen's intervention-inspired upticks to step-up their purchases of foreign bonds and stocks, the most in two-year, and which appears to have largely recycled the amount of yen that the US Treasury bought.

Drivers: The dollar continues to appear most sensitive to changes in short-term interest rates. The 30-day correlation of changes in the Dollar Index and the US two-year yield is near 0.60, its highest in nearly two months.

Data: After the July jobs reports and inflation gauges, the flurry of economic data in the coming week is somewhat less important. Housing starts and industrial production will feed into forecasts for Q3 GDP. Halfway through the quarter, and the median forecast in Bloomberg's survey is for 2.1% annualized growth. The Treasury's International Capital (TIC) report always draws interest. In the first five months of the year, foreign investors bought a net $483.3 bln of US stocks and bonds compared with $661.1 bln in the Jan-May 2025 period. Fed Chair Warsh is reducing the central bank's communication even before his taskforces have reached any conclusions. Look for the FOMC minutes, like in June, to be shorter and less revealing than previously was the case. It will be interesting to see 1) how close the three hawkish dissents were to winning over other FOMC members, and 2) if there was a discussion of reducing the number of FOMC meetings in a year as reported in the media.

Prices: This month, the Dollar Index has been bumping up against 100.00. It has not been above 100.10. After the unexpected decline in US July retail sales, the Dollar Index was sold to new lows for the week a little below 99.50. The low seen after the surprise loss of jobs in July was 99.40. Initial support is seen in the 99.20-30 area. A break could spur losses to 98.70, which DXY has not traded below since mid-May. Still, the momentum indicators have flatlined in oversold territory.

EMU

Drivers: The 30-day correlation of changes in the euro and the two-year US yield is near -0.60, the most extreme in about three weeks. The euro's 30-day correlation with changes in Germany's two-year yield is near -0.16. That is to say that a rising US rates are association with a weaker euro, which makes intuitive sense, but higher German two-year yield is also associated with a weaker euro. The correlation between the exchange rate and the two-year interest rate differential is an almost -0.52. It reached -0.60 in mid-July, the most robust in more than two decades.

Data: The week's highlight is the preliminary August PMI on August 21. Recall that in July the composite PMI reached a new high since last November at 52.0. The same day, the ECB releases its July survey of one- and three-year inflation expectations. Germany's August ZEW survey will be reported earlier in the week. In July, the assessment of the current situation remained somber at -77.6, a three-month high but still slightly weaker than the Q2 average. The expectations component has risen for three months through July to 26.3 compared with 45.8 at the end of last year and 58.3 on the eve of the Middle East war. The swaps market remains confident of an ECB rate hike in September (~85%).

Prices: The euro reached new highs for the week ahead of the weekend, $1.1585, slightly above the high seen at the end of the previous week after the unexpected loss of US jobs in July. A move above the $11615-30 area improves the technical outlook, but the momentum indicators are stretched, suggesting upside may be limited.

PRC

Drivers: The yuan is the strongest currency in Asia this year, rising about 3.65%. The yen is off about 1.5%. here is not a compelling reason to think that the changes in the yen impact the yuan. The broad direction of the dollar is more important. The 30-day correlation of changes in the Dollar Index and the offshore yuan is near 0.73, which is the most since late 2024.

Data: This is the week that China reports high-frequency real sectors data and new and used house prices. The data is August 17. Sequentially, retail sales look a little stronger, while industrial production, fixed asset investment, and property investment may have softened. Home prices continue to look weak. The banks set the loan prime rates on August 19 and will likely remain steady at 3.0% and 3.5% for the one-year and five-year rates, respectively.

Prices: This month, the dollar has held below CNH6.76 and above CNH6.74. With the broad dollar set back ahead of the weekend, the PBOC may struggle not to set the dollar's fix on Monday at a new low since February 2023. Still, we are cautious, seeing some signs that the officials may be seeking to moderate its appreciation, perhaps, ahead of the Trump-Xi meeting next month. The US has already announced new import restrictions and tariffs om China, while stepping up its push back against "transshipments", though the US Trade Representative have yet to give a precise definition (domestic content).

Japan

Drivers: The market continues to test the resolve of Japanese and US officials to put a floor under the yen. Contrary to conventional wisdom, the exchange rate is more sensitive to changes in US short-term yields than Japanese rates. The 100-day correlation of changes in the exchange rate and changes in the US two-year yield is near 0.65, near the highest since last November. The 100-day correlation of changes in the exchange rate and Japan’s two-year yield is de minimis around 0.02. The correlation has been mostly inverted this year but turned positive in late June.

Data: Japan will report its first official estimate of Q2 GDP on August 17. Growth is expected to have strengthened to 2.0% (annualized) after 1.8% in Q1 26, though consumer spending steady to weaker. On the other hand, capex appears to have recovered after it contracted by 0.7% in Q1. June industrial production, tertiary activity index, and core machine orders are due the next day. The July trade balance will be reported on August 20. There is a strong seasonal pattern for deterioration but note that the even stronger seasonal pattern of improvement was defied in June. Still, on a trend basis, Japan's trade imbalance is gradually improving. At the end of the week, the national July CPI is released. Investors have already been warned by the Tokyo CPI when it was released late last month of modest upward pressure on the national figures. Tokyo's headline measure rose to 2.0% from 1.7% and the core went to 1.9% from 1.6%. Comparable gains in the national CPI would put the headline and core near 1.9%. The preliminary August PMI is due shortly thereafter, but the markets tend not to react much to it. Still, recall that in July, the composite was 52.8. It finished last year at 51.1 and peaked in February at 53.9.

Prices: The dollar reached about JPY159.55 last week, its best level since the late July intervention. Officials have been remarkable silent. Many market participants sense that the JPY160 level is a possible trigger for officials and turned cautious as it was approached. Initial support is seen near previous resistance around JPY158.50, which it tested approached ahead of the weekend. It also corresponds with the (39.2%) retracement of the greenback's bounce from the intervention-inspired low near JPY156.70. The 200-day moving average is a little lower around JPY158.25. The momentum indicators look constructive, and Japanese investors responded to the yen's gains by aggressively buying foreign bonds and stocks.

Drivers: The rolling 30-day correlation of changes in the sterling and the euro is near 0.76. The year's low in late July was near 0.65. The and the high in mid-June was above 0.90, the highest since November 2023. As we have noted the exchange rate remains more sensitive to changes in the US two-year yield (30-day correlation is near -0.42) than changes in the UK two-year yield (~0), though note there has been an inversion since early April, meaning that an increase is short-term UK rates is not associated with a firmer pound.

Data: It is a big week for UK data. June jobs data on Tuesday kicks off the reports. While average weekly earnings (three-month year-over-year) ticked up to 4.3% in May from 4.2% at the end of last year, the measure of regular pay in the private sector has not risen since the end of 2024. It has fallen by 0.1% a month through May this year after falling a little more than twice as fast last year. The number of payrolled employees fell by about 38.5k in H1 26 after falling by 33k in H2 25. The following day, the July CPI is due. In H1 26, UK's headline CPI rose at an annualized pace of 3.6%, down from 4.8% in H1 25. In June, the headline and core rates rose by 2.6% year-over-year, though services inflation was sticky at 3.6%. At the end of the week, the UK reports July retail sales, the government's finances (July) and sees the preliminary August PMI. UK retail sales (volume) were strong in H1 26, rising by an average of 0.6% a month, and rose by an average of 1.1% in May and June. On one hand, the UK's budget deficit in the first three months of the fiscal year was GBP57.6 bln, which was about GBP3.7 bln less than in the first quarter of the previous fiscal year, it was GBP2.7 bln more than the Office for Budget Responsibility forecast. This leaves little flexibility for the new government. Lastly, the UK's composite PMI decline in June and July. It was 51.9 in July, which was still better than any monthly reading last year.

Prices: Ahead of the weekend, sterling rose slightly above $1.3560, its best level since mid-May. The (61.8%) retracement of the decline from the year's high in late January (~$1.3870) is near $1.3590. While there is scope for additional near-term gains, the momentum indicators are stretched, injecting a note of caution for sterling bulls.

Canada

Drivers: Changes in US dollar's exchange rate against the Canadian dollar over the past 30-sessions have a correlation with changes in the Dollar Index is near 0.65 (this year's range is ~0.40-0.85). More robust than this is the exchange rate's correlation with the two-year interest rate differential, which is near 0.82. Meanwhile, the exchange rates correlation with oil prices (WTI), which had been positive since mid-March (i.e., a rising US dollar was associated with rising oil prices), it has turned negative (inverse) since around mid-July is now around -0.28. The greatest inversion was seen in February about two weeks before the Middle East war began (-0.45).

Data: There are two highlights this week. The first is the July CPI on August 17 and the second is the June retail sales report at the end of week. Canada's headline inflation rose at an annualized rate of 4.8% in H1 26 compared with 3.6% in H1 25. The year-over-year rate was 2.8% in June, but the core (1.8%) and underlying measures (median and trimmed core) are emphasized by the central bank and below 2%. The median forecast in Bloomberg's survey is for a 0.4% increase in July, which would see the year-over-year rate edge up to 2.9% from 2.8%. The core rates are expected to be little changed. The swaps market sees practically no chance of a hike at the September 2 meeting and has about 14.5 bp of tightening priced in before the end of the year (~58% of a 25 bp hike is discounted). Canadian retail sales have risen by an average of 0.8% a month in the first five months of the year, a dramatic improved from an average of -0.4% a month in the same year ago period. StatCan made a preliminary estimate of a 0.4% increase in June. Note that on August 19, unless a deal is struck, the US threatened to impose a 50% tariff on around $20 bln of Canadian imports, and not exception was granted for good complying with the USMCA.

Prices: The US dollar was sold through CAD1.39 ahead of the weekend, even before the disappointing US retail sales were reported. It is the lowest level since June 3. It surpassed the (50%) retracement of the rally from the May 1 low (~CAD1.3550), found slightly above CAD1.3885. The 200-day moving average is near CAD1.3850 and the next retracement (61.8%) is close to CAD1.3800. There are a few reasons for caution: the momentum indicators are stretched. The greenback has slipped through the lower Bollinger Band five times in the last six sessions and decline in the US two-year premium has steadied around 120 bp, a drop of more than 20 bp in the past three weeks.

Australia

Drivers: The Australian dollar is sensitive to the US dollar's broad direction. The 30-day correlation of changes in the Aussie and the Dollar Index is near -0.68. The correlation between the exchange rate and changes in the US two-year yield is near -0.60, while the correlation of the changes in the exchange rate and Australia's two-year yield is about 0.24. The exchange rate's 30-day correlation with changes in gold has fallen from near 0.90 on June 9 to around 0.48 now. The low for the year was recorded in late March slightly below 0.30.

Data: Australia's Q2 wage price index is expected to have matched the 0.8% rise in Q1 26, but the base effect will allow the year-over-year pace to tick down to 3.2% from 3.3%. The following day, August 20, Australia's July employment report will be published. Australia's labor market improved in H1 26. The economy grew an average of almost 27k jobs a month compared with about 10k average in H1 25. Of those jobs, an average of 14.7k were full-time posts in H1 26 compared with an average of 6.4k in H1 25. The unemployment rate stood at 4.4% in June, up from 4.3% in June 2025, while the participation rate was steady at 67.0%. The preliminary August PMI will be released before the weekend. Recall that in July, the composite PMI was 53.2. It was the first back-to-back increase since July-August 2025. The composite PMI ended 2025 at 51.0, pointing to economic resilience in the face of three hikes already delivered this year.

Prices: The Australian dollar drew near $0.7100 before the weekend, its best level in a little more than two months. It is knocking on the upper Bollinger Band, and momentum indicators are stretched. Still, there may be enough juice for a marginal new high. The (61.8%) retracement of the Australian dollar's losses the early May high (~$0.7280) is found slightly below $0.7110.

Mexico

Drivers: Over the past 30 sessions, the USD-MXN exchange rate has been more sensitive to changes in US two-year yields (30-day correlation is ~0.59) and Mexico's two-year yield (0.50), which is to say that higher Mexican rates are associated with a stronger US dollar than with the Dollar Index (~0.41). Note that the peso is also sensitive to the broader risk environment. Using the S&P 500 as a proxy, the rolling 30-day correlation is near -0.62. Yet most of all, the peso is correlated with JP Morgan's Emerging Market Currency Index (~-0.75).

Data: Mexico reports June retail sales on August 21. Retail sales have been weak this year. Through May, they have risen by an average of 0.1% a month. In the first five months of last year, retail sales rose by an average of 0.4% a month. Although the economy appears to have recovered in Q2 after it contracted by 0.6% (quarter-over-quarter) in Q1, consumption and government spending likely slower. Gross fixed investment may have contracted but at slower pace. Still, it would be the seventh consecutive quarter of contraction. Net exports may have been the driver of the recovery.

Prices: The US dollar was sold ahead of the weekend to a little below MXN16.98. This is the first time the greenback traded below MXN17.00 since the run-up to the July 2024 Mexican presidential election. In the 20 sessions since July 17, the US dollar has fallen in all but three sessions against the peso. The momentum indicators are stretched. Previous support in the MXN17.08-MXN17.15 area may not act as resistance. Last week, Latam currencies accounted for four of the time five performing emerging market currencies. The 0.85% gain of the Taiwanese dollar led the complex, followed closely by the Colombian peso. The Mexican peso rose a little more than 0.7% and the Argentine peso by slightly less than 0.7%. The Peruvian sol rounded out the top five with about a 0.4% gain. On the other hand, the Brazilian real was the weakest of the emerging market currencies, losing about 3%.

Disclaimer

USD Trades Heavier and Look for North America to Follow Suit

noreply@blogger.com (Marc Chandler) — Fri, 14 Aug 2026 06:46:44 -0400

Tomorrow is the 55th anniversary of the end of Bretton Woods. R.I.P. It was an economic agreement, pegging the dollar to gold and the other currencies to the dollar, and establishing the World Bank, and the International Monetary Fund. Ultimately, however, it was political in nature. It was an exercise in the Golden Rule. He with the gold makes the rules. The US, the world’s only meaningful creditor in 1944 and the US fashioned the rules to suit it. The debtors were capably represented by none other than John Maynard Keynes. But outcome was not decided by who had the better economic argument but by the power relationship. And at the risk of over-simplifying, the fact that we are not at or close to a unipolar moment, a new Bretton Woods agreement seems highly unlikely.

The end of Bretton Woods and the initial attempts to resurrect it ushered an era of floating, which sometimes seems an official euphemism for volatile, exchange rates. This week has been relatively quiet in the foreign exchange market. The dollar is softer against the G10 currencies today, though it is mixed on the week. The yen is the weakest, losing almost 0.9% this week, followed by the Swiss franc’s nearly 0.7% loss. The strongest has been the Norwegian krone’s almost 0.5% gain, even though the central bank softened its outlook for tighter monetary policy, and the Canadian dollar, which has gained about 0.35%.

Prices

G10

• The euro recovered from a seven-day low in Europe yesterday, slightly above $1.1510 and reached $1.1545 in the North American morning. Follow-through buying today has lifted it to almost $1.1560, which is around where it settled last week. Options for 1.2 ln euros at $1.1550 expire today. Recall that after the disappointing US jobs data at the end of last week, the euro reached $1.1580. It was hardly challenged this week despite softer inflation gauges, and the reduced expectations for a Fed hike next month.

• The dollar initially was sold to session lows in early North American turnover yesterday against the yen. It held slightly above JPY159 and recovered to make new session highs, a little above JPY159.55 in the NY afternoon. This is the highest level since the intervention. The greenback is trading between about JPY159.05 and almost JPY159.55 today.

• Sterling recorded a new low for the week yesterday near $1.3475. It stabilized but still settled below the five-day moving average for the first time since the day before the loss of US jobs were reported last Friday. Sterling has come back better bid today and reached session high near $1.3530 in late European morning turnover. Recall on Wednesday, sterling was turned back from almost $1.3545, its best level since July 16.

• After holding support near CAD1.39 on Wednesday, the US dollar recovered to approach CAD1.3960 yesterday. It stalled in front of the week’s high, recorded Monday (~CAD1.3965 and met sellers who pushed it back slightly below CAD1.3930. The US dollar has been sold to almost CAD1.3885 today, its lowest level since June 5. The CAD1.39 area was the (50%) retracement of the US dollar’s rally in May and June. The next chart area of note is the 200-day moving average around CAD1.3850 and the (61.8%) retracement near CAD1.3815.

• The Australian dollar pulled back to about $0.7045 yesterday after approaching $0.7100 on Wednesday, its best level in two months. Although the Aussie recovered, it still settled below Wednesday’s low (~$0.7055). The Australian dollar has recovered and in late European morning activity reached almost $0.7080. Options for about A$670 mln at $0.7100 expire today, and another stack for ~A$455 mln expires there Monday.

• The dollar consolidated inside Wednesday’s range against the Mexican peso, when it fell to new two-year lows (MXN17.0160). Yesterday’s range was roughly MXN17.0250-MXN17.0805. Recall that the previous low was recorded in mid-February near MXN17.0865. The greenback drew a little closer to MXN17.00 today, slipping below MXN17.01. There is little on the charts until around MXN16.92.

• The offshore yuan has been steady this week. The US dollar has been confined to last Friday’s range of about CNH6.74 and CNH6.75. If it were a less managed currency, the price action would look like a base, especially given momentum indicators. On a monthly basis, the PBOC has lowered the dollar’s reference rate for the last 10 months, which is to say the last time it was lifted was September 2025. Yet, there seems to be a slightly different cadence this month and recall that the last dollar fix in July was at CNY6.7894. It was set at CNY6.7878 today. While conventional wisdom warned that Beijing would allow the yuan to depreciate in the face of the US tariffs, we were among the small minority who anticipated yuan strength. By all reckoning, except the performance of the other currencies in the region, and interest rate differential, the yuan’s appreciation has been modest (~3.65% year-to-date). Our observation is similarly modest, the PBOC pausing its efforts that have gradually lifted the yuan.

• The dollar was little changed against the Indian rupee today and finished the week with about a 0.25% gain. It was the first dollar gain in three weeks. Reports suggest the central bank continued to intervene to support the rupee. Nevertheless, the price action looks dollar supportive. The greenback finished the week at INR95.4350, slightly above last week’s high.

Other Markets

• The S&P 500 reached a new record high yesterday, and the Nasdaq composite reached its best level since early June. Japan, China and South Korea equity markets rose today while most of the other large bourses in the region rose. The MSCI Asia Pacific Index rose by around 2% this week, its fourth consecutive weekly gain. Europe’s Stoxx 600 is edging higher for the first time in three sessions. It is nearly flat this week. US index futures are narrowly mixed.

• The US 30-year bond auction produced a small tail (the yield was slightly lower in the when-issued market) but there was no concession as US note and bond yields fell yesterday after a softer PPI and lower oil prices. The yield on the 10-year Treasury fell to a new low for the week near 4.61% and settled below the 20-day moving average (4.65%). 10-year yields. A weaker yen may have kept the 10-year JGB under pressure today. It has risen a little more than 6 bp this week. European rates have softened this week but are about 2-3 bp higher today. 10-year US Treasury yield has fallen by about five basis points this week, after taking into account today’s one basis point increase (to 4.65%).

• Gold posted a potentially bearish key reversal yesterday. It reached almost $4450, its best level since early June before the bears took control and pushed it to nearly $4351. The losses were extended to almost $4311 today before buyers emerged and lifted the yellow metal to almost $4360 in Europe. Silver fell to a three-day low yesterday and settled below the five-day moving average (~$65 today) for the first time since August 3. It retreated to almost $63.50 today before recovering to almost $65.

• October WTI was sold to a three-day low yesterday, near $79.30 in the North American morning. It fell for the first time in six sessions. It rallied nearly 11% over the run and retreated by 2.2% yesterday. It is trading within yesterday’s range today and has mostly traded between $81 and $82 today. It settled at $77.15 last week.

Data

• The US is expected to report a small rise in July retail sales. Partly lifted by the rise in prices, retail sales rose by an average of 0.8% a month in H1. They rose by an average of 0.6% a month in Q2 and may begin Q3 with a relatively paltry 0.1% gain, according to the median forecast in Bloomberg’s survey. The core measure, which excludes autos, gasoline, building materials and food services, rose by an average of 0.6% in Q2 after a 0.8% average in Q1. The median forecast in Bloomberg’s survey is for a 0.3% increase. The preliminary University of Michigan’s August consumer confidence will be reported as well today. The market anticipates a small decline in sentiment with the inflation expectations steady at 4.2% and 3.3% for the one-year and 5-10-yr, respectively.

• The eurozone confirmed that Q2 GDP expanded by 0.4%. The details included slightly slower household consumption and government spending, but stronger capex was a bright spot. Recall that GDP stagnated in Q1 26. Note that the eurozone reported a seasonally adjusted trade deficit in Q2, the first since Q1 23.

• Japanese investors continued to buy foreign assets last week (through August 7) according to the weekly Ministry of Finance data. In fact, last week’s JPY1.63 trillion purchases of foreign bonds were the most since early May. Japanese investors also bought JPY963.5 bln of foreign stocks. A week after the intervention, Japanese investors bought the most foreign assets in more than two years.

Disclaimer

Becalmed FX Market

noreply@blogger.com (Marc Chandler) — Thu, 13 Aug 2026 06:43:45 -0400

The US dollar is mixed against the G10 currencies. Despite yesterday’s constructive price action, there has been little follow-through buying today. Mostly narrow ranges prevail. While the Japanese government reported signaled acceptance of faster rate hikes, the greenback has held above JPY159 and the 10-year JGB yield edged higher. It has not fallen since last Thursday.

US Energy Secretary Wright claimed that almost 9 mln barrels of oil a day transited the Strait of Hormuz over the past week, which is well above the 4-5 mln barrels estimated by those tracking flows. Still, the actual amount is indeterminate as many vessels are tuning off transponders and GPS. Satellite-imagery vendors have reportedly ceased sales of high-resolution pictures.

Prices

G10

• The euro posted a bearish outside down day yesterday. It traded on both sides of Tuesday’s range and settled below it low. Indeed, the single currency returned to nearly last Friday’s low, which was slightly below $1.1520. Its losses were extended to almost $1.1510 today before catching a bid in Europe that carried it to new session highs a little above $1.1535. Nearby resistance is seen in the $1.1540-50 area.

• The greenback posted an outside up day against the Japanese yen and reached new a session high in the NY afternoon, almost JPY159.55. The dollar posted the highest settlement of the month. While the JPY159.50 area corresponds to the (61.8%) retracement the dollar’s intervention inspired slide, the JPY160 area is the next important psychological hurdle. News that Japan’s Prime Minister Takaichi appeared to endorse faster BOJ rate hikes failed to lift the yen, which is trading in a narrow range near yesterday’s low. The greenback is consolidating between about JPY159.20 and JPY159.50.

• Sterling initially reached almost $1.3545, its best level in almost a month. It reversed lower and took out Tuesday’s low, slightly above $1.3490. A firm, Q2 GDP (0.4%) failed to deter follow-through sales of sterling today. It fell to $1.3475. The $1.3510 offers the initial cap. Unless it is overcome, risk may extend to $1.3420-40 area, which hosts the (38.2%) retracement objective of the rally from the late July low (~$1.3275) and the 20-day moving average.

• The US dollar looks like it bottomed against the Canadian dollar yesterday slightly above CAD1.39, which corresponds to the (50%) retracement of the rally from the May 1 low (~CAD1.3550). It reached nearly CAD1.3950 yesterday and almost CAD1.3960 today. Initial resistance is in the CAD1.3980-CAD1.4000 area. The US two-year premium over Canada rose yesterday for the first time in six sessions, which only the third increase in two-and-a-half weeks. It may have also bottomed near 120 bp after peaking near 145 bp in late July, which was the highest in a year.

• The Australian dollar briefly traded above $0.7090 yesterday, its best level since early June. The broad greenback recovery saw it fall back to around $0.7060. It eased to about $0.7045 today but recovered back to almost $0.7060 in Europe. There is limited scope for additional gains before the intraday momentum indicators are stretched.

• The Mexican peso reached its best level since June 2024, before the run-up to the presidential election that year. The dollar reached almost MXN17.0160. The greenback has fallen for the past three weeks and has risen in only three sessions since July 17. Still, the move was rather small yesterday. The US dollar fell by about 0.15%. The dollar is a narrow range so far today (~MXN17.0435-MXN17.0805). The competitors for carry trades, like the Brazilian real and the Colombian peso both weakened. While the Mexican peso was the strongest in the region, the Colombian peso was the weakest, off by a little more than a third of one percent. The recent deadly earthquake is a human tragedy and will adversely impact the economy in the first instance and could mark the end of the rightening cycle at 12.0%.

• The offshore yuan has practically flatlined in recent days. For the last seven sessions, it has settled between CNH6.7460-CNH6.7482. The dollar against the G10 currencies favored a high fix today by the PBOC after yesterday’s three-and-a-half year low (CNY6.7888 vs CNY6.7882).

• The US dollar edged slightly higher against the Indian rupee today. It reached INR95.4475, matching the high from Tuesday, which is the highest for the week. It settled near the high. Recall that the dollar gapped lower on July 31. The bottom of the gap is about INR95.4715 and extends to about INR95.57.

Other Markets

• US equities advanced yesterday, but both the S&P 500 and Nasdaq composite settled below opening levels. In the Asia Pacific region today, among the large markets, Japan, Taiwan and South Korea advanced, but most of the other fell. Europe’s Stoxx 600 snapped a seven-day advance yesterday but recouped the loss today. US index futures are trading with a firmer bias.

• Benchmark 10-year yields were narrowly mixed in the US and Europe yesterday. The 10-year JGB yield has not fallen since last Thursday. It rose another 1.5 bp today. European yields are mostly 1-2 bp lower today. The US 10-year Treasury yield is off three basis points to 4.67%. Yesterday’s $42 bln 10-year Treasury note auction some lukewarm demand, though the yield was the highest since 2007. Today, the US will sell $25 bln 30-year bonds. The 10-year note auction took place before news that the July federal government deficit was $432.3 bln, above the expectations of the dozen economists surveyed by Bloomberg. It was nearly as big as the previous two months combined and the largest in about 5.5 years, when the post-pandemic stimulus hit.

• Gold and silver extended this month’s advance yesterday. Gold rose by more than 1% yesterday for the second time this week and the fourth time in six sessions. It peaked in early North American turnover around $4441. It is trading heavier today but found support near $4364. Silver rose a little more than 1% yesterday and still finished a bit more than a dollar off its intrasession highs. It was the seventh session in the past eight that it rose by more than 1%. At its best, it reached almost $66.80, its best level since June 22. It is also trading with a heavier bias today. Bids emerged near $64.25.

• October WTI spent yesterday inside Tuesday’s (~$80.15-$83.35) range. Given what appears to be a stalemate in the Strait of Hormuz, which is still not open, the risk seems to be higher prices. Yet, it is consolidating today. It held above Tuesday’s low (~$80.15). The 20-day moving average is near $80.35.

Data

• After yesterday’s tick lower in the year-over-year pace of CPI, the US reports July PPI. A large moderation is expected after June’s 5.5% headline increase and a 5.1% rise in the core rate. Weekly jobless claims will also draw attention. They have been below 200k for the past three weeks. This has not happened in a generation and offers a somewhat more constructive view of the labor market than non-farm payrolls.

• The eurozone reported industrial output was flat in June, while the May series was revised to 0.3% from the initial estimate of -0.2%. The market impact is minimal. It is old news in the sense that Q2 GDP has already been reported at 0.4%. It is subject to revision tomorrow and more details will be released.

• The UK economy grew by 0.3% in June. The median forecast in Bloomberg’s survey was for a 0.1% contraction. May’s 0.1% growth was revised away. Still, the June data looked poor. Industrial output fell by 0.2% and the May decline was revised to -0.7% from -0.5%. Construction output weakened and the trade balance deteriorated. Government spending fell by 0.3%, the first decline since Q1 25. The bright spot was services, where the index of activity rose 0.4%, but the May series was revised to 0.1% from 0.3% initially. Still, Q2 GDP was spot on expectations, rising 0.4%, led by capex and consumption and better next exports. The impact on policy expectations was minimal, and the swaps market continues to fully discount a hike before year end.

• Japan’s July PPI edged up by 0.1% and the June series was revised to 0.5% from 0.4%. The year-over-year pace ticked down to 7.2% from a revised 7.3%. The swaps market has about a 75% chance of a hike discounted for next month, up from almost 65% at the end of last week, but down slightly from yesterday. A hike is fully discounted in October.

Disclaimer

US Dollar is Mixed Ahead of July CPI

noreply@blogger.com (Marc Chandler) — Wed, 12 Aug 2026 06:45:04 -0400

The US dollar is mixed. It is mostly softer against the G10 currencies, though sterling, the Australian dollar, and Japanese yen are slightly firmer. The greenback is a bit weaker against most of the emerging market currencies. Of note, the PBOC set the dollar’s reference rate at a new 3.5-year low, and the Mexican peso is at its best level since the Mexican election in the middle of 2024. The market did bid the dollar to a new post-intervention high against the yen (~JPY159.45) in the local session today.

President Trump claimed that the US has “total control over the Hormuz Strait”, but both sides appear to be hardening positions. Qatar and Pakistan have been mediating, but the oil prices remain near the highs for the month, suggesting the market remains skeptical. The data highlight today is the US July CPI, where the headline and core rates are expected to slip slightly. The futures market is discounting slightly less than a 50% chance of a hike next month ahead of the report.

Prices

G10

• The euro traded between a little below $1.1520 and about $1.1580 last Friday, with the high being recorded after the disappointing US jobs report. It remains confined to that range so far this week. It is in a narrow range of less than a fifth of a cent below $1.1550, where options for about 930 mln euros expire today. The down trendline off the Jan and spring highs comes in near $1.1540 today.

• The US dollar trades firmly even if cautiously against the yen. The greenback reached almost JPY159.40 yesterday and edged slightly higher today. However, the dollar hit an air pocket in early European turnover. It fell to about JPY158.60 and just as quickly bounced back above JPY159. Options for almost $1.2 bln at JPY159 expire today. While JPY158 posed the first challenge of the intervention, a softer-than-expected US CPI report today could off the fundamental cover to push closer to JPY160. Looking at pricing in the options market indicates short-dated dollar puts continue trade at a relatively large premium of dollar calls. Coupled with dollar strength in the spot market suggests the puts may be a hedge for the dollar bulls. The put premium in one-month risk reversal is wider now than before the July 30. Implied one-month volatility is slightly below 8% compared with 6% before the intervention. It jumped to over 10% following the recent intervention.

• Sterling went no place yesterday and straddled $1.3500 in quiet, uneventful turnover yesterday. Today, it is holding above $1.3500 but below Monday’s high of $1.3530. A break of Monday’s range, roughly $1.3485-$1.3530, may point the direction of the next half-to-three-quarters of a cent move. Options for about GBP330 mln at $1.3525 expire today.

• The Canadian dollar reached its best level yesterday since June 10. The US dollar eased to CAD1.3915, having been stuck a little above CAD1.3925 in the previous two sessions. It is consolidating quietly inside yesterday’s range. The CAD1.3875 area corresponds with the (50%) retracement of the US dollar’s rally from the May 1 low (~CAD1.3550). The 200-day moving average is closer to CAD1.3850.

• Yesterday’s hawkish hold by Australia’s central bank failed to push the Australian dollar out of the range it recorded before the weekend (~$0.7025-$0.7080). It is in tight range between about $0.7055 and $0.7070. The momentum indicators are stretched but have not turned down. There may be enough juice to lift the Aussie to a marginal new high.

• Stronger than expected Mexican June industrial output figures helped lift the peso yesterday, and in late dealing rose to its best level in six months. The dollar was sold to almost MXN17.0925. Follow-through selling today has pushed the greenback to about MXN17.0435, its lowest level since the mid-2024 elections. Led by the Colombian peso (~0.65%), five of the top six performing emerging market currencies yesterday were from Latam. The notable exception was the Brazilian real, which was the weakest in the emerging market complex with a nearly 1% loss. A soft inflation reading coupled with minutes from the recent central bank meeting encouraged speculation of another rate cut. With the cut last week, Brazil’s central bank has cut the Selic rate four times this year to 14.0%.

• The offshore yuan has been confined to unusually narrow ranges for several days. This month, the dollar has been trading between about CNH6.74 and CNH6.76. It held below CNH6.75 today. The PBOC’s dollar fix has, likewise, hardly moved this month. The reference rate has been between CNY6.7884 and CNY6.7917 and today set a marginal new low since February 2023 of CNY6.7882 (CNY6.79 yesterday).

• The Indian rupee rose for the first time this week, seemingly helped by dollar sales by the Reserve Bank of India. The dollar gapped higher yesterday and today’s setback filled the gap. Still, the greenback settled a little above Monday’s high (~INR95.30).

Other Markets

• Equities are mostly firmer today. Most of the large bourses in the Asia Pacific regions rallied, with Hong Kong, India, and Australia the main exceptions. Europe’s Stoxx 600 is extending its rally for the eighth consecutive session, and US index futures are recouping yesterday’s losses.

• Benchmark 10-year yields in Europe and the US reversed earlier gains yesterday and finished lower. Some linked the recovery to the steadying of oil prices amid reports from Pakistan that a Strait of Hormuz deal was still possible. While the yield of the 10-year JGB jumped almost 4.5 bp today, European and US yields are 2-4 bp lower. It puts the US 10-year yield slightly below 4.67%. The US 30-year yield reached almost 5.28% yesterday, which was the 19-year high recorded at the end of July. It has pulled back and is now around 5.22%.

• After reaching slightly above $4435 yesterday, its best level in two months, gold pulled back to about $4357. Although the yellow metal recovered, sellers blocked it from rising much above $4400. It is bid in Europe, where the session high was recorded slightly above $4424. Likewise, silver’s rally stalled near $66.50, its best level since June 22. It found support around $64.25. Silver has returned bid today and reached almost $66.80 in Europe.

• September WTI rose for the fourth consecutive session yesterday and reached $84.60, a new high for the month. That met the (50%) retracement objective of the losses from the July 23 high near $93.50. The next retracement (61.8%) is around $86.15. In subdued activity, it is little changed ahead of the US open and is in a range of about $82.45-$84.35. The US will not accept Iran’s terms and Iran will not accept US terms. Stalemate means continued disruption.

Data

• The US reports July CPI. The median forecast in Bloomberg’s survey anticipates a 0.1% increase in the headline and 0.2% in the core rate. The headline rate fell by 0.4% in June and the core was flat. Given the base, effect, the year-over-year measures are expected to slip slightly, depending on the rounding. In H1 26, the CPI rose at an annualized rate of 4.2% and the core rose at an annualized pace of 2.6%. The federal government’s deficit for July is also due. In the first six months of the calendar year, the US recorded a budget deficit of about $764 bln compared with $626 bln shortfall in the first six months of 2025. The lion’s share of the difference can be accounted for by the roughly $100 bln of tariff refunds that have been delivered since the Supreme Court ruled against the president’s use of emergency powers to impose the levies.

• Canada reports June building permits (on a value basis). They may increase slightly, less than 1%, after falling by around 8.3% in April and May. Still, they are not the stuff the moves investors or policymakers.

• Norway’s central bank, Norges Bank meets tomorrow and the stable underlying measure of July CPI reported on Monday strengthened the markets conviction that it will stand pat. Still the swaps market has a nearly fully discounted a hike before the end of the year.

• India reported a small increase in July CPI: 4.45% from 4.38%. The swaps market expects the Reserve Bank of India to hike rates before the end of the year.

Disclaimer

Parallel Play or Joint Intervention?

noreply@blogger.com (Marc Chandler) — Tue, 11 Aug 2026 09:10:08 -0400

The Bank of Japan intervened in the foreign exchange market in late July. Initial indications put the operation at roughly JPY8.45 trillion, near $52.8 bln, as the dollar approached JPY164.

The mechanics repeated a pattern seen in January. The Federal Reserve reportedly checked on rates, which is routine. What was not routine is that it did so on behalf of the US Treasury.

This time, the US Treasury intervened several hours later but it sold euros, not dollars, to buy yen. It drew on Treasury's Exchange Stabilization Fund, which holds euro, yen, and dollar balances. There has been no official explanation for why euros were sold rather than dollars, and European officials reportedly were not notified until after the operation was done. The working theory is that Treasury did not want to appear to be selling dollars.

In the past, the Federal Reserve not only acts as the Treasury's agent but it also intervenes with its own account, SOMA (System Open Market Account). It also holds foreign currency (euros and yen) and dollar securities. This time, it does not appear that the Fed participated with its own funds.

Officials cited volatility as the trigger. It does not hold up under scrutiny. Three-month implied volatility was near 6% before the intervention, close to its lowest level since March 2022. After the intervention, it spiked above 10%, the highest since the end of March 2026. The stated justification for acting was to calm markets, and the immediate consequence of acting was a volatility spike.

This has become a familiar pattern. The justification for the war on Iran shifted repeatedly as each initial rationale failed to survive contact with events, and success proved elusive despite the escalating explanations. The Strait of Hormuz was open before the war and then we were told it was the objective of the war.

FX intervention is smaller stakes, for sure, but the pattern of stated reasons multiplying and shifting after the fact rhymes. Volatility was the first reason offered. It did not fit the data. The market speculated US participation was aimed at deterring Japanese Treasury sales. Other observers note possible concerns about US bank liquidity.

The yen's own weakness does not obviously separate it from the rest of Asia either. Through July 30, the yen was off almost 1.8% this year, hardly a standout. The same "uniquely weak currency" argument was made about the Chinese yuan for months, yet the yuan's 3.5% gain in the year through July 30 was the best performance in Asia, and better than every G10 currency except the Norwegian krone, up near 5.8% on oil, and the Australian dollar, up near 5.3% after three rate hikes this year. Whatever ails the yen is not obviously a yen-specific illness.

Conventional wisdom pins the weakness on the BOJ's slow-walk on rate hikes and Japan's debt stock. Neither survives close contact with the data. Foreign investors have continued buying Japanese Government Bonds this year in the face of claims of concerns about Japan's fiscal trajectory.

Dollar-yen is positively correlated with changes in Japan's own two-year yield, meaning rising Japanese short rates have tracked with a weaker yen, not a stronger one. Dollar-yen correlates far more with US two-year yields, a little above 0.40 on a 100-day basis, versus roughly 0.05 for the two-year JGB yield. Calls for "some fiscal austerity" in Japan are chasing a deficit that ran below 2% of GDP in 2024 and 2025 and is projected near 3% this year, a smaller shortfall than most other large economies.

The bigger question is why Washington waited. Japan intervened in April and May. The US said nothing at the time. The Treasury had the Fed check on prices in January, a form of verbal intervention, and nothing since. Had Washington offered verbal or material support back in April, the July operation might not have been needed at all. Silence is a choice, not an absence of one, and the sin of omission in the spring looks like it set up the scramble in July.

There may be some concern about foreign central banks selling US Treasuries, the data suggests that the pressure was greater in April and May than July. In the last two weeks of July, foreign central banks' custody holdings of Treasuries at the Fed rose by a little more than $48 bln, the largest two-week increase since January 2021.

Separately, cash assets at the largest US banks fell by almost $140 bln in two weeks while overall balance sheets barely moved, pushing the cash-to-total-assets ratio to its lowest since the pandemic. Thinner liquidity cushions can make large banks less willing to fund foreign institutions in the FX swap market.

None of this reaches the actual engine behind yen weakness, which may ultimately sit outside Tokyo's control. The US policy mixed has kept the rate differential wide and the US 10-year yield is near the highest of the year. Oil prices, lifted by Middle East hostilities, add to import costs and reinforce the case for holding higher-yielding currencies against the yen. And the carry trade itself, borrowing cheap yen to fund exposure elsewhere, has stayed popular precisely because those conditions persist. Intervention addresses the symptom. It does nothing to the machinery producing it.

Intervention did spur a brief short-covering squeeze among speculators. CFTC data in the week through August 4 showed non-commercial accounts cut short yen positions by almost 72k contracts, a 27% reduction. That still leaves nearly 193k short contracts outstanding, large by recent standards even after the squeeze.

The shifting rationale matters more than any single justification, because it signals officials are working backward from an action already taken rather than forward from a clear diagnosis. Until the threat of higher US interest rates pass, oil settles, and the carry trade loses its appeal, Tokyo and US appear to be managing different problems with the same policy tool.

The market remains skeptical like it is of US policy toward Iran.

Disclaimer

Hope of Re-Opening the Strait of Hormuz Fades and Markets Test Resolve of Putting Floor Under the Yen

noreply@blogger.com (Marc Chandler) — Tue, 11 Aug 2026 06:44:19 -0400

US officials have been playing up the possibility of a near-term agreement with Iran. The market remains skeptical and has extended the recovery in oil prices. Brent futures are rising for a fifth session and reached $90 a barrel, a seven-day high. September WTI is up nearly $2 today, after rising nearly $4 yesterday and $3 in the last two sessions of last week.

Rising oil prices are helping lift interest rates, and rising interest rates are helping lift the greenback against most currencies. Despite US promises to do “whatever it takes” to put a floor under the yen, the market is skeptical. It has taken the US dollar to a marginally new post-intervention high near JPY159.40 today. As widely expected, the Reserve Bank of Australia delivered its hawkish hold, and this is helping the Australian dollar join the Norwegian krone and Canadian dollar as the only G10 currencies gaining traction against the US dollar today. Ranges are narrow and the consolidative tone continues.

Prices

G10

• The euro made marginal new session low in the North America afternoon yesterday near $1.1540 in lethargic turnover and slipped a little further today to almost $1.1530, which was around where it was trading when the US reported the disappointing jobs data last Friday. Last week’s low was near $1.1500. The euro has been capped near $1.1550 today.

• The action in the foreign exchange market was in the yen yesterday. It was sold. The greenback rose to about JPY159.35, a new post-intervention high, arguably encouraged by firmer US yields and the 5% rise in September WTI. The dollar has edged a little higher and has held below JPY159.40. The market continues to probe for the pain threshold of officials, encouraged firm higher oil prices and firmer US yields.

• Sterling reached its best level in three-and-a-half weeks yesterday (~$1.3530) after posting a bullish outside up day before the weekend. The $1.35 area corresponds to about the midpoint of this year’s range. It is in a narrow range, straddling the $1.35 area today. Initial support may be near $1.3485. The next upside technical target may be the two-month high set mid-July near $1.3560 and then the (61.8%) retracement of the decline from the late January high (~$1.3870).

• The US dollar traded with a slightly heavier bias against the Canadian dollar yesterday. It had fallen to almost CAD1.3925 after the contrasting employment reports before the weekend. The greenback held the pre-weekend low yesterday, its lowest level in two months. It is still holding today, while the US dollar has not traded above CAD1.3950 today. The CAD1.3900 area marks the (50%) retracement of the greenback’s rally from the May 1 low (~CAD1.3550) The next retracement level (61.8%) is slightly above CAD1.3815, while the 200-day moving average is near CAD1.3855.

• The Australia dollar was confined to about a quarter-of-a-cent range below $0.7075 yesterday and finished near its lows. It eased to $0.7040 today but the hawkish hold by the central bank may have helped it recover almost to the session high, a little above $0.7060. Still, it remains in the upper end of the pre-weekend range when it reached almost $0.7080, its best level since June 16.

• The greenback consolidated in quiet turnover against the Mexican peso yesterday. It enjoyed a firmer bias. After settling near MXN17.1355 before the weekend, the US dollar spent most of the North American session in a little less than a two centavos range on either side of MXN17.15. It is in the weaker end of the range today.

• The dollar hardly moved yesterday against the offshore yuan yesterday. It traded between about CNH6.7420 and CNH6.7480. The dollar’s range has been extended to about CNH6.7490 today. After setting the dollar’s fix at a new low since early 2022 yesterday (CNY6.7884), the PBOC set it a little higher today at CNY6.7900.

• Rising oil prices and weaker equities is doing the Indian rupee no favors today. The US dollar posted an outside up day against the rupee yesterday and it gapped higher today. Yesterday’s high was about INR95.2875 and today’s low was INR95.3750. It reached a seven-day high today of INR95.4475 and settled slightly below it. A move above INR95.59 warns of near-term risk back toward INR96.

Other Markets

• US equities traded heavier yesterday, perhaps weighed down by higher oil prices and higher US rates. This seemed to drag down most Asia Paciifc equities today, though Japan, South Korea, Taiwan and Australia were exceptions, with the Nikkei gaining 2%, its first gain in three sessions. Europe’s Stoxx 600 is threatening to snap a six-day advance. US index futures are narrowly mixed.

• Benchmark 10-year yields are extending yesterday’s gain today. European yields were up mostly 4-6 bp yesterday, are up 2-5 more today. The 10-year US Treasury yield rose to 4.70%, a four-day high. It is edging closer to the high set late July, when it reached nearly 4.75%, the highest since January 2025.

• Gold found support yesterday near $4313 and reached the session high in late North American turnover around $4395 near midday in NY. This is its highest level since June 5. It reached $4435 today and has reversed lower. It fell slightly through $4357 before stabilizing, but the price action warns late longs may be at risk. Silver managed to rise above its high from the end of last week (~$65.15), as well, and posted its highest settlement since June 17. The gains initially extended to almost $66.50 before profit-taking kicked in and set silver to about $64.25, where new buying emerged. It is knocking on $65 in late European morning turnover.

• Iran’s aggressiveness and the apparent change in US tactics saw September WTI contract reach about $82.30 yesterday. It was the third consecutive session that oil prices rose. Last week’s low was recorded last Wednesday, near $74.25. The contract is extending its gains today and reached $84.60 today. The next technical retracement target is a little above $86.

Data

• In the first half, the US existing home sales fell in three of the six months with the seasonally adjusted annual pace dropping by a cumulative 4.2%. July’s report is due today, and it is expected to show a 1% decline. More interest, of course, is on tomorrow’s July CPI release. A slight moderation in the year-over-year headline and core rate is anticipated.

• Mexico’s monthly industrial output has been in a sawtooth pattern, alternating between increases and decline this year. True to form, after falling by almost 0.8% in May, industrial production is expected to have edged 0.2% higher in June. Mexico's exports of AI-related hardware and computer equipment to the United States (including commercial servers and data center infrastructure) have surpassed traditional automotive shipments for the first time. Driven by an 84.5% year-over-year surge these technology shipments reached a record $105.8 billion between January and May 2026, overtaking the country's leading auto sector. Is it China? No, Taiwan, who is now Mexico's 3rd largest trading partner (up from 8th in 2022). Taiwan companies assembling in Mexico.

• As anticipated, the Reserve Bank of Australia left rates on hold (4.35%). RBA Governor Bullock did not rule out additional rate hikes, after delivering three earlier this year. The yield on the three-year Australian government bond rose a couple of basis points. It was the sixth increase in seven sessions. The futures market has around a 69% chance of a hike before the end of the year discounted. It was about 46% at the end of last week.

Disclaimer

Market Challenges US-Japan Resolve on Yen and Tehran Challenges US Resolve to Re-Open Strait of Hormuz

noreply@blogger.com (Marc Chandler) — Mon, 10 Aug 2026 06:46:14 -0400

The most important development today is the yen’s weakness. The dollar has approached JPY158.90 in the European morning, a new high for the month. Despite a hawkish sounding record of last month’s Bank of Japan meeting, the swaps market shaved the risks of a rate hike at next month’s meeting. The market is challenging the resolve of Japanese and US officials. The greenback is more broadly narrowly mixed and the yen’s roughly 0.65% loss stands out. A record jump in Swedish industrial orders (32% month-over-month, seasonally adjusted), led by export orders for transport equipment is lifting the krona by about 0.25% to top the G10 leaders’ board.

The Middle East is the other major story. Iran and its allies continued to press. Tehran has demanded that US lift its naval blockade, withdraw forces, lift sanctions, release frozen assets, and pay reparations before the Strait of Hormuz will be allowed to open again. President Trump has suggested that the US may rely on the economic chokehold on Iran to pressure the regime and that the US was only “semi-negotiating” with Iran. This follows reports that the US has depleted much of its defense weapons, and the Saudi-Pakistan-Türkiye defense treaty struck last week. Oil prices are firm near four-day highs.

Prices

G10

• The euro rose to about $1.1580 in the immediate response to the disappointing US employment report. It has not been higher since the Fed delivered its hawkish hold on June 17. The momentum was not sustained, but the euro still settled above the recent highs. It is in a narrow range, straddling the almost $1.1560 settlement. Options for 1.4 bln euros at $1.1575 expire today. With expectations for a softer US CPI reading expected on Wednesday, there may be potential for the euro to test the $1.1600-25 area in the coming days.

• The market remains skeptical about the effectiveness of the intervention to support the yen. Indeed, the focus has shifted from the yen purchases to the euro sales by the US (and reportedly not notifying European officials to well after the fact). Before the US employment report the dollar reached slightly above JPY158.55, the highest since the intervention. That matched the (38.2%) retracement of the intervention-inspired losses. It has reached almost JPY158.90 today in Europe and is bid ahead of the North American session. The intraday momentum indicators are stretched.

• Sterling posted its highest close since July 15 ahead of the weekend. It posted a potentially bullish outside up day ahead of the weekend. It traded on both sides of the previous day’s range and settled above its high. It is firm today and is probing the $1.3500 area but has held below the pre-weekend high near $1.3510. Last month’s high (~$1.3560) is the near-term target but more formidable resistance may be near $1.36.

• The diverging employment reports helped lift the Canadian dollar to its best level since June 10. The greenback had been finding support a little below CAD1.40. Ahead of the weekend it was sold through (38.2%) retracement objective of the US dollar’s strong rally off the early May lows (~CAD1.3980). It was sold to almost CAD1.3925. It is consolidating in about a 30-point range below CAD1.3965 today. Options for about $460 mln at CAD1.3920 expire today. The CAD1.3900 area is the 50% retracement, and the 200-day moving average is near CAD1.3855.

• The Australian dollar reached almost $0.7080 after the US jobs report, its best level since June 16, the day before the Fed’s hawkish hold. It settled firmly above the recent highs. It is in about a quarter-cent range today above $0.7050. The next target is in the $0.7100-$0.7120 area. The Reserve Bank of Australia meets the first time tomorrow and there is little chance of a change in policy. Still, we suspect the Governor Bullock will keep the door ajar to another rate hike.

• The dollar had approached MXN17.20, its lowest level since mid-June and busted through after the US employment data. The dollar dropped to about MXN17.0925 before steadying. It is trading quietly today and has held below MXN17.1720. The dollar recorded nearly two-year lows in mid-February (~MXN17.0865). Contrary to talk that the intervention to support the yen, undermined the attractiveness of carry trades, the strength of some of the high-yielding emerging market currencies, like the peso, suggest the funding leg may have shifted back to the Swiss franc and US dollar. We note that the Swiss franc, another funding currency candidate, reached its weakest level against the euro late last week.

• The offshore yuan edged higher before the weekend and reached its best level since February 2023. The dollar fell to almost CNH6.74. It has held today. The greenback’s weakness seemed to deliver a bit of fait accompli to the PBOC, which seemed to have little choice but to set the dollar’s reference rate late. And it did just that (CNY6.7884 vs CNY6.7904 before the weekend).

• The Indian rupee rose by a minor 0.2% last week. It was the first back-to-back appreciation of the rupee since late May/early June. The rupee traded with a softer bias today. The dollar rose to INR95.30 and settled near its highs. Central bank Governor Malhotra speaks tomorrow and on Wednesday, India reports July CPI.

Other Markets

• US equities advanced ahead of the weekend, though the S&P 500 held below the record high set in the middle of last week. However, it did post a record close at the conclusion of its best week since April (~3.6%). Europe’s Stoxx 600 reached a record high before the weekend. MSCI Asia Pacific Index rose by 0.4% last week, its third consecutive weekly advance. The large bourses in the region advanced, led the Nikkei’s 2% rally. Australia and Singapore were exceptions. The Stoxx 600 is up for the sixth consecutive session. The S&P 500 and Nasdaq futures are firm.

• Benchmark 10-year yields fell by 2-3.5 bp last week in Japan, Europe, and the US and Canada. Yields are mostly slightly firmer today. The 10-year JGB rose almost two basis points while most European yields are +/- half a basis point. The 10-year US Treasury yield is up nearly one basis point to poke above 4.65%.

• Gold rallied 7.3% last week, its best week since late January. Lower rates and weaker US dollar seemed to help. China’s reserve figures also showed continued interest in the yellow metal. It reached almost $4378 at the end of last week. It is consolidating in the upper end of last Friday’s range. The $4400 area is the next area of technical resistance. Silver surged almost 10% last week. That is its biggest weekly advance since the end of February. It pushed slightly above $65, and although the momentum was not sustained, it did post its highest settlement since June 22. It is straddling the $64 area late in the European morning. The next area of resistance may be around $67.

• September WTI bottomed in the middle of last week near $74.25. Iran’s aggressiveness: still attacking its neighbors and the Houthis striking Saudi Arabia helped support the recovery in oil prices. Ahead of the weekend, the September contract reached a little above $78.75 and edged up to almost $79.45 today. A move above $80 could target the $81.65 area.

Data

• Japan reported its June current account (surplus) earlier today. True to the strong seasonal pattern, the surplus narrowed, and in fact swung into deficit (-JPY9.3 bln from JPY3.97 trillion in May). It was the first deficit since January 2025. Still, the OECD forecasts Japan's current account surplus this year at 5.2% of GDP (4.9% in 2025), though it is notable that the IMF expects it to narrow to 3.8%. An even stronger seasonal tendency is for the trade balance on the balance-of-payments basis to improve, but it was defied today. The balance of payments trade balance flipped to a JPY135 bln deficit from a JPY6.9 bln surplus in May.

• China’s July CPI was softer than expected, rising 0.5% year-over-year, half of the June pace. It is the smallest increase since before the Middle East war. Although the conventional narrative focuses on weak demand, the ceasefire saw gasoline prices all 11% on the month and that seemed to play an outsized role. Food prices fell for the fourth consecutive month on a year-over-year basis, and this does not seem to be demand driven either. On the other hand, the cost of tourism services (hotels and flights) did see weaker demand, according to reports. Core prices (excluding food and energy) rose 0.9% year-over-year, which is the slowest since January. Producer prices also moderated (3.5% year-over-year vs. 4.1% in June). It is the first such easing of producer prices since March. Oversupply in the hog industry appears to be gradually easing and the year-over-year decline in pork prices slowed.

Disclaimer

Week Ahead: Soft CPI to Follow Disappointing US Jobs Report

noreply@blogger.com (Marc Chandler) — Sat, 8 Aug 2026 07:05:00 -0400

The market has not been comfortable since the Federal Reserve meeting at the end of July. Despite the lip-service paid to the Fed's price stability mandate, only three officials favored doing something (raising rates) about it. It was hardly a coincidence then that the media reported that people close to the Fed chair said that a further increase in price pressures could spur Warsh into action in September. However, the following day, the July jobs data warned that the recovery in the labor market seen earlier this year may be stalling. After the loss of jobs in July, and the downward revisions, the three-month moving average stands at 20k, down from 142k in May. The decline in the unemployment rate to 4.1% from 4.2% can be traced to the drop in the participation rate, which at 61.4%, matches the lowest since the pandemic. The futures market saw the odds of a hike next month fall to about 44% from around 72% a week ago.

The data highlight in the week ahead are the US inflation gauges, and they look softer. It will be difficult to rebuild expectations of a Fed hike next month. The central bank of Australia and Norway meet in the coming days, but both are expected to standpat. The derivatives market seems more comfortable with a Norwegian rate hike before the end of the year than a move by the Reserve Bank of Australia. Subjectively, we suspect the risks of a hike by the RBA may be a bit higher than the market, which has slightly more than a 45% chance of a fourth hike this year. The market continues to probe for the pain threshold of officials on the yen. And even after the US employment report, the greenback finished the week, a little below JPY158 and still in the upper end of the range since the intervention.

Drivers: The Dollar Index's 30-day correlation with changes in the US two-year yield fell from the year's high near 0.80 shortly after the June FOMC meeting and reached nearly 0.40 by the end of July. That was the lowest since late April. It has stabilized and is now near 0.62 The 30-day correlation with changes in the US 10-year yield peaked in early June near 0.75 and by late July dipped below 0.10. It is now a little above 0.35. The correlation was inverted in the second half of February.

Data: The July CPI and PPI are the data highlights of the week, but US also reports retail sales and the July budget (deficit). At the end of the week, the preliminary August University of Michigan consumer survey will be released. It is difficult to imagine a more benign inflation report than the one in June. Then the headline CPI fell by 0.4% and the core was flat. The median forecast in Bloomberg's survey is for a 0.1% increase in headline rate and 0.2% in the core rate. Given the base effect, the year-over-year headline rate may slip to 3.4% from 3.5% and the core could ease to 2.5% from 2.6%, depending on the rounding. Producer prices are expected to have risen by a 0.2% and 0.3%, for the headline and core, respectively. If so, the headline pace will moderate to about 4.9% from 5.5%, and the core can ease to 4.2% from 4.7%. The impact on Fed policy is likely to be minimal: the FOMC does not meet until September 16. Still, the disappointing July employment report, which saw the first net loss of jobs since February, suggest the bar to a hike in September, though the Fed will have another jobs report and August CPI and PPI in hand when it meets. Turning to retail sales, which have been flattered by higher prices, the average monthly increase in H1 was 0.8%. In H1 25, the average increase was 0.1%. Excluding autos, gasoline, food services and building materials, a core measure used in some GDP models, is expected to slow to 0.3% from 0.5%. The comparative numbers are 0.7% and 0.2%, this year's average monthly gain and H1 25. Then, there is the federal deficit. Through the first nine months of the fiscal year, it has recorded a cumulative $1.37 trillion deficit, which is about $30 bln more than in the year ago period and $100 bln more than in the first nine months of the previous fiscal year. The Congressional Budget Office projects the deficit will reach $1.92 bln this year (5.8% of GDP). That means an average deficit of about $183.3 bln a month in the last three months of the fiscal year. In the last three months of FY25, the shortfall averaged $146 bln a month.

Prices: The poor jobs report saw US interest rates slide the dollar drop. The Dollar Index fell to a marginal two-month low near 99.40. It traded above 100.00 in three sessions last week and failed to settle above it once. The 200-day moving average is a little below 99.20. The Dollar Index has not settled below it since mid-May. Below there, initial support may be around 99.65-75. The potential double top pattern projects toward 98.80.

EMU

Drivers: The euro has become a little less sensitive, less correlated with the changes in the US two-year yield. The 30-day rolling correlation's multiyear extreme was reached around the FOMC's meeting in June near -0.87. It is now near -0.62. The euro is also less correlated with changes in Germany's two-year yield. As we have noted before, the euro is frequently inversely correlated with changes in Germany's two-year yield, which is to say rising short-term German rates do not coincide an appreciating euro. The inverse 30-day correlation reached a multiyear high in early June (-0.63) but has steadily shifted and in late July reached a little beyond +0.10, a seven-month high. It is now back to around -0.15. What about the two-year differential? The 30-day correlation was slightly positive in early June but spent most of the second half of July around -0.60, the largest inversion since last September. It is now around -0.50. Meanwhile, the euro's rolling 30-day correlation with the US S&P 500 and NASDAQ has fallen to the 0.20-0.30 area, respectively, which are the lows since March.

Data: The eurozone reports June industrial output and trade figures and they will help with the revision of Q2 GDP, which is due at the end of the week. The initial estimate was that the aggregate economy expanded by a better-than-expected 0.4%, which was the best since Q1 25. However, the data will not impact the policy outlook or likely trading considerations. The swaps market is discounting around an 83% chance of a hike at the September 10 ECB meeting.

Prices: As we noted previously, the euro broke above the down May-June-July down trendline at the end of July. The boost after the loss of US jobs lifted the euro above the down trendline drawn off the late January, mid-April, and May highs. It came in near $1.1550 before the weekend. The next technical target is around $1.1625, which corresponds to the mid-June high (before the FOMC meeting), the 200-day moving average, and the halfway point of this year's range. The momentum indicators are rising but are in overbought territory.

China

Drivers: Officials are continuing to signal their acceptance of a gradual appreciation of the yuan. It has been modest against the dollar (~3.6% year-to-date) but it is the strongest currency in the region this year. The yuan has also risen against most G10 currencies more than it has against the US dollar. While many offer their pet reasons, the one thing we can bank on is that Beijing sees this in its interests. On a weekly basis, the PBOC's dollar fix has fallen in all but six times since the end of last September. Last week was the seventh.

Data: Beijing is expected to report July lending figures and the Q2 current account (surplus). It looks as if shadow banking lending rose while bank lending remains miserly. Toward the end of the week, the current account is due. In recent years, Chinese figures tend to be soft in first half of the year and rise, often dramatically in H2. There are some observers who argue that the current account surplus is understated, but they often cite other Chinese data series without being able to establish the veracity of the other data. There also are some economists that argue that Chinese trade surplus has peaked. The IMF expects the current account surplus to fall to 3.5% of GDP this year from 3.8% last year and anticipates it falling to 3.3% next year. The OECD expects it to be steady at 3.8% this year before rising to 4% next year. The median forecast in Bloomberg's survey is for a 3.5% surplus this year and 3.2% next.

Prices: The dollar fell to almost CNH6.74 before the weekend. It is the lowest level since February 2023. The low in early Q1 23 was about CNH6.6975. That is the next obvious chart area. In the middle of last week, the PBOC set the dollar's reference rate at CNY6.7889, a new low since February 2023. The greenback's losses before the weekend suggest a lower fix on Monday.

Japan

Drivers: The intervention injected a new force into the mix. For the first time since early 2023, the 30-day correlation of changes in the exchange rate and the 10-year US yield slipped into inversion. It is around 0.65% in mid-June and is now slightly above 0.10. The correlation between the exchange rate and the 10-year JGB fell from around 0.25 before the intervention to almost nothing (slight inversion at the end of last week). And the correlation between the exchange rate and the 2-year Japanese yield is also slightly inverted (-0.05). Contrary to declared intentions, the intervention injected volatility and contributed to weakening relationship between the exchange rate and interest rates. Perhaps, if the US supported in word or deed Japan's heavy intervention in April and May, when its silence was deafening, there would not have been a need for intervention now.

Data: Early on Monday, Japan will report the June current account (surplus). There is strong seasonal pattern of deterioration in June--past 13 years without failing to be less than May's and 18 of the past 20 years. Still, the OECD forecasts Japan's current account surplus this year at 5.2% of GDP (4.9% in 2025), though it is notable that the IMF expects it to narrow to 3.8%. Counter-intuitively, an even stronger seasonal tendency is for the trade balance on the balance-of-payments basis to improve. There has been only one exception in the past 20 years. Japan reports July producer prices on Thursday. While the targeted measure of consumer prices has not been above 2% this year, producer prices are high at 7.1% year-over-year in July, the highest since the end of Q1 23. The weak yen exacerbates the increase in energy and commodities. The swap market boosted the chances of a BOJ rate hike next month to about 65% from about 23% before the intervention.

Prices: The market challenged officials by pushing the dollar a little above JPY158.55, a new high since the intervention. However, the disappointing US jobs report saw the greenback drop slightly through JPY156.70, a four-day low. The JPY156.50 area corresponds to the (61.8%) retracement of the post-intervention bounce. And the JPY155 area was the low in the spring intervention and also the more recent operation. If officials were as market savvy many seem to believe, they would have, we suggest, intervened when while the dollar was offered. The momentum indicators are oversold.

Drivers: Changes in sterling are more correlated with changes in short-term US interest rates than UK rates. Over the past 30 sessions, the correlation between changes in sterling and UK two-year is around -0.18. The 30-day correlation between changes in sterling and US rates are around -0.53. Meanwhile, sterling's rolling 30-day correlation with the changes in the euro has fallen from a two-and-half year high in May (~0.95) to almost 0.77 in late July (a four-month low). It is now a little above 0.80.

Data: The UK will publish its preliminary estimate of Q2 GDP on Thursday. After posting quarterly growth of 0.6% in Q1, the economy seems to have slowed in Q2, and the median forecast in Bloomberg's survey is for a more modest pace of 0.2%. The cumulative monthly GDP estimates were 0.8% in Q1 and in April and May, flat. June details will also be released. The Bank of England meets on September 17, and it will have more data. The swaps market is slightly less than fully discounting a hike this year. Recall that as recently as July 23, nearly two hikes were discounted (48 bp).

Prices: Sterling traded in a roughly $1.3420-$1.3505 range on Monday, August 3, and remained in that range until the US jobs data at the end of the week lifted sterling to almost $1.3510. Sterling posted an ostensibly bullish outside up day ahead of the weekend by trading on both sides of the previous day's range and settling above it high. Last month's high was closer to $1.3560. The halfway mark of this year's range is about $1.3505, and the $1.3590 area is the (61.8%) retracement of sterling losses since the last January high, slightly shy of $1.3870.

Canada

Drivers: The Canadian dollar continues to be sensitive to the changes in the US two-year premium over Canada. The 30-day correlation between the exchange rate and two-year differential reached nearly 0.75 in late July, the highest since Q1 18. Now near 0.68, it is slightly above the highs in 2024-2025. The 30-day correlation between the exchange rate and the Dollar Index is near 0.59, which is slightly below the middle of this year's range. In the past, we have noted a risk-off characteristic of the Canadian dollar. With a few minor exceptions, the correlation between changes in the USD-CAD exchange rate and the S&P 500 were inversely correlated since mid-2025. This is to say, the Canadian dollar tended to appreciate when the S&P 500 advanced. However, since the end of July the correlation has swung positive. The US dollar tends to appreciate against the Canadian dollar when the S&P 500 rises. Around 0.20, the positive correlation has not been this high since June 2025.

Data: Canada has a light economic calendar in the coming days. Neither building permits, nor manufacturing sales, or wholesale sales capture the market's attention. The Bank of Canada does not meet until September 2 and the swaps market prices in practically no chance of a change in policy, even after the better-than-expected July employment report that saw the unemployment rate slip to 6.4% from 6.5%, a two-year low, despite the rise in the participation rate (65.1% vs. 65.0%).

Prices: The diverging employment reports before the weekend saw the US two-year premium over Canada narrow by almost nine basis points, the largest such move since late March. And around 123 bp, it is the narrowest in more than two months. The US dollar had been finding support on a closing basis near CAD1.4000 punched through and fell to slightly below CAD1.3945. The CAD1.3980 area corresponded to the (38.2%) retracement of the greenback's rally starting on May 1. The next retracement (50%) is near CAD1.3900. It settled below the lower Bollinger Band (~CAD1.3965). The momentum indicators are stretched.

Australia

Drivers: The Australian dollar has also become less sensitive to changes of US two-year yields since it reached a little beyond -0.80, the most in at least 30-years in early June. It is now near -0.52. The exchange rate is more sensitive to the broad movement in the US dollar (DXY), with the 30-day inverse correlation near -0.62. The exchange rate is not sensitive to changes in Australia's two-year yield (less than 0.15). The 30-day correlation of changes in exchange rate and gold was practically halved to about less 0.43 in the past two months. It is now near 0.49.

Data: While there is the NAB business confidence survey and Q2 homeowner data, the highlight of the week is the central bank meeting on Tuesday. The futures market is pricing in practically no chance of a change in the 4.35% cash rate target. The RBA does not seem to be in a hurry to hike rates again after the three earlier hikes this year and the softer than expected June CPI reinforced the speculation that it will remain on the sidelines. However, officials cannot be comfortable with an acceleration in price sector credit expansion and stronger household spending in June. It also suggests that the wealth effect from falling house prices has not hit consumption (yet?). The futures market is pricing in a nearly 60% chance of a hike before the end of the year, up from about a 46% chance at the end of July.

Prices: The Australian dollar reached almost $0.7080 before the weekend. That is the highest level since the day before the Fed delivered its hawkish hold on June 17. The Aussie peaked this year on June 6 near $0.7280. The $0.7070 area corresponds to the halfway point of this year's range. The next retracement (61.8%) is around $0.7120. The momentum indicators are still rising but are stretched and it has been knocking on the upper Bollinger Band (finished last week slightly above $0.7065).

Mexico

Drivers: The US dollar's movement against the Mexican peso is slightly more correlated with the US two-year yield (~0.58) is more correlated with the Dollar Index (~0.50) over the past 30 sessions. There seems to be an element of risk appetite that is also reflected in the exchange rate. Its inverse 30-day correlation with the S&P 500 (~0.60) suggests that the peso's recent appreciation may have been aided by the rise of the S&P 500 to record highs. The strongest correlation we observed continues to be the JP Morgan Emerging Market Currency Index (~-0.74).

Data: June industrial production will be reported on August 11. It contracted in Q1 but has done better in Q2 because of a 2.1% surge in April, the most in five years. Output fell by 0.8% in May, and the IMEF manufacturing index warned that that growth is fragile. The manufacturing PMI rose to 51.3 in June, which was the first reading above 50 since June 2024. That said, Mexico's exports of AI-related hardware and computer equipment to the United States (including commercial servers and data center infrastructure) have surpassed traditional automotive shipments for the first time. Driven by an 84.5% year-over-year surge, these technology shipments reached a record $105.8 billion between January and May 2026, overtaking the country's leading auto sector. Is it China? No, Taiwan, who is now Mexico's 3rd largest trading partner (up from 8th in 2022). Taiwan companies assembling in Mexico.

Prices: The drop in US rates and the rally in US stocks after the disappointing US July employment report sent the greenback to about MXN17.0925. The multiyear low was recorded in mid-February near MXN17.0865. Previous support around MXN17.20 may now offer resistance. While there are several crosscurrents in the foreign exchange market, the many high-yielding emerging market currencies, including the Mexican peso, the South African rand, and Hungarian forint gained against the dollar last week despite the squeeze om yen (and Swiss franc) funded carry trades. It looks like the dollar may be the preferred funding currency now.

Disclaimer

August 2026 Monthly

noreply@blogger.com (Marc Chandler) — Sat, 1 Aug 2026 07:15:00 -0400

Fifty-five years ago this month, US President Nixon closed the gold window. It was presented as temporary, but it became permanent and launched the dollar into a half-century of dominance nobody sitting in the room that weekend would have bet on. Now, on the anniversary, the cracks are getting harder to paper over.

Let's go back to the beginning because the origin story explains everything that follows.

How We Got Here

The Bretton Woods agreement was struck between Dexter White for the US and John Keynes, nominally for the UK but really negotiating on behalf of debtor countries everywhere. The deal pegged the dollar to gold at $35 an ounce, and everyone else pegged to the dollar. Simple, elegant, and doomed. It institutionalized power relationships as if the post-war situation was going to be sustained. Although Bretton Woods allowed for adjustments of the pegs, political considerations made them more rigid.

Still, it worked until it didn't. By the late 1960s, the US was running persistent balance-of-payments deficits, and foreign central banks were sitting on more dollar claims than Fort Knox could cover. Europe, in particular, wanted more gold than Nixon was willing to hand over.

What followed Nixon's unilateral announcement, which some argue was a default, was two years of improvisation: The Smithsonian Agreement. The snake in the tunnel. A string of half-measures trying to rebuild some version of fixed rates. All of it fell apart by 1973. Currencies floated, and the interesting part is what didn't happen next: the dollar didn't lose its throne.

Why the Dollar Stayed King

Nothing else was deep enough, liquid enough, or legally robust enough to take the dollar's place. The mark and yen were regional currencies playing a global role they weren't built for. Sterling was already a memory of empire. The dollar's advantage was self-reinforcing then, and it still is now. That's not an accident of history. It's a structural moat.

The early weaponization of the dollar, against the US special ally, the UK, gave birth the offshore dollar, dubbed the Eurodollar market. US banks booking deposits in London to dodge domestic rate ceilings, foreign holders (the Soviets included) parking dollars offshore to keep them out of Washington's reach. In the 1956 Suez Crisis, Washington had already shown it would use the dollar as leverage. It threatened to withhold IMF support that London sought and possibly sell sterling from its reserves unless the UK pulled out of Egypt.

The Eurodollar system underpins global trade finance to this day. The Federal Reserve has supported the market that it does not regulate. The Federal Reserve has standby liquidity swap lines with several major central banks and in past crisis has offered the facility to other central banks on ad hoc basis.

The Federal Reserve launched the Foreign and International Monetary Authorities repo facility in 2022. It allows approved foreign central banks and international monetary authorities to temporarily exchange their Treasury holdings for dollars. Quantitative Easing (QE) and broad dollar liquidity easing during the Great Financial Crisis and again during the pandemic, also support the offshore dollar market.

Weaponization

September 11 changed the calculus. Treasury's Office of Foreign Assets Control turned the dollar's centrality into an actual policy weapon, cutting terrorist financiers off from SWIFT and correspondent banking. That started as counterterrorism. It didn't stay there. Iran, Venezuela, North Korea, Russia, didn't quit the dollar system. They got fired from it. Secondary sanctions made sure other countries fell in line too.

Freezing roughly $300 billion in Russian central bank reserves after 2022 was a different order of escalation entirely. The message landed everywhere, not just in Moscow: Dollar reserves, and euro reserves too, are not sovereign in any absolute sense. They sit at the pleasure of Washington and its allies. When the US then threatened Canada and Denmark, both NATO members, that drove the point home even harder. If treaty allies aren't insulated, nobody is.

You can see the response building in the data. IMF COFER figures show the dollar's share of global reserves sliding from roughly 72% at the turn of the century to under 58% today. A recent Official Monetary and Financial Institution Forum (OMFIF) survey found emerging-market central banks actively planning to trim dollar allocations over the next few years, with the euro and yuan the likely beneficiaries, and real curiosity building around smaller currencies like the Singapore dollar.

Gold is having its own moment in this story. A net 30% of central banks surveyed expect to add to gold holdings over the next one to two years. If you're a reserve manager worried about confiscation risk, bullion is the obvious answer. Nobody can freeze what sits in a vault at home.

The Counterweight Nobody Wants to Talk About

Yet this isn't the whole picture. The US runs a current account deficit near $1 trillion a year. By simple accounting identity, foreigners have to absorb an equivalent volume of US assets: bonds, equities, real estate, direct investment. There's no way around this arithmetic.

And the money keeps showing up. Foreign investors bought $1.43 trillion of US stocks and bonds last year, up from $1.2 trillion in 2024 and $840 billion in 2023. That's not the behavior of capital fleeing the dollar system. That's capital voting with its feet, over and over again, for dollar assets.

So, which is it? Is the dollar being abandoned, or is it still the destination of choice? The honest answer is both, just not in the way headlines suggest.

The real question isn't whether foreign capital keeps showing up. It's which assets it buys and at what price. A rotation out of Treasuries into equities, or out of long-duration debt into bills, would hit the term premium and raise the cost of financing the deficit. That's the mechanism worth watching. Not some cinematic exit from dollar assets that never actually arrives. De-dollarization is a slope, not a cliff, and the slope's angle is what matters here, not the direction.

Where This Leaves Us

Fifty-five years on, the dollar is still the world's number one reserve currency, the transaction currency of choice, and the ubiquitous unit of account. But something intangible, and essential, has slipped away: trust. The weaponization of the dollar crossed a line somewhere along the way, and the broader turn toward economic nationalism and short run transactionalism has alienated exactly the allies who used to provide the system's quiet stability.

Expect the erosion in reserve share to continue even if at glacial speeds. Expect alternative payment systems to keep chipping away at pieces of monetary sovereignty. But a genuinely multipolar currency order, if it ever arrives, is a story measured in years, not months.

And it would be naive to think the midterms this year, or the 2028 election, arrest any of this. The dynamic is bigger than any single election cycle. It's bigger than any single administration.

Bannockburn World Currency Index

Bannockburn's World Currency Index is composed of the currencies of the dozen largest economies--half of which are from high-income countries and half from emerging markets. In July, it recouped about half of the 1.1% it lost in June. It is up about 0.70% this year after it rose by 3.7% last year, which was the first increase since 2020.

Turning to the components of the index, the greenback itself was unchanged, of course. It accounts for about a third of the index and dampens the volatility of the BWCI. The other five G10 components rose against the dollar. The euro's roughly 0.65% gain was the least. The others rose by at least 1%. The intervention on July 30 helped lift the yen by nearly 2%, which was the strongest of the major currencies.

Turning to the emerging market components, two of the six fell. The Russian ruble fell the most in the index, losing about 1.15%. The Indian rupee fell by about 0.75%. Intervention seemed most effective in South Korea where the won rose by about 7.7%, making it the strongest component. Yet, its weight is slightly less than 2.0%, means marginal impact. . The Chinese yuan, which has about a 21.5% weight rose by 0.25%, while the Brazilian real, with almost a 2.5% weight, rose by about 1.65%.

BWCI rose from late June through the middle of July. It stalled and drifted lower before the combination of the uninspiring Federal Reserve and BOJ intervention weighed on the greenback broadly. BWCI finish July at its best level since mid-June.

U.S. Dollar: The dollar fell against the G10 currencies in July but the Swiss franc. The greenback had been mixed until late in the the month when the market took the dollar down after the FOMC failed to convince the market that is was serious about reaching the 2% inflation target, which it has missed more more than five years. Rhetoric has less heft than action and what was expected to be a hawkish hold turned out saw US short-term rates fall despite the three regional presidents dissents in favor of an immediate hike. The following day, it appears the Bank of Japan intervened. A preliminary review of the changes in the Bank of Japan's balance sheet suggests it sold almost $53 bln, and reports suggest that as was the case earlier this year, the Federal Reserve checked prices and indicated it was doing so on behalf of the US Treasury. The US Q2 26 GDP slowed to 1.5% from 2.1% in Q1. It was dragged down by trade (-1 percentage point) and inventories (-2/3 of a percentage point). Real final sales to private domestic purchasers (excludes trade, inventories, and government) accelerated to 3.9% from 1.7%. Consumer spending rose 3.2% the most in three quarters. The US labor market is proving resilient, with the four-week moving average is below 200k for the first time in almost four years. The Fed funds futures imply about 36 bp tightening, little changed on the month.

Euro: The euro rose by about 0.7% in July, which pared its loss to about 2.1% for the year. The regional economy continues to struggle under three shocks, China's growing market share, especially in autos, the energy shock, emanating from the war in the Middle East, and the ongoing US tariff threats. In addition to the ongoing investigation into "excess capacity" the US has threatened an investigation into the EU's $1 bln (890 mln euros) fine on Google for self-preferencing and app store anti-steering restrictions, with a new levy the expected outcome. The eurozone economy continues to struggle. After stagnating in Q1 26, the eurozone grew by 0.2% in Q2 26, while the year-over-year growth is uninspiring at 0.5%. Inflation remains elevated and the preliminary July estimate was 2.9%. It was at 1.9% before the Middle East war began. August, the month of summer vacations in Europe, will likely be quiet on the political front. However, Le Pen is leading the opinion polls for next spring's presidential election. There are three state elections in Germany in September, and the AfD could win its first state (Saxony-Anhalt). There is speculation at Italy's Meloni will call for national elections next April.

(As of July 31, indicative closing prices, previous in parentheses)

Spot: $1.1527 ($1.1384) Median Bloomberg One-month forecast: $1.1512 ($1.1493) One-month forward: $1.1541 ($1.1398) One-month implied vol: 5.2% (5.6%)

Japanese Yen: The 10-year Japanese government bond yield has risen by slightly more than 70 bp this year, well more than any other G10 country, including the US, where the 10-year Treasury yield has risen by about 56 bp. Yet, the yen has continued to trend lower, reaching new 40-year low in late July. While the yen is sensitive to interest rate developments, many observers are looking in the wrong place. The rolling 60-day correlation between changes in the dollar-yen exchange rate and changes in US two- and 10-year yields is 0.25-0.40, while the correlation with changes in Japanese rates is less than 0.10. Moreover, the correlations with US interest ratees is greater than the correlation with the two- and 10-year interest rate differentials. The core measure of CPI (excludes fresh food) has not been above the 2% target this year. Among the G10, only Switzerland has lower inflation than Japan. Nor will another quarter-point rate hike necessarily make much of a difference, given the external factors, like elevated oil prices, ongoing Middle East tensions, and a hawkish Fed outlook. The Japanese government opened a new front in efforts to support the yen and JGB market. It wants Japanese pension funds and households to boost domestic investment. And that is what appears to be taking place this year. Weekly data shows that Japanese investors have sold about JPY24.3 trillion (almost $153 bln) of foreign bonds this year after purchasing JPY10.1 trillion in the same period last year. Equity flows are considerably less, but Japanese investors have bought about JPY9.6 trillion of foreign equities this year compared with JPY6.2 trillion in the year ago period. Preliminary indications suggest the Bank of Japan intervened on July 30 to sell almost $53 bln to support the yen. The US stepped up its verbal intervention into the month end and the greenback finished July below the 200-day moving average (near JPY158) for the first time since last October.

Spot: JPY157.40 (JPY161.74) Median Bloomberg One-month forecast: JPY158.81 (JPY160.11) One-month forward: JPY157.04 (JPY161.35). One-month implied vol: 9.1% (6.8%)

British Pound: The rally that began from the year's low in late June ($1.3140) continued through mid-July when sterling reached a two-month high, near $1.3560. It stalled amid a broader US dollar recovery and fell back to $1.3300, meeting a technical retracement target. However, it recovered and reached almost $1.3500 at the end of the month. As widely expected, the UK got its seventh prime minister in the decade since the Brexit referendum in 2016. Prime Minister Burnham nearly immediately announced several small measures meant to signal concern about "affordability", including the removal of the value-added tax from electric bills, capping bus fares, and reduction of taxes for pubs, social clubs, and live music venues. The new government inherits a fiscal situation that leaves minimal flexibility. The government borrowed GBP2.7 bln more than the Office for Budget Responsibility forecast in March in the first three months of the new fiscal year (revenue was GBP2.4 bln higher but spending rose by GBP3.6 bln). Higher market interest rates will boost the debt servicing costs. After growing by 0.6% quarter-over-quarter in Q1 26, matching the strongest since Q1 24, the economy likely slowed to a 0.1%-0.2% in Q2 26 and in the second half of the year. The Bank of England stood pat at the July meeting, and the swaps market has about a 30% chance of a hike at the next meeting in September.

Spot: $1.3483 ($1.3200) Median Bloomberg One-month forecast: $1.3378 ($1.3235) One-month forward: $1.3485 ($1.3205) One-month implied vol: 5.6% (6.3%)

Canadian Dollar: The US dollar reached nearly CAD1.4250 at the end of June, its highest level since April 2025. As the US two-year premium over Canada narrowed, the greenback pulled back to slightly below CAD1.4000 in late July. After contracting by 1.0% in Q4 25 and -0.1% in Q1 26 (annualized rates), growth appears to have returned in Q2 26, helped by an increase in government spending. US trade policy is still a headwind, and it may be intensifying if the 50% tariffs threatened on a $20 bln of variety of Canadian products (e.g., electrical equipment, packaging, hockey gear, beer, and dairy) that could be implemented as soon as August 19. Under Prime Minister Carney's leadership, Canada is taking strong measures that will diversify exports away from the United States. Still, his Liberal Party needs to win at least one of three byelection in late August to retain its slim control of the House of Commons. The Bank of Canada cut its overnight lending rate (now 2.25%) last October. It will likely remain on hold in the coming months, but the swaps market is pricing in about a 70% chance of a hike before the end of the year.

Spot: CAD1.4021 (CAD 1.4196) Median Bloomberg One-month forecast: CAD1.4010 (CAD1.4159) One-month forward: CAD1.4005 (CAD1.4192) One-month implied vol: 4.0% (4.5%)

Australian Dollar: The Australian dollar recovered from a three-month low at the end of June ($0.6865) to $0.7045 at the end of July. It has risen in four of the past five weeks, and is up 5.25% this year, which is the second-best in the G10 behind the Norwegian krone (up about 6.25%). The Reserve Bank of Australia hiked rates three times between late February and late May. The economy remains resilient and June employment data and preliminary July PMI suggest that the rate hikes have had minimal impact on the economy, including private sector credit, household spending, and inflation expectations. Meanwhile, Australia's goods trade balance is deteriorating. The May deficit, reported in early July, of A$3.02 bln, the largest monthly gap since 2015. Exports fell 6.9% in May The average monthly trade surplus fell to A$820 mln in the first five months of 2026 compared with an average of nearly A$4.2 bln a month in the January-May 2025 period. Goods exports have fallen by an average of 0.1% this year, while goods imports have soared by an average of 2.8% a month. The disruption from the Middle East war has seen prices for fuel and lubricants rise dramatically, but the softer than expected June and Q2 CPI saw the futures market downgrade the likelihood of another hike this year to about 50%.

Spot: $0.7019 ($0.6896) Median Bloomberg One-month forecast: $0.7009 ($0.6964) One-month forward: $0.7015 ($0.6893) One-month implied vol: 7.3% (7.7%)

Mexican Peso: Within the broad consolidation seen last month, the dollar approached the upper end of our target range (MXN17.58-MXN17.65 in the July monthly) and remained slightly below the June high (near MXN17.6765). At the end of the month, the dollar pushed through the shelf it had forged in the MXN17.35-MXN17.37 area and fell slightly through MXN17.3150. The Mexican economy found better traction in Q2. After contracting by 0.6% (quarter-over-quarter) in Q1 26, the Mexican economy grew by 1.3% in Q2. However, growth is uneven. Consumption slowed as did government spending. The external sector improved. After it recorded trade deficit of a little more than $1 bln in Q1 26, Mexico's trade balance swung back into surplus in Q2 26 to the tune of $10.87 bln. That was the largest quarterly trade surplus since the end of 2020. The June unemployment rate rose to 2.9%, the highest since September 2024. On the other hand, the headline and core inflation rates have slipped back into the 2-4% target range. The central bank meets on August 6 and the swaps market has about a 40% chance of a hike discounted, which seems a bit rich. Lastly, we expect Mexico to acquiesce to US pressure to boost steel tariffs and offer greater protection for domestic truck makers.

Spot: MXN17.3426 (MXN17.5053) Median Bloomberg One-month forecast: MXN17.39 (MXN17.5310) One-month forward: MXN17.4470 (MXN17.5490) One-month implied vol: 7.6 (8.5%)

Chinese Yuan: The JP Morgan Emerging Market Currency Index fell for the second consecutive month in July. It was the first back-to-back monthly decline since the end of 2024. The Chinese yuan rose by about 0.5% on the month. Still, year-to-date the RMB has appreciated by about 3.5%, which leads the region and is the fourth strongest emerging market currency this year behind the high-yielding Colombian peso, Brazilian real. and Mexican peso The PBOC gradually reduced the dollar's fix over the course of the month. It fell from CNY6.8109. at the end of June to a 3.5-year low of CNY6.7892 on July 30. China's Q2 26 growth disappointed at 4.3% year-over-year, its slowest pace since the end of 2022. Many observers anticipate new measures to come after the conclusion of the late July Politburo meeting, but it may opt for implementing previously announced efforts. Meanwhile, given the shifting US tariff regime, the average effective US tariffs on China appears to have fallen to 25.5%-26% from almost 34% at the end of last year, according to Penn Wharton Budget model. Moreover, the pending Section 301 excess-capacity investigation covering 16 economies including China is still outstanding and could raise Chinese electronics rates by another 10 points before year-end. The US and China ae reportedly moving toward establishing investment and trade boards ahead of the likely trip by President Xi to the US in September. Chinese shipments rare-earth magnets to the US remain below pre-trade war levels. Beijing has also weaponized its near monopoly it enjoys on processing critical materials to the detriment of Japan and Europe, as well.

Spot: CNY6.7515 (CNY6.8005) Median Bloomberg One-month forecast: CNY6.7525 (CNY6.7900) One-month forward: CNY6.7525 (CNY6.8121) One-month implied vol: 2.3% (2.3%)

Disclaimer

Greenback Consolidates after Being Rocked by the US Fed and Japan's Ministry of Finance

noreply@blogger.com (Marc Chandler) — Fri, 31 Jul 2026 06:59:32 -0400

The Federal Reserve’s reluctance to take action despite pledges to respect the inflation target, which has not been met in over five years, put the dollar under pressure. Then yesterday, it appears that Japanese officials may have intervened in the foreign exchange market, and as was the case earlier this year, the Federal Reserve reported checked on prices and indicated they were doing so at the request of the US Treasury. If true, it illustrates a notable difference between Japan, which tries to overwhelm the market with size (intervention and the BOJ’s balance sheet expansion), while the US tries finesse. Still, the MOF’s decision to intervene, and a preliminary review of the BOJ’s balance sheet suggests intervention involved selling almost $53 bln was not matched by the BOJ itself, which not only did not raise interest rates but shaved this year’s core inflation projection.

After the large moves in the foreign exchange market between the FOMC and MOF/BOJ, the currency market is mostly confined to narrow ranges (except the yen where officials have injected volatility), with most pairs not seeing any follow-through action. Oil prices are firm, but September WTI is poised to snap a three-week 30% surge. Chip and AI stocks are back in favor, with surges in the Japan, South Korea, and Taiwanese markets today. The Nasdaq looks poised to gap higher.

Prices

G10

• The euro held above the three-month downtrend that was violated after the FOMC meeting on Wednesday. It comes in near $1.1410 today. As US short-term interest rates continued to fall, the euro rose to almost $1.1540. It is consolidating, but in a little less than a 1/3 of cent range today below $1.1530. Some of the buying may have been related to the 3.6 bln euros in option at $1.1500 expire today and another 2.5 bln euros there that expire next Tuesday and Wednesday. The euro settled above the upper Bollinger Band yesterday, found near $1.1505 today.

• In late Tokyo yesterday, Prime Minister Takaichi confirmed speculation that the government will cut the sales tax on food and soft drinks to 1% starting in the new fiscal year near April. It also will help eligible families with cash subsidies. She denied the funding would come from new bonds and instead will seek non-tax revenue through a review of special accounts and government funds. The dollar was sold aggressively against the yen. It fell below JPY158 for the first time since May 14. The sharpness of the move spurred talk that the BOJ may have intervened and as was the case in January, the Federal Reserve reportedly checked on rates (usual event) but acknowledged it was on behalf of the US Treasury (unusual), though the timing was said to be late in the North American afternoon Early estimates based on changes in the BOJ’s balance sheet points to intervention of around JPY8.45 trillion (almost $53 bln). With the sharp drop, the greenback surpassed the (61.8%) retracement of the gains since the last intervention low (in May ~JPY155), found near JPY158.45. The dollar barely held above the 200-day moving average comes in today slightly below JPY158, which is also about the halfway mark of this year’s rally. The greenback has not traded below the 200-day moving average since last October. The dollar settled below the lower Bollinger Band, which is found near JPY160.25 today. The BOJ standpat decision helped the dollar recover to almost JPY160.90. Market nervousness over another possible intervention operation drove it back to around JPY158.55 in the European morning and is now hovering near JPY160. Japanese and US officials have in the past cited concerns about volatility, and what they did yesterday lifted one-month implied volatility to nearly 8.5%, a three-month high from around 6%, the lowest in around four years.

• Sterling reached the slightly above $1.3405 before the Bank of England’s 6-3 decision to stand pat. The central bank noted that inflation risks are tilted higher relative to the July Monetary Policy Report. Despite the optics, BOE Governor Bailey denied that the central bank was getting closer to a hike. In the broad dollar sell-off in the North America, sterling rose slightly through $1.3475. The upper Bollinger Band comes in near $1.3520 and the July high, which was a two-month high, nearly $1.3560. It is consolidating today in about a third of a cent range below $1.3470.

• The Canadian dollar edged higher yesterday, but as is often the case in a weak US dollar environment, it underperformed. The Canadian dollar’s 0.25% gain was the least among the G10 currencies. The US dollar slipped a little below CAD1.40 for the first time since mid-June but settled above it. Below the psychological support at CAD1.40, the CAD1.3980 area corresponds to the (38.2%) retracement of the US dollar’s rally from the May 1 low. A break could spur a move toward CAD1.39. The greenback has held above CAD!.40 so far today, but below CAD1.4025.

• After falling to a two-week low near $0.6920 on Wednesday, the Australian dollar recovered to almost $0.6990 in response to the FOMC decision. The gains were extended to nearly $0.7035 amid the broad greenback sell-off in the North American morning. It is one of the few currencies that extended yesterday’s rally today, albeit marginally. It rose to $0.7045, the highest since June 17. The upper Bollinger Band comes in slightly below $0.7040 today. The next technical target may be near $0.7055. It has found initial support near $0.7020.

• The broad dollar decline pushed it to nearly MXN17.32 yesterday and a little further today (~MXN17.3165), a new low for the month. Nearby support is seen in the MXN17.28-30 area, and last month’s low was slightly below MXN17.16. The Mexican peso’s 0.90% gain in July, depending on today’s action, offsets the June decline. Latam currencies did well yesterday, led by the nearly 2.7% rise in the Colombian peso (9.8% gain on the month coming into today).

• The offshore yuan settled yesterday at its best level since January 2023, and the dollar closed slightly below CNH6.7450. The minor follow-through sales today took to aroundCNH6.7425. There is little on the charts now ahead of CNH6.70. The market’s caution may have been spurred by the firm fix. With the greenback’s broad weakness, it seemed like the PBOC would lower the dollar’s reference rate. Instead, it was set slightly higher: CNY6.7894 vs. CNY7.7892 (which was a new low since February 2023.

• The Indian rupee reached three-week highs today, helped by the broad setback in the US dollar, and softer oil prices. Last week’s reserve figures will be released shortly, and speculation was intervention was heavy. The dollar settled near INR95.3925. This week was the first in six that the greenback fell.

Other Markets

• Equities are finishing the month on an upbeat note, helped by the Nasdaq snapping of a six-day slide yesterday with its biggest gain since mid-June. Huge moves in the some of the largest Asia Pacific bourses today with renewed interest in chips. Japan’s Nikkei rose 4%, Taiwan’s Taiex jumped nearly 8%, while South Korea’s Kospi surged almost 18%. Europe’s Stoxx 600 is up about 0.65%, its fifth gain in six sessions. It is up about 1.5% this week and has only declined one week in the past eight. Nasdaq futures are up nearly 1.2%, while the S&P 500 and Dow futures are up a little more than 0.5%.

• Benchmark 10-year yields unwound early gains yesterday and finished lower. The European bond market recovery was led by the UK Gilts (~-5 bp) on what was seen as a dovish hold by the Bank of England. The UK two-year yield fell 11 bp, the most since late May. Today’s two-year yields in Europe are 3-4 bp higher, while the 10-year rates are around two basis points higher. The 10-year Treasury yield is up almost one basis point to push slightly above 4.25%. It is off around 6.5 bp this week.

• Gold rose higher for the second consecutive session and reached $4120, its best level in a week, and settled slightly above $4100. The break today of the $4070 area suggests the yellow metal is still in a choppy trading range. It is near $4050 in late in the European morning. Silver was somewhat less impressive, though it settled at its best level in six sessions. Yet there was no follow-through buying today and silver is slipped below $58 in the European turnover after peaking a little above $59 yesterday.

• New hostilities in the Middle East lifted the September WTI contract to almost $86 in early European activity yesterday. The momentum was not sustained in North America, where participants still (want to suspect) the war is winding down. The session low, a few pennies below $83, was seen before the US cash equity markets opened. It was sold to almost $81 earlier today before it rebounded to new session highs near $84.30. It settled about five dollars higher last week. It will snap a three-week 30% rally.

Data

• The US reports Q2 Employment Cost Index. It measures direct costs (compensation) and indirect costs (benefits, Social Security contributions, training, taxes). They have moderated in the last three years but remain above the where they were pre-pandemic. The ECI rose on average by 0.80% a quarter in 2025 and that is what it is expected to have risen in Q2 after a 0.90% increase in Q1. Between the University of Michigan’s preliminary and final July survey results, we suspect sentiment deteriorated. That seems to be what the Conference Board’s survey picked up.

• Canada reports May GDP. StatCan says that the preliminary data points to 0.1% growth, while the median in Bloomberg’s survey is for 0.2%. In any event, the Bank of Canada has already acknowledged that economic activity is broadening.

• The consumer price index in the eurozone rose by 0.2% in July for a 2.9% year-over-year pace, on a preliminary basis. It was at 2.8% in June and had fallen below 2% before the Middle East war. The core rate was edged up to 2.5% from 2.4%. It was at 2.2% in January, the lowest since October 2021.

• Australia reported another robust rise in private sector consumer credit in June. The 0.8% increase is above this year’s average (0.6%) and appears to have seen no slowing despite the three rate hikes that have been delivered this year. Separately, it reported 1.3% increase in Q2 PPI (0.4% in Q1) for a 3.6% year-over-year rate (from 3.0%).

• It is a busy day in Japan. As widely expected, the Bank of Japan left its policy rate at 1.0%. Its revised forecasts include a small increase in this year and next growth forecast (0.6% from 0.5% this year, 0.8% vs. 0.7% next). It shaved this year’s core inflation forecast to 2.5% from 2.8%. A slew of economic data was also released. The highlights include an uptick in the pace of Tokyo’s July CPI, though the headline and core remain below 2%. The headline rose to 2.0% from 1.7%, while the core (excluding fresh food) rate rose to 1.9%. The June unemployment rate was steady June at 2.5%. Retail sales slumped a dramatic 4.1% in June, which offset the gains of the past two months. It was the largest decline since the early days of the pandemic. June industrial output rose a strong 1.3% (0.1% in May). It was the largest increase since last September.

• China’s July PMI reflects an economy struggling to sustain forward momentum. The manufacturing PMI fell to 49.2 from 50.3. The non-manufacturing fell to 49.0 from 50.2. The composite stands at 49.3 (50.6 in June), the lowest since the end of 2022.

Disclaimer

Federal Reserve's Thunder and no Rain Weighs on Dollar

noreply@blogger.com (Marc Chandler) — Thu, 30 Jul 2026 07:02:09 -0400

The decision to standpat on a 9-3 vote at the FOMC yesterday looked like a hawkish hold but it seemed like the more Chair Warsh affirmed the central bank’s commitment to achieving the inflation target, the more short-term interest rates and the dollar fell. The expected year-end effective Fed funds rate fell 15 bp from the session high yesterday. The 2-10-year yield curve steepened by 12 bp, completely unwinding the flattening of the last six consecutive sessions, and is now near 44 bp is the steepest since the end of May. The Bank of England, as widely expected, stood pat today, and the swaps market is discounting about 50% chance of a hike at the next meeting in September. There were three dissents. The Bank of Japan meets tomorrow, but it is also widely understood to be on hold.

The US two-year yield remains soft today and the dollar is consolidating with a softer profile against most currencies. The US Nasdaq has been unable to sustain upticks and has fallen for the past six sessions coming into today. Better tech earnings (Microsoft and Samsung) appear to be encouraging investors to try again today. Meanwhile, despite the new hostilities in the Middle East, oil prices are narrowly mixed, with WTI slightly lower and Brent slightly higher.

Prices

G10

• The euro jumped from a little below $1.1400 before the Fed’s standpat announcement and reached almost $1.1470 as short-term US interest rates fell. It settled at its best level in two weeks and above the 20-day moving average (~$1.1420 today). The euro is consolidating between about $1.1435 and $1.1485. The three-month downtrend was violated on a closing basis yesterday. The trendline is slightly below $1.1420 today.

• The yen approached its 40-year low yesterday. The dollar peaked around JPY163.90 shortly after midday in NY and was sold to about JPY163.25 after the Fed’s announcement. However, the dollar did not settle below Monday’s low, the neckline of a potential double top (~JPY164.00) that projects to around JPY162.60. It is still under pressure today, though with the dollar slipping to around JPY163.20 in the European morning. Perhaps, another way to look at the price action: the greenback is pinned between two large option strikes. There are options for $2 bln at JPY163 and $1.5 bln at JPY163.50 the expire today.

• Sterling held above Tuesday’s low (~$1.3275) and reached above $1.3370 after the FOMC announcement. It frayed resistance in the $1.3380 area, which houses the 20-day moving average and the (38.2%) retracement objective of sterling’s losses from the July 15 high (~$1.3560). It settled at $1.3370. The 200-day moving average is near $1.3400 and the (50%) retracement objective is around $1.3415. Sterling was sold in Asia to around $1.3335 before it rebounded in Europe to session highs near $1.3410.

• The Canadian dollar strengthened for the second consecutive session yesterday, and the US two-year premium over Canada narrowed for the second day, too. The greenback fell to a seven-day low yesterday, slightly below CAD1.4025. Last week, the dollar bounced smartly after approaching CAD1.4000. It is consolidating between about CAD1.4030 and CAD1.4070 today. Options for $1.12 bln at CAD1.4015 expire today.

• The Australian dollar recovered from (~$0.6920), its lowest level since July 14. It reached a new session high, slightly shy of $0.6990 and left an ostensibly bullish hammer candlestick. It is consolidating between about $0.6945 and $0.6975 so far today. Regaining a foothold above $0.7000 lifts the technical tone.

• The dollar approached the upper end of its recent range against the Mexican peso yesterday, near MXN17.54. The momentum was not sustained after the FOMC meeting and the greenback was sold to new session lows near MXN17.40 low, a four-day low. Despite trading on both sides of Tuesday’s range the settlement was near the middle of the day’s range, neutralizing the technical signal. The greenback was pressed back to MXN17.40 today and it is holding. The lower end of the recent range extends toward MXN17.35.

• The dollar posted an outside down day against the offshore yuan. It traded on both sides of Tuesday’s range and settled below its low. The US dollar was sold slightly below CNH6.7525 to record a new three-year low. The PBOC set the dollar’s fix at a new low since Q1 23 (CNY6.7892 vs. CNY6.7899 yesterday).

• The dollar recorded an inside day against the Indian rupee. Equity inflows appeared to have blunted the negative impact of firmer oil prices. The dollar rose for the first time in three sessions today and reached nearly INR95.7540. The three-day bounce in the rupee was the longest this month.

Other Markets

• Equities were uninspired by the decline in US short-term interest rates after the FOMC announcement. The Nasdaq briefly turned positive, but the upticks were sold into, and it finished lower for the sixth consecutive session ahead of Microsoft and Meta earnings. The former did better than the latter and Samsung’s reported upbeat sales today. Still equities were mixed most mostly lower in the Asia Paciifc region today. Europe’s Stoxx 600 is up a little more than a third of a percent to recoup yesterday’s loss. US index futures are trading higher, led by a nearly 2/3 of 1% gain by the Nasdaq.

• The jump in oil prices and renewed hostilities that dashed the creeping optimism earlier in the week saw benchmark 10-year yields rise mostly 6-8 bp in Europe. The 10-year US Treasury yield rose seven basis points yesterday to 4.66%. Asia Pacific yields played catch-up today, rising mostly 5-8 bp. European yields are a little firmer today, and the 10-year Treasury yield is up nearly two basis points to 4.70%. On the other hand, the US two-year yield slumped yesterday. It initially rose four basis points and fell sharply after the FOMC meeting. It is a little softer today, a little below 4.27%.

• Gold was already recovering from the dip below $4000 in the North American morning but surged after the FOMC decision. It reached a little above $4116, a new three-day high by a few cents, but could not sustain the momentum and finished slightly below the 20-day moving average (~$4072 today). It was greeted with sellers today as it tried pushing above $4100. Silver settled firmly, up almost $1, but failed to impress. It is consolidating inside yesterday’s range.

• September WTI dipped below $77.80 on Tuesday and reached almost $85.60 yesterday as hopes that the Middle East war was winding down again were dashed. After being marked up following new US threats to hit Iran hard in retaliation for its strike on Jordan, September WTI held above $84 though most of the North American session. The new hostilities in the region saw the contract extend its gains to almost $86 but stabilized and is below $85 ahead of the North American opening.

Data

• With the FOMC meeting concluding yesterday, today’s data poses possible headline risk but in terms of policy or investment decision, the impact will be marginal. The June CPI and PPI remove most of the guess work around today’s US PCE deflators. The headline pace is expected to moderate to 3.7% from 4.1%, while the core rate may slip to 3.3% from 3.4%. Personal income itself is seen rising by 0.3% and consumption by 0.4%. Weekly jobless claims will get extra attention today after last week’s report showed the lowest claims since 1969 (187k). Many observers are skeptical, but another low print may be taken more seriously. Tomorrow’s headlines, though, will be about the first estimate of Q2 GDP. The Atlanta’s Fed’s GDP tracker is for a 1.6% annualized pace, while the economists in Bloomberg’s survey are more optimistic, looking for 2.0% growth (weekly survey) and 2.2% (monthly survey).

• Canada reports its May establishment employment survey today. The household survey showed an 87.8k increase in jobs, after a loss of nearly 18k in April. The market tends to react more strongly to the household survey than the establishment survey.

• Mexico reports Q2 GDP today. After a 0.6% contraction in Q1, the economy is expected to have grown by 1.3% quarter-over-quarter. If accurate, it would be the fastest growth since Q1 22. Private consumption is projected to have slow and government spending may have fallen as investment likely did, too. The big improvement came from the external sector, with stronger exports and weaker imports.

• Growth in the eurozone surpassed expectations, rising 0.4% after a flat Q1. Although the first estimate lacks many details, Germany grew by 0.2% (and Q1 was marked up to 0.4% form 0.3%). France and Italy also grew by 0.2%. Spain reported an impressive 0.7% expansion in Q2 after 0.6% in Q1. Unemployment in the region was stable at 6.3% in June after May was revised from 6.2% to 6.3%. Ahead of tomorrow’s aggregate estimate, Germany and Spain reported July CPI figure. The German state figures point to a national increase of about 0.7%-0.8% for a 2.7%-2.8% year-over-year pace. The EU harmonized measure was 2.4% in June. Spain’s EU-harmonized measure eased by 0.1% in July after rising 0.6% in June. The year-over-year rate ticks up to 3.8% from 3.6%. Lastly, French consumer spending rose 0.4% in June, better than the 0.1% contraction expected in the Bloomberg survey and the May series was revised to 0.3% from 0.5%.

• As widely expected, the Bank of England left policy steady, with the base rate unchanged at 3.75%. The swaps market has a little more than a 50% chance of a hike at the next meeting in mid-September and sees about a 50% chance of another one before the end of the year.

• Australia’s June building permits soared by 7.2% in June, snapping a three-month fall (May was revised to -1.6% from -1.1%). Approvals for private sector homes edged up by 0.4% after surging a revised 2.4% (initially 2.8%) in May. Separately, export and import price indices for Q2 warned that Australia positive terms of trade developments stalled. For the first time in three quarters, import prices rose faster than export prices.

Disclaimer

Hump Day: War and the FOMC

noreply@blogger.com (Marc Chandler) — Wed, 29 Jul 2026 06:48:16 -0400

New hostilities in the Middle East have lifted oil prices for the first time in four sessions and is snapping the three-day decline in European and US bond yields. The US dollar is mostly narrowly mixed against the G10 currencies. Softer than expected CPI has reduced the perceived chances the Reserve Bank of Australia will hike rates again this year, after delivering three hikes in H1 26. The Australian dollar is at more than two-week lows today and is off almost 0.5%; the weakest in the G10. Among emerging market currencies, despite the continued volatility in the equity markets, the South Korean won and the Taiwanese dollar are among the strongest today. The PBOC set the dollar’s fixing at a new three-year low.

The outlook for today’s FOMC meeting is among the most uncertain it has been for some time. This may become a new feature with Chair Warsh, who eschews “forward guidance”. Most observers lean against a hike, but at the last meeting half of the “dots” implied a rate hike this year. And despite the softer June CPI and PPI, the war and tariffs continue to underpin price pressures. The Fed funds futures have almost 44 bp of tightening discounted before the end of the year.

Prices

G10

• Falling oil prices and the drop in US yields helped fuel the euro’s recovery from a new low for the month in early North American activity (slightly below $1.1355) to new session highs, near $1.1410. It stopped shy of the Monday’s high (~$1.1420) and the 20-day moving average (~$1.1415). It probably requires a move above the $1.1430 area to suggest a low may be in place. It is confined to about a quarter-of-a-cent range today above $1.1380. About 1.1 bln euros of options at $1.1415 expire today and nearly 2 bln euros at $1.1375 expire tomorrow.

• The dollar initially crept up to JPY163.95 against the yen early North American turnover yesterday before it returned to the session low near midday in NY (~JPY163.65), arguably dragged lower by the decline in US rates. It frayed Monday’s low, near JPY163.30 today, but has recovered to JPY163.70 by early European activity and has found support near JPY163.50., where options for $1.45 bln expire tomorrow. A convincing break of JPY163.30 would suggest a potential double top is in place, which projects toward JPY162.60.

• Sterling was sold to about $1.3275 yesterday, its lowest level since July 2 before the greenback’s broader retreat saw sterling recover to around $1.3310. It has held below $1.3310 today and found bids near $1.3280. Still, it must recapture the $1.3320-30 area to lift the technical tone.

• The US dollar reached a new two-week high against the Canadian dollar yesterday, near CAD1.4130, before the greenback’s broad setback. It fell to nearly CAD1.4085. It is holding today. Options for ~$500 mln at CAD!.4100 expire today. A break of CAD1.4050 could signal a retest on last week’s low around CAD1.40.

• The Australian dollar fell to a two-week low yesterday (~$0.6965), though it held the 20-day moving average and recovered, it was unimpressive. Softer than expected inflation data early today pushed the Aussie slightly below $0.6940 today. Since the low was recorded, it has not been above $0.6960.

• The Mexican peso traded mostly inside Monday’s range yesterday. The US dollar traded between about MXN17.4175 and MXN17.4930. It is in a narrower range today of roughly MXN17.4275-MXN17.4600. The first estimate of Q2 GDP will be reported tomorrow. Economists expected a trade-related recovery after a 0.6% quarter-over-quarter contraction in Q1.

• The dollar recorded an inside day against the offshore yuan yesterday. The greenback has been in a CNH6.7630 to CNH6.7820 range for two weeks. It has traded in a CNH6.7655-CNH6.7745 range so far today. The PBOC set the dollar’s reference rate at CNY6.7899 (CNY6.7928 yesterday), a marginal new three-year low.

• The Indian rupee rose today for the third consecutive session, which is its longest advance this month. Rising equities and the generally softer dollar buoyed the rupee. The dollar settled near INR96.57 at the end of last week and briefly slipped through INR95.49 today, its lowest level since July 10. The S&P 500 and Nasdaq futures are 0.2%-0,3% higher. Microsoft and Meta report earnings today.

Other Markets

• Most large equity markets in Asia Pacific recovered some of the ground lost in yesterday’s onslaught, helped perhaps by the stabilization of the Nasdaq, which initially fell to new three-month lows before recovering and settling near its highs. Still the chip space remained under pressure and took South Korea’s Kospi down another 6%, with Taiwan’s Taiex dropping 3.75%. Europe’s Stoxx 600 has a three-day advance coming into today—less exposed to tech and energy—but is off almost 0.2% in the morning session.

• Benchmark 10-year yields have stabilized today after a three-day drop in Europe and the US. Over those three days, the 10-year Treasury yield and German Bund yield both fell by 10 bp. The yield on the 10-year Gilt fell by 16 bp. Yields are mostly 2-4 bp higher in Europe today and the 10-year US Treasury yield is up a little more than one basis point to 4.62%.

• Gold has not found much traction in recent days despite the drop in yields and lower oil prices. It recorded a five-day low yesterday, slightly below $4012. The attempt to recover stalled in front of $4050. It made a marginal new low today but held above $4010. The upside remains blocked around $4050. Silver also recorded a five-day low yesterday (~$56.65). Upticks were capped, near $57.50. It rose to nearly $58.25 today, where it stalled.

• Optimism over ongoing US-Iran talks drove the price of September WTI slightly through $77.80 yesterday, a few cents from the 20-day moving average and a little above the (61.8%) retracement of the rally from earlier this month. However, new hostilities today lifted the contract to $83.30. It has straddled the $82 area throughout the European morning.

Data

• The conclusion of the FOMC meeting is today’s highlight. The Fed funds futures are discounting about nine points of a hike. This is about a 1-in-3 chance of a hike, which seems somewhat elevated to us. The softer than expected June jobs growth and moderating June CPI and PPI would seem to buy officials some time given the lack of visibility (Middle East war and impromptu tariffs). The Fed funds futures have fully discounted a hike at the September meeting and have slightly more than a 70% chance of another hike at the end of the year. Chair Warsh will hold a press conference afterwards, as has become customary.

• The UK reported a slight sequential improvement in mortgage lending in June and a nearly steady increase in net consumer credit. The data have not impacted expectations for the outcome of tomorrow’s Bank of England meeting. The swaps market is pricing in practically no chance of a change in policy. There is about a 55% chance discounted for a hike at the September meeting, and a hike is fully discounted for the early November meeting.

• Australia’s June CPI was softer than expected and this has seen the futures market downgrade the chance of a rate hike, which has, in turn, weighed on the Australian dollar. Given the base effect, unexpected 0.1% decline in Australia’s June CPI saw the year-over-year pace ease to 3.8% from 4.0%. The Q2 reading rose by 0.6% after it rose 1.4% in Q1 26. The quarterly trimmed mean rose by 0.8% (the same as in Q1 26) for a 3.6% year-over-year rate, up from 3.5% in Q1. This is the fastest quarterly pace since Q2 24 and the fourth consecutive quarterly increase. The probability of a hike next month has been modest and now negligible. Arguably, more significant is that the implied odds of a hike this year have fallen for the third consecutive session. At the end of last week, 30 bp of tightening was discounted and now slightly less than 13 bp are priced into the futures strip.

Disclaimer

Oil Falls Further, China Claims Chip Break-Through, and Market Contemplates Fed Hike Tomorrow

noreply@blogger.com (Marc Chandler) — Tue, 28 Jul 2026 06:48:14 -0400

There are three developments to note today. First, the lack of hostilities in the Middle East has oil prices continue to unwind this month’s surge. This has also taken some pressure off major bond markets. Second, reports that China has started to mass produce its own chipmaking tools and has developed DUV lithography tools that etch chip patterns onto silicon weigh on the equities in this space, which had already been hit with profit-taking. South Korea’s Kospi fell nearly 11% today and Taiwan’s Taiex slumped a little more than 4.5% today. The Nasdaq is poised to gap lower today.

The third development is the heightened speculation of a rate hike by the Federal Reserve tomorrow. On July 16, the Fed funds futures were pricing in about a 10% chance of a hike and now about a 33% chance. The US dollar itself is trading with a clear firmer bias. It is made a new high for the month against several pairs, including the euro, sterling the Australian dollar.

Prices

G10

• The euro reached the session high a little before in early European turnover yesterday slightly below $1.1420. It gradually declined from there and slipped below $1.1370 before European markets closed. It traded in a narrow range and settled on its lows. The euro slipped to a little below $1.1355 today and made a marginal new low for the month. There is little standing in the way of the year’s low, set June 24 near $1.1325.

• Lower oil prices and lower US yields dragged the greenback slightly below JPY163.35 yesterday. The US dollar recovered and approached the session high that was shy of JPY163.80. It has firmed JPY163.95 today to approach the 40-year high from last week near JPY164. The level does not appear to hold much in the way of stops or optionality. The next inflection point might be nearer JPY165.

• Sterling snapped a six-day fall before the weekend but recorded an ostensibly bearish outside down day yesterday. It traded on both sides of last Friday’s range and settled below its low. In fact, it settled below $1.33 for the first time since July 1. That was the (61.8%) retracement of sterling’s rally from the June 24 low of the year (~$1.3140). Follow-through selling today has pushed sterling to about $1.3275. Options for GBP375 mln at $1.3280 expire today. The next area of chart support may be in the $1.3240-50 area.

• The US dollar edged higher against the Canadian dollar yesterday and reached CAD1.4120, its best level in nearly two weeks. The CAD1.4125 area marks the halfway point of the greenback’s decline this month. The 20-day moving average is near there as well. The US dollar reached a high near CAD1.4130 in Asia today. Above there, the CAD1.4155 area holds the next retracement objective. The two-year US premium widened a little yesterday and reached near the highest level in 14-months recorded last week around 144 bp. It is a couple of basis points softer today.

• Yesterday, for the eighth consecutive session, the Australian dollar traded on both sides of $0.7000 and failed to close above it even once. The Aussie tested last week’s low and the 20-day moving average, slightly below $0.6965 today. That area also corresponds to the (38.2%) retracement of this month’s rally. The next retracement level is near $0.6945.

• MXN consolidated in the North American session yesterday. The dollar reached the session high near MXN17.49 in early Asia Pacific trading on Monday and recorded the session low in early European turnover (~MXN17.4120). The peso rose by about 0.2% yesterday. The greenback is testing yesterday’s high in the European morning. Resistance is seen in the MXN17.54-MXN17.56 area. The Chilean peso led the regional advance with a 0.85% gain followed by the Colombian peso’s 0.65% gain. The Brazilian real was the weakest in the region. It fell by almost 0.5% as the greenback settled above BRL5.10 for the first time in a week.

• The dollar was sold to session lows against the offshore yuan a little after midday in NY yesterday, near CNH6.7630. It is also a new low for the month. Last month’s three-year low was about CNH6.7540. The dollar is bid above CNH6.77. Last Friday’s high near CNH6.79 offers the nearby target. The PBOC set the dollar’s reference rate slightly higher today (CNY6.7928 vs. CNY6.7911 yesterday. The first fix below CNY6.80 in three years was on July 10. It has not been fixed above there since then and July 23 was the new low (CNY6.7906).

• Reports of continued intervention by the Reserve Bank of India heled to initially push the dollar to INR95.6275, its lowest level since July 13. However, the greenback’s strength emerged late in the session, and it settled near the session high around INR95.86, though slightly below the 20-day moving average for the first time this month.

Other Markets

• Equities are mixed today. As was the case before the weekend, the Nasdaq was unable to sustain early gains. After gapping lower last Thursday, it posted an ostensibly bearish outside down day yesterday. The futures are trading around -0.85% lower. A break of the 24700 area could signal a test on the 23940-retracement area, which also holds the 200-day moving average. The S&P is off marginally. Most of the large bourses in Asia fell today, led by a precipitous 10.8% plunge in South Korea and a 7.7% drop in Taiwan. Hong Kong, India, Australia and New Zealand posted small gains. Europe’s Stoxx 600 is up about 0.4%, its third consecutive gain, if sustained.

• The sharp drop in oil prices saw a modest 3-6 bp decline in US and European benchmark 10-year yields yesterday. And yields continue to pull back today. They are 2-4 bp lower in the Europe and the 10-year US Treasury yield is off three basis points to about 4.62%. The two-year Treasury yield is off around the same to dip slightly below 4.30%.

• Gold gapped higher yesterday, and after it reached a little above $4116, it reversed lower and filled the opening gap that extended to the pre-weekend high (~$4082). It settled below there and remains uninspiring. IT has pulled back to around $4020 today. The price action of silver tells a similar story. It popped above $60 briefly but has not settled above it in three weeks. It was sold below $57 today but has steadied late in the European morning.

• September WTI surged ~30% in the past three weeks and gapped lower yesterday amid new hopes for the end of the Middle East war, which the IEA has said was the most disruptive in history. Momentum traders and trend followers go caught leaning the wrong way. The session low was recorded late in the North American session a cent below $82.00. Follow-through selling today took the contract to $79.80, a little beyond the halfway point of this month’s range is about $80.30. The next retracement (61.8%) is found around $77.20 and the 20-day moving average is ~$77.80.

Data

• There is a flurry of US economic data that will be reported today in a two-hour window (8:30-10:30 AM ET) but outside of headline risk, the reports will be overshadowed by the outcome of tomorrow’s FOMC meeting (hawkish hold) and the first estimate of Q2 GDP on Thursday. The merchandise goods balance (deficit) may be the most political sensitive. The goods deficit widened in May by the most in more than a year. Exports pulled back (-5.4%) from record levels and imports rose (3.6%). Consumer goods imports increased to their highest level in six months. The trade and inventory data (US businesses have been re-stocking in Q2) will help drive last-minute adjustments to Q2 GDP forecasts. The median forecast in Bloomberg’s survey is for 2.1% annualized growth in Q2 (that same as in Q1). The Atlanta Fed’s GDP tracker has it at 1.7%. House prices and the Richmond and Dallas Fed surveys may draw passing interest. The Conference Board’s July survey is expected to see small improvement in confidence and the current assessment, but softer expectations.

• Spain reported a decline in Q2 unemployment but at 9.87% in Q2 (10.83% in Q1), it remains elevated despite solid growth (Q2 GDP due Thursday and it is expected to have grown by 0.6%, the same as Q1, making it among the strongest EMU members). June retail sales rose 2.4% year-over-year in June in constant prices, after a revised 0.3% decline in May (-0.4% initially). The wildfires in Spain (and France) will likely spur an emergency fiscal response.

• India reported June industrial output rose 7.3% year-over-year after a revised 5.0% pace in May (initially 5.1%). It matches the largest rise since March 2024. The gain was broad-based. Capital goods output jumped by a little more than 14% followed by electricity and gas production (10.6%) and manufacturing rose 7.8%.

Disclaimer

Pause in Middle East Hostilities Spark Stock and Bond Market Rally

noreply@blogger.com (Marc Chandler) — Mon, 27 Jul 2026 06:49:18 -0400

There is one major driver in the capital markets today: A sharp drop in oil prices as the US and Iran have inexplicably not attacked for the past three nights. There is speculation in the press that the US decision was partly motivated by concerns over diminishing supplies of air defenses (e.g., Patriot interceptors) after the two-week assault, but the Trump administration played this down. Crude oil prices are off 7-8% and this encouraged further unwinding of the rise in bond yields seen last week. Equities are rallying today and China’s CXMT chip maker IPO was launched in Shanghai today and it is the largest list company after today’s surge. It is big week for US tech earnings (MSFT and Meta on Wednesday and Apple and AMD on Thursday).

The dollar was marked down initially early Asia Pacific trading but has not made much further progress. The euro continues to struggle to sustain gains above previous support (~$1.14), sterling has not distanced itself convincingly from $1.33 support. The Australian dollar is struggling to sustain the recovery above $0.7000. The US dollar is above CAD1.4100. The dollar pulled back to about JPY163.35 but remains within striking distance of the 40-year high set last week near JPY164.

Prices

G10

• The euro consolidated at the lower end of last Thursday’s range ahead of the weekend. The range on Thursday, when the euro record an ostensibly bearish outside down day, may be key to the near-term outlook. The range that day was roughly $1.1365 to $1.1435. The euro held above $1.1375, where options for 1.3 bln euros expire today. The upside has been capped in front of $1.1420, and the euro is struggling to sustain the push above $1.1400, where another set of options for nearly 1.5 bln euros expires today.

• The dollar continues to hover within striking distance of the 40-year high reached against the yen last week near JPY164. Japanese officials could hike rates this week, intervene, and, possibly, secure US support. However, this seems little more than a remote tail risk. Still, the drop in oil prices and lower US yields has pushed the greenback slightly through JPY163.35, its lowest level since last Thursday’s high was recorded. US and Japanese officials have referred to the yen’s volatility, but the implied one-month vol reached a multi-year low week near 5.9%. It is now around 6.3%.

• Sterling snapped a six-day slide before the weekend and rose from almost $1.3300 to $1.3350. The gains have been extended to almost $1.3365 today. Still, more work needs to be done to boost confidence that a low is in place. Nearby resistance is seen in the $1.3375-$1.3400 area.

• The greenback made a marginal new high for the week against the Canadian dollar on Friday, near CAD1.4115. On the midday pullback, the US dollar slipped to ~CAD1.4075 where buyers re-emerged. The US dollar held above CAD1.4070 earlier today but resurfaced above CAD1.4100 in late European morning turnover. Nearby resistance is seen in the CAD1.4125-55 band.

• The Australian dollar held support before the weekend near $0.6965 and recorded in the session high near midday in NY, ever so slightly above $0.7000. The Australian dollar was one of two G10 currencies to have risen against the greenback last week; the other being the Norwegian krone. It is firm today and is trying to establish a foothold above $0.7000, which it has settled above one in the past nine sessions despite trading above it on an intraday basis. Last week’s high was a little shy of $0.7030, where options for almost A$600 mln expire today.

• Currencies from Latam accounted for three of the top five emerging market currencies last week. The Colombian peso rose 1.3% for second place behind the South Korean won. The Brazilian real rose almost 1%, while the Russian ruble appreciated by 0.60%. The Mexican peso’s nearly 0.4% gain put it in fifth place. Before the weekend, the US dollar consolidated against the peso within the previous day’s range. The peso is firmer today, amid the stronger risk appetites but it remains within last Thursday’s range (~MXN17.3775-MXN17.5400).

• The dollar slipped against the offshore yuan before the weekend but held above the previous day’s low (~CNH6.7675). The broadly heavier greenback fell to a four-day low against the offshore yuan near CNH6.7650, today. It was confined to a CNH6.7635-CNH6.7790 range last week. The PBOC set the dollar reference rate lower today (CNY6.7911 vs CNY6.7939 at the end of last week).

• A combination of lower oil prices and aggressive intervention by the Reserve Bank of India, helped lift the rupee by a little more than 0.7% today. It is the largest gain since early June. RBI Governor Malhotra indicated that the central bank’s measures to attract foreign capital with subsidized rates have drawn around $32 bln. The controversial education minister resigned over the weekend. The dollar gapped lower and fell to around INR95.7840, a two- week low and frayed the 20-day moving average (~INR95.81) for the first time in more than three weeks but settled above it.

Other Markets

• The pressure on the AI and chips was still evident before the weekend. The Nasdaq fell to a new low since early May, and although it recovered, the intraday bounce was sold and the composite finished lower for the third consecutive session and the sixth in the past seven. However, the de-escalation of tensions, at least for the moment, and the sharp drop in oil prices are boosting equities today. The large bourses in the Asia Pacific region rallied but Taiwan. China’s CXMT (important chip maker) surged by more than 450% at its is Shanghai debut today and is the largest onshore-listed company. Europe’s Stoxx 600 is about 0.7%, and US index futures are 1.0%-1.6% higher.

• Benchmark 10-year yields slumped ahead of the weekend as oil pulled back. The 10-year US Treasury yield slipped for the first time in five session last Friday, and the yield of the two-year note fell for the first time in seven sessions. Most European 10-year yields fell by 3-5 bp, but the 10-year UK Gilt outperformed with a seven-basis point pullback. Yields continue to fall today. The 10-year JGB slipped by one basis points, but in Europe, benchmark yields are off mostly 4-7 bp, led by Italy and France. The 10-year US Treasury yield is off four basis points (to almost 4.63%) and the two-year is off three basis points to 4.30%.

• Gold recovered from a three-day low before the weekend and settled above the 20-day moving average (~$4070). The yellow metal rose by about 1.4% last week. It gapped higher today. Today’s low is slightly below $4083.80, while the pre-weekend high was a little above $4082. Still, last week’s high is still a distance away at $4166. Silver rose by about 5% last week after losing more than 10% in the previous two weeks. It rose a little more than 2% before the weekend, the fifth advance in six sessions. It, too, gapped higher today and poked through $60 but could not sustain it and it is near $59 in late European morning activity.

• September WTI reached $93.50 on July 23 and pulled back to about $87.70 before the weekend. Reuters reported that Pakistan was exploring ways to resume peace talks between the US and Iran. There have been no strikes over the last couple of days. Without an explanation for either side, it allows speculation to fill the gap. The contract finished a little more than 8.5% higher last week but is off nearly 7.8% ahead of the North American open. Sept WTI gapped lower today and continued to decline. It reached a low slightly above $82 today. The halfway mark of the rally since early this month is around $80.30.

Data

• Helped by stronger Boeing orders, June durable goods orders are expected to have rebounded from May’s 4.5% drop. Boeing orders rose to 121 from 27 in May and deliveries edged up to 64 from 60. Excluding defense and aircraft orders, the median forecast in Bloomberg’s survey is for a 0.9% increase after 1.4% gain in May. Durable goods orders rose by an average of 1.5% a month in H1 25 and a 1.5% increase in June would put the H1 26 average at about 0.9%. While the FOMC’s decision on July 29 is a highlight, two days later the US publishes the first estimate of Q2 GDP. The median forecast in Bloomberg’s survey is for a 2.3% annualized pace (2.1% Q1 26). The Atlanta Fed’s GDPNow tracker says 1.7%.

• Mexico reports June trade figures today. Mexico’s trade balance has improved markedly. In the first five months of 2025, Mexico recorded a trade surplus of almost $920 mln. In the Jan-May 2026 period, its trade surplus is $5.77 bln. Mexico’s Q2 GDP will be reported Thursday, and the median forecast in Bloomberg’s survey is for 0.6% growth quarter-over-quarter after a contraction of that magnitude in Q1 26.

• The markets showed little reaction to steady eurozone money supply growth (M3 3.3% year-over-year vs 3.0$ in May)). The ECB’s Q2 bank survey warned that credit supply and demand may weaken even if at a slower pace than in the previous three months. In June, lending figures were largely in line with May. The first estimate of the region’s Q2 GDP is due Thursday and the median forecast in Bloomberg’s survey is for a 0.2% quarter-over-quarter increase after a flat Q1.

• Germany’s July IFO business survey showed an improvement in expectations that was greater than the deterioration of the current assessment, and this helped lift the overall measure of the business climate. At 86.6, perceptions of the business climate were the strongest since February, when the Middle East war began.

• Japan’s producer service prices slowed last month to 3.2% (from a revised 3.4% from 3.3% initially). The BOJ meets later this week and is widely recognized to be on hold until possibly October. Ahead of the meeting, Tokyo’s July CPI will be reported. The core is expected to remain below 2% and underscores the lack of a compelling case for faster rate hikes.

• China’s June industrial profits rose 15.1% year-over-year in June, down from 21.1% in May. A breakdown showed profit-growth in tech related industries slows. Furniture and automakers reported significant drops in earnings, according to reports. The Politburo meets this week, and many observers anticipate more stimulative measures.

Disclaimer

Week Ahead: War, Tariffs, and Three G10 Central Bank Meetings

noreply@blogger.com (Marc Chandler) — Sat, 25 Jul 2026 07:09:29 -0400

The escalation of the Middle East war sent oil prices sharply higher and pulled interest rates up, too. September WTI rose by more than 10% for a three-week increase of more than 25%. Neither side seems prepared to back down. However, judging by the largest spread this year (~$11) between the September WTI and the December contract suggests many participants suspect the current high level of stress will not be sustained. Yet, reports of the movement of munitions and people are consistent with a dramatic escalation. Moreover, last week, for the first time in the conflict, the Houthis struck ships in the Strait of Bab-el-Mandeb. At the same time, there are two other disruptive forces. First is the US tariff regime. The US has replaced the expiring Section 122 tariffs (balance of payments) with Section 301 tariffs (lax forced labor standards). But in addition, in recent weeks the US threaten 25% tariffs on Brazil, 50% on Canada (and no USMCA compliant exemption) and announced a 100% tariff on generic drugs in two years (to induce the production in the US).

The highlights for the week ahead include three G10 central bank meetings: The Federal Reserve, the Bank of England, and the Bank of Japan. The rise in oil prices spurred boosted speculation that the Fed could raise rates. The derivatives market has about a 33% chance of a hike discounted but has the moved fully discounted for the next meeting in September. The market sees the Bank of England on hold. And while the odds of hike at the September meeting eased a little, a move is fully discounted in Q4. The swaps market shows practically no chance of a BOJ hike. Earlier in the cycle, Governor Ueda was criticized for not preparing the market sufficiently. There has been no preparation now. The odds of a hike in October increased to a little more than 80% from around 70% a week ago.

Drivers: The dollar continues to be sensitive to changes in short-term interest rates. The 30-day correlation between changes in the Dollar Index and the December Fed funds futures contract is around -0.63. It has been fairly stable. The 60-day correlation is around -0.69. Changes in the Dollar Index and the US two-year yield are around 0.65 correlated over the past 30-day, while DXY correlation with the US 10-year yield is slightly above 0.50.

Data: There are two highlights in busy week ahead. The first is the FOMC meeting that concludes on July 29. Given that some officials have been edging toward a hike and the jump in oil prices, the odds of a rate hike have risen from about 14% on July 17 to about 33% before the weekend. The other highlight is the first estimate of Q2 GDP, which is due the day after the FOMC meeting. The Atlanta Fed's GDP tracker has diverged from the Bloomberg survey. The Atlanta Fed's model puts growth at 1.3% while the median forecast in Bloomberg's survey is 2.5%. The former warns of slower growth after 2.1% in Q1 26, while the latter anticipates a slightly strong pace. Other real sector data out, such as durable goods orders and shipment, June goods trade, retail, and wholesale inventories will feed into Q2 GDP forecasts.

Prices: Rising rates helped lift the Dollar Index to its highest level since July 1 on July 23 (~101.55). It consolidated ahead of the weekend. The momentum indicators are turning up. With the US seen as among the most able to cope with the disruption of the war in the Middle East, the Dollar Index looks poised to move to new highs for the year in coming days. A move above the 101.80 seen in June 24 would target 102.00 (May 2025 high) and then the 102.70 area, the (50%) retracement of the losses from the 2025 high set last February (~109.90).

EMU

Drivers: Over the past 30 sessions, changes in the euro are inversely correlated to changes in the US December Fed funds futures and the US two-year yield by about -0.65. The euro is more sensitive to changes in US short-term rates than German short-term rates, though it is inversely correlated with the German two-year yield. The euro is less sensitive to changes in the longer end of the US curve, but from the first time since the end of February, the euro's 30-day rolling correlation with changes in Germany's 10-year yield has turned positive.

Data: This week's two highlights are in the second half of the week. On July 30, the eurozone provides its first estimate of Q2 GDP. It is seen strengthening to 0.2% quarter-over-quarter. Recall that Q1 26 GDP was revised to -0.2% in June from 0.1% flash estimate (April). The revision was almost entirely a function of developments in Ireland. Ireland's Q1 GDP was initially estimated at 2% growth. The final figure came in at -12.1%. The culprit was Ireland's multinational-dominated sector, which contracted 27.1% in the quarter, as pharma and tech firms unwound the export front-loading in 2025 to beat U.S. tariff deadlines. Domestic Irish activity actually grew by up 0.6% in the quarter. The second highlight is the preliminary July CPI. The risk is that higher oil prices, after a four-month slide, will lift the CPI after a 0.1% decline in June. The year-over-year rate is likely to rise back above 3% from 2.8% in June. Before last week's ECB meeting, the market was confident that another rate hike will be delivered in September, and nothing President Lagarde said dissuaded the market expectations.

Prices: The euro's high this month, ~$1.1485, was recorded on July 15 after softer US inflation gauges. However, the surge in US rates dragged the euro to $1.1365 on July 23, a few hundredths of a cent above the low for the month set July 1. The momentum indicators are curling lower and a return to the low for the year (~$1.1325) seems increasingly likely. This area corresponds to a (38.2%) retracement of the euro's rally from the February 2025 low (~$1.0140). The next retracement (50%) is a little above $1.11. That is not a forecast at this point but identified to illustrate the significance of the recent lows and the potential of a convincing break.

PRC

Drivers: Changes in the dollar against the offshore yuan have become somewhat less correlated with the changes in the Dollar Index. The rolling 30-day correlation has eased from the year's high in late April from almost 0.90 a little more than 0.52 now. It is around levels seen in March. Since early May, the correlation between changes in the dollar against the offshore yuan and China's CSI300 equity index has been inverted (the offshore yuan tends to appreciate when Chinese equities rise). The exchange rate is not sensitive to changes in China's one-year yield. The 30-day correlation has moved between around -0.30 and +0.20 this year and is now about -0.10.

Data: China reports June industrial profits and the July PMI. Industrial profits rose 21.1% year-over-year in May. In May 2025, they had fallen by 9.1% year-over-year. In May 2024, they were virtually flat. For some context, consider that US corporate profits rose by about 12.8% in Q1 26 year-over-year and 5.5% in Q1 25. The June PMIs give some hope that as the quarter ended the economy was finding some traction. The June manufacturing PMI stood at 50.3, up from 50.0 in May. The Q1 high of 50.4 was the highest since March 2025. The non-manufacturing PMI stood at 50.2, which is the highest for the year so far, but simply returned to where it was at the end of last year. The 50.6 composite reading is also the year's high. It fell below 50 in January and February. China's Politburo meeting in the last week of July is expected to evaluate second-quarter economic performance, set the macro policy tone for the second half of 2026, and guide the rollout of the opening year of the 15th Five-Year Plan.

Prices: The dollar looks rangebound against the offshore yuan. The range seems to be about CNH6.7635-CNH6.7815. The 20-day moving average is around CNH6.7845 and a move above there could target the July high (~CNH6.81). The 20-day moving average of the dollar against the onshore yuan is ~CNY6.7815 and the July high is about CNY6.8060.

Japan

Drivers: A common claim is that if the BOJ would only hike rates a little faster that the yen would find support. Yet, the correlations suggest otherwise: that the influence of US rates is greater than Japanese rates or the interest rate differential. The dollar-yen correlation with US changes in the US two-year and 10-year yields over the past 30 days is around 0.44 and 0.32, respectively. Changes in the exchange rate and Japan's two- and ten-year yields is around 0.06 and 0.19, respectively. Changes in the dollar-yen and the two-year rate differential are about 0.32 correlated and with the 10-year differential, the 30-day correlation is slightly inverted for the first time this year.

Data: The highlight of the week is the Bank of Japan meeting that concludes on July 31. The issue is not whether it will hike rates. It is nearly a foregone conclusion it will not after it delivered a 25 bp hike last month. However, it will also provide updated forecasts, which would ostensibly lay the groundwork for another hike later this year. After recording its fastest growth in three years in 2025 (1.1%), Japan's economy is expected to slow to 0.5% this year and 0.7% next year, according to the April forecast. There is some speculation that officials will upgrade their forecasts. However, the economy appears to have lost some momentum after the 1.8% annualized rate in Q1 26, which was bolstered by stronger net exports and stronger consumption. Q2 GDP will be reported on August 17, and the early forecasts are for 0.2% (annualized), according to the median forecast in Bloomberg's survey. This week's industrial production and retail sales will help economists update their forecasts. Slightly before the outcome of the BOJ meeting, Tokyo's July CPI will be reported. Tokyo's CPI is reported a few weeks ahead of the national figure but does a decent job anticipating the national forces. The BOJ targets CPI core rate at 2%. Tokyo's core rate has not been above the target this year and neither has the national core.

Prices: The dollar reached almost JPY164 last week, a new 40-year high. Official rhetoric has not escalated. Since the high was recorded on July 23, the dollar has not traded below JPY163.65. Additional support may be around JPY163.25. A surprise rate hike by the BOJ next week could see the yen spike higher, but as the correlation work shows above, the exchange rate is more sensitive to US rates. A rate hike followed by intervention could have more meaningful impact, and explicit support by the US, could also be helpful. However, this does not seem like a high-probability scenario.

Drivers: The Burnham government is taking shape. Many observers are not convinced that the corner has been turned on the political conditions that have produced now seven prime ministers in a little more than a decade. Sterling's rolling 30-day correlation with changes in the euro has eased to around 0.82 from a peak in May of almost 0.94. Sterling's 30-day inverse correlation with US two-year yield bottomed in mid-June near -0.80 and is now around -0.60. Sterling is slightly inversely correlated with changes in two-year and 10-year UK yields.

Data: The UK reports consumer credit and mortgage lending on July 29, but the highlight of the week is the Bank of England meeting the following day. The swaps market is pricing in a little less than a 10% chance of change in policy. The BOE last cut the base rate by 25 bp to 3.75% at the end of last year. In both Q3 25 and Q4 25, the British economy grew by 0.1% quarter-over-quarter. It jumped to 0.6% in Q1 26, but that is not sustainable and Q2- growth looks to be about 0.2% (due August 13). CPI averaged 3.8% in Q3 25 and 3.4% in Q4 25. Inflation average 3.1% Q1 26 and slightly below 2.8% in Q2. The swaps market has around a 65% chance of a hike at the BOE meeting in September.

Prices: Sterling reached almost $1.3560 on July 15, its highest level in a little more than two months. It fell for the following six sessions and reached $1.33, which is the (61.8%) retracement of sterling's rally from the June 24 low, which is also the year's low (~$1.3140). It held below $1.3350 ahead of the weekend. With the momentum indicators turning lower, the risk may be on the downside, unless sterling can regain a foothold above the $1.3400 area.

Canada

Drivers: The most important driver of the USD-CAD exchange rate appears to be changes in the US two-year premium over Canada. The 30-day correlation is a little below 0.75, the highest since Q1 18. The correlation of the exchange rate and changes in the two-year US yield is near 0.40. The correlation between changes in the exchange rate and Canada's two-year yield is slightly inverse for the first time since mid-March (~-0.06).

Data: Sometimes, at the risk of confusing investors if not policymakers, the US reports the establishment and household labor surveys at the same time. The results are not always congruous. Canada separates the two reports and with a lag. On July 30, it will report May's establishment survey. The May household survey showed an almost 88k increase in overall employment, with an outsized surge of 154k full-time posts. The following day, Canada reports May monthly GDP. The economy contracted by 1.0% at an annualized rate in Q4 25 and another 0.1% in Q1 26, but Q2 is off to stronger start with a 0.5% expansion reported in April. The Bank of Canada projects Q2 growth around 2.5%, while the median in Bloomberg's survey is for 1.9%.

Prices: The US dollar held barely above CAD1.40, a new low for month, at the start of last week and never looked back. The greenback posted a key upside reversal last Monday and rose to a new high at the end of the week, a little above CAD1.4115. The CAD1.4125 area marks the halfway point of this month's range. The 20-day moving average is near CAD1.4135 and chart resistance is seen in the CAD1.4150-CAD1.4155 area. The momentum indicators look poised to turn higher early next week.

Australia

Drivers: The Australian dollar is sensitive to the broad direction of the US dollar. The 30-day correlation between changes in the Aussie and the Dollar Index is around -0.63. Over the past 30 sessions, the Australian dollar slightly less correlated to gold (-0.58) as with DXY. The 30-day correlation of changes in the Australian dollar and the two-year US yield is around -0.50. The Aussie is positively correlated with changes in Australia's two-year yield (~0.23).

Data: Australia reports June and Q2 CPI. The 0.7% decline in May will not be repeated, and given the base effect, the risk is that the year-over-year pace moves above 4%. It peaked at 4.6% in March. Central bank officials put more emphasis on the quarterly reading. CPI rose 1.4% in Q1, which matched the most since the end of 2022. The Q2 CPI is expected to rise by half as much. Australia will also report June private credit growth. It has risen by an average of 0.65% in the first five months of the year, compared with a 0.56% average increase in the first five months of last year and 0.48% in the Jan-May 2024 period to a 0.65 average After delivering three rate hikes earlier this year, the Reserve Bank of Australia is on the sidelines. It has not ruled out additional hikes, but the market is not convinced, especially at next month's meeting (August 11). The futures market has about a 1-in 3 chance of a hike discounted. Still, the market has another hike fully discounted at the November meeting.

Prices: The Australian dollar was bid to a new high for the month, slightly above $0.7025, early last week before being sold to a marginal new low for the week on July 23. It stabilized before the weekend but could not recapture $0.7000. This month's up trendline is found near $0.6955 at the start of the new week and about $0.6975 at the end of next week.

Mexico

Drivers: The 30-day correlations show that the Mexican peso is a better proxy for the JP Morgan Emerging Market Currency Index (~-0.73) than the major currencies in the Dollar Index (~0.64). The 30-day correlation between changes in the exchange rate and the two-year US yield is near 0.50. It peaked near 0.80 in mid-June, which was the highest in more than three decades. The 30-day correlation of changes in the exchange rate and Mexico's two-year yield is also positively correlated near 0.47. This year's peak in February was near 0.70, the highest since September 2022.

Data: There are two highlights for Mexico in the coming week. First, Mexico reports the June trade balance on July 27 and then Q2 GDP on July 30. Mexico's trade surplus has grown through May this year. In the first five months, Mexico recorded at trade surplus of almost $5.77 bln compared with a $918 mln surplus in the Jan-May 2025 period, and an $8.51 bln deficit in the same period in 2024. Second, on July 30 Mexico reports Q2 GDP. The economy likely rebounded. After contracting by 0.6% in Q1 26, the economy is expected to have grown by 0.6% in Q2, according to the median forecast in Bloomberg survey. The median projection is for a similar pace of growth here in Q3.

Prices: The US dollar continues to trade choppily in a new and higher range against the Mexican peso. From early May through late June, the greenback was in a roughly MXN17.16-MXN17.50 range. In the past month, it has been around a MXN17.37-MXN17.65 range. Last week, it found support near the lower end of the new range and peaked near MXN17.55. Although the momentum indicators are not generating strong signals, it remains vulnerable to a further escalation and broadening of the Middle East war and a risk-off environment. The Colombian peso, backed by a 12% policy rate and favorable political development, led the regional currencies with a nearly 2% advance last week. It reached its best level since 2020 ahead of the weekend.

Disclaimer

Oil Pulls Back, Takes Some Pressure off Interest Rates, Leaves the Greenback Slightly Softer

noreply@blogger.com (Marc Chandler) — Fri, 24 Jul 2026 06:46:32 -0400

The price of crude oil is consolidating today after yesterday’s surge and this has taken some pressure off bond markets after several countries, including the US, saw 10-year yields rise to new highs for the year. The pullback in yields is also occurring despite unexpectedly strong preliminary July PMIs. Nevertheless, there are reports that suggest the Middle East war could be on the verge of a significant escalation. The prospects could deter significant risk-off moves ahead of the weekend. Meanwhile, the US has announced 10%-12.5% tariffs on 60 countries for either not having or not sufficiently enforcing safeguards against forced labor. These tariffs are meant to replace the expiring tariffs imposed for the past 150 days that were justified on the deterioration of the balance-of-payments.

The US dollar has followed the decline in US rates and is softer against the G10 currencies today. The dollar is little changed against the Japanese yen, where it has held slightly below JPY164, the 40-year high approached yesterday. Japanese rhetoric did not change significantly. Intervention is threatened “whenever necessary”.

Prices

G10

• The jump in oil prices and interest rates pressed the euro to about $1.1365 in North America yesterday, its weakest since July 1, the day before the disappointing June jobs growth was reported. The year’s low was recorded on June 24, near $1.1325. The euro posted a bearish outside down day yesterday. It traded on both sides of Wednesday’s range and settled below Wednesday low. Yet, there has been no follow-through today and the euro is mired in about a quarter of a cent range below $1.14. Options for 1.3 bln euros at $1.1360 expire Monday.

• The dollar rose to nearly JPY164 in North America yesterday, a new 40-year high against the yen. Rising oil and US yields were the arguable the driving force. Yesterday’s high has held and since then the dollar found support near JPY163.65. Options for around $900 mln at JPY163.30 expire today. The strong correlation between US rates and the exchange rate suggests BOJ intervention may be more effective if it waited for some sign US rates are peaking.

• Sterling fell for the sixth consecutive session yesterday. That is the longest losing streak of the year. It tested support around $1.3300, which also corresponded to the (61.8%) retracement of rally from the June 24 low (~$1.3140). It is holding today, though a break could signal a move toward $1.3240-50. On the top side, sterling has not traded above $1.3345.

• The Canadian dollar has been unexpectedly resilient in the face of the greenback’s climb in the last couple of sessions. There have been two developments: the rise in the price of oil and the narrowing of the US two-year premium over Canada. The correlation of the changes in the exchange rate and the Us premium is more robust than the correlation between the exchange rate and oil prices. That said, the 30-day rolling correlation between changes the US dollar-Canadian dollar exchange rate and September WTI futures contract turned negative early this month for the first time since mid-March, but at around 0.18, it is not particularly strong. The greenback is consolidating in a narrow range so far today: ~CAD1.4065-CAD1.4085.

• The Australian dollar posted an outside down day yesterday. It fell from around $0.7020 to almost $0.6960. It held a couple of hundredths of a cent above the week’s low set Monday. A band of support extends toward $0.6945. The Aussie is trading with a firmer bias today but has been capped near $0.6990.

• The Mexican peso and Brazilian real snapped three-day rallies yesterday and were both tagged for about 0.60%-0.70%. All but a handful of emerging market currencies fell yesterday. The Colombian peso eked out a minor gain. The dollar posted an outside up day against the Mexican peso. It rallied from about MXN17.3775 to almost MXN17.54. It stopped slightly shy of the week’s high set Monday near MXN17.5540. It has not been above MXN17.5235 today but found support slightly below MXN17,47, The greenback rose a little above BRL5.09 to reach a three-day high against the Brazilian real.

• The dollar posted its highest close of the week against the offshore yuan yesterday, near the session high, slightly below CNH6.78. It is largely consolidating inside yesterday’s range today. A trendline connecting the late April, June 25 and July 8 highs comes in around CNH6.8020 on Monday. Given the greenback’s broad gains, the PBOC seemed to have little choice but to fix the dollar higher today, and indeed it did: CNY6.7939 vs. yesterday’s three-year low of CNY6.7906.

• Reports suggest Indian officials directly or indirectly intervened in the foreign exchange market to support the rupee today. The dollar traded on both sides of yesterday’s range against the rupee and settled little changed around INR96.57. It was the fifth consecutive weekly loss for the rupee, during which time it fell by about 2.4%.

Other Markets

• After Asia Pacific equity markets advanced yesterday, sharp losses in Europe and North America set the stage for today’s sell-off. The large bourses in the Asia Pacific region fell, led by South Korea’s 5.7% drop. Japan’s Nikkei 225 was off 2.7% and its 3.3% loss on the week was the most among the large regional markets. China’s CSI 300 fell almost 1.7% today but was the strongest in the region this week with a 2.65% gain. Europe’s Stoxx 600 has recouped about half of yesterday’s nearly 1.2% decline. It is little changed on the week. US index futures are firmer but nursing around 0.3%-0.5% losses for the week.

• Benchmark 10-year yields jumped 3-6 bp in Europe yesterday and five in the US. Yields in the Asia Pacific region played catch-up today. Lower oil prices appear to be helping European bonds recover from yesterday’s losses. Yields are off 2-4 bp today. The 10-year US Treasury yield is off around a basis point to 4.68%.

• The rising dollar and interest rates proved too much for gold, which unwound Wednesday’s gains in full, with a little less than a 2% drop. Losses were extended to almost $4022 today before gold recovered to a little below $4062. The week’s low on Monday was a little below $3983 and last Friday’s low was the low for the month (~$3960). It is up about 1% this week, which is sustained would be the first weekly advance in three weeks. Silver’s four-day rally was snapped with prejudice and marked by a 3.60% decline. It is firmer today near $58.50 in late European morning turnover. If today’s gains are sustained, it will be the fifth day in the past six that the price of silver has risen. Monday’s low was slightly below $55.40 and last Friday’s low (for the year) was almost $54.75.

• September WTI climbed steadily yesterday through the European and North American session. It reached $93.50 in the North American afternoon before settling near $92.20. It was the fifth consecutive gain and the eighth in the last nine sessions. Since July 10, the price of WTI for Sept delivery has risen from about $71.35 to $93.40 (~30%). It is trading lower today and reached about $88.75. Yesterday’s low was about $87.30. We see the price action as consolidative in nature and reports warn that the war could be on the verge of a major escalation. September WTI is up about 9% this week after it surged 14.6% last week. According to AAA, the average price of unleaded gasoline has risen by almost 6% over the past two weeks to around $4.10, the highest since June 11.

Data

• The preliminary estimate for the US July PMI is expected to have edged up. Recall that the June composite of 51.9 matched the highest reading since January. It finished last year at 52.7 and was at 55.1 last July. June new homes sales also will be reported. After a 7.3% slump in May, they are expected to have bounced by around 4.5%. Through May, new family home sales are off about 15% since the end of last year and about 7% below the first five months of 2025.

• The eurozone’s flash July PMI was stronger than expected. The manufacturing PMI edged up to 52.0 from 51.4. The high this year was in April (52.2) after finishing last year at 48.8. The services PMI rose to 51.6 from 49.4. It had not been above 50 since March and was at 52.4 at the end of last year. The composite is at 51.9, up from 50.0 in June. The year’s peak was in February, before the Middle East war began, 51.9.

• The UK reported an unexpected 1.0% rise in retail sales (the median forecast in Bloomberg’s survey was for a 0.3% decline after the outsized 1.2% jump in May). Excluding gasoline, UK retail sales, which are reported on a volume basis, rose by 1.1%. Separately, the preliminary July PMI was also stronger than expected. Manufacturing rose (52.8 vs. 52.5), while services improved and rose above 50 for the first time since April (51.8 vs. 48.8). The composite jumped to 52.1 from 49.3. It peaked this year at 53.7 in January and February.

• Australia’s preliminary July PMI improved. The manufacturing reading edged up to 51.7 from 51.5 in June. The services PMI rose to53.0 from 50.5. The composite now stands at 52.6 (50.4 in June). The year’s high was in January at 55.7, which was its best level since before the pandemic. It was 53.8 last July and 51.0 at the end of 2025.

• As tipped by the Tokyo CPI report a few weeks ago, Japan’s national CPI crept up in June. The headline rose to 1.7% from 1.5% and the core, which excludes fresh food, rose by 1.6% (1.4% in May). The BOJ targets a 2% core rate. It has not been above there this year. The measure that excludes fresh food and energy slipped to 1.7% from 1.8%. Separately, the preliminary July PMI showed continued strength albeit slightly less, though the market typically does not react much to the report. The manufacturing PMI is 54.7 (54.8 in June) and the services PMI is 51.9 (52.2 in June). The composite is at 53.1 (52.8 in June). It averaged 51.5 in Q4 25, 53.3 in Q1 26, and 52.0 in Q2 26.

Disclaimer

Yen Sold to New 40-Year Lows, while PBOC Sets Dollar's Reference Rate at a 3-Year Low

noreply@blogger.com (Marc Chandler) — Thu, 23 Jul 2026 06:46:49 -0400

The foreign exchange market is quiet, and the US dollar is trading with a firmer bias. The widening Middle East war has lifted September WTI to $90 and October Brent to $93. Interest rates are firm and 10-year benchmark rates in a few European countries, and the United States are at new highs for the year. These developments overshadow today’s ECB meeting, for which there is practically no chance of a hike after last month’s move. Still, there is not reason to expect President Lagarde to push back against strong expectations of a hike in September.

The dollar’s climb to new 40-year highs against the Japanese yen met little more than the mantra about taking “decisive action” if necessary. At the same time, the PBOC set the dollar’s reference rate at a new three-year low. Lastly, the US is expected to make a new tariff announcement today or tomorrow given that the 10% Section 122 tariffs (balance-of-payments grounds) expire tomorrow.

Prices

G10

• In Europe and North America yesterday, the euro was confined to about a 1/5 of a cent above $1.1400. After recording lower highs for the past five consecutive sessions, the euro traded through yesterday’s high, slightly above $1.1420 and reached $1.1435 before stalling. The sideways to lower price action has seen the five-day moving average slip back below the 20-day after pushing above it last week for the first time since mid-May. Options for nearly 1.7 bln euro expire today at $1.1400. Another set of expiring options, for nearly 2 bln euros at $1.1450, also expires today.

• The dollar recovered against the yen from the nervous drop in late Asia yesterday (to ~JPY162.70) and remained above JPY163 for most of the North American session. The greenback held a little below the 40-year high recorded on Tuesday near JPY163.25 but reached nearly JPY163.45 today, even though Finance Minister Katayama reiterated the threat of “decisive action”. Initial support is seen near JPY163.20.

• Sterling was sold to a six-day low yesterday near $1.3355, which was the first time traded below the 20-day moving average since July 2 (before the disappointing US June job growth was reported). Sterling reached a two-month high last week (~$1.3560). Yesterday’s low is holding but the upside has been capped slightly below $1.3400, where options for GBP405 mln expire today. A band of resistance extends toward$1.3435.

• The US two-year premium over Canada narrowed slightly for the first time in three days and the Canadian dollar traded with a firmer bias. The greenback peaked near CAD1.4110 and pulled back to almost CAD1.4075 yesterday in quiet turnover. It slipped to almost CAD1.4055 today, Tuesday’s low but has bounced in the European morning to around CAD1.4085. The intraday momentum indicators are stretched, but the two-year rate differential is a little wider and risk-off mood may limit the Canadian dollar’s strength despite jump in oil prices.

• The Australian dollar traded in a narrow range as it straddled $0.7000 yesterday. Recall that it had posted a key upside reversal on June 30 after it hit a three-month low near $0.6865. It might begin looking tired if it cannot establish a foothold above $0.7220, which it retested today but is hovering around $0.7000 in late European morning turnover.

• The Mexican peso traded within Tuesday’s range yesterday, leaving the greenback pinned near the lower end of its recent range. The dollar is traded narrowly on both sides of MXN17.40. There is little momentum in either direction. The dollar is posting an outside day today, trading on both sides of yesterday’s range. The close is important, especially if it is above yesterday’s high (~MXN17.4355). Brazil, which offers a significantly greater carry than the Mexico, saw the real firm to its best level since June 16, the day before the FOMC delivered its hawkish hold. The US dollar traded slightly below BRL5.05 but settled slightly above it. Moody’s played a little catch-up yesterday as it upgraded Argentina credit status to B3 from Caa1. This is in line with Fitch’s decision in May and S&P in June.

• The dollar approached a five-week low against the offshore yuan on Tuesday (~CNH6.7635) and rose to CNH6.7760 yesterday. It is trading inside that range today (~CNH6.7675-CNH6.7755). Initial resistance may be around CNH6.7815. The PBOC set the dollar’s reference rate at CNY6.7906 (CNY6.7933 yesterday), a marginal new three-year low.

• Intervention by the Reserve Bank of India helped steady the rupee today, though the dollar settled firmly near yesterday’s high. The implications of the rally in oil have seen the rupee unwind the gains made after the recently announced measures to attract foreign capital.

Other Markets

• Most of the Asia Pacific equity markets rallied today, with South Korea’s Kospi jumped 4.4% and Hong Kong’s Hang Seng rising almost 1.3% to lead the move. India and Singapore were noted exceptions. Europe’s Stoxx 600 is off about 0.6% to give back yesterday’s gain. US index futures are off around 0.3%-0.4%

• Benchmark 10-year yields in France, Spain, and Sweden are at new highs for the year today. The 10-year Treasury yield is also at new highs for the year. The US two-year yield has risen for the past five sessions. Its yield has risen by 17 bp. The implied yield of the December Fed funds futures has risen by nearly the same amount. Over the same period, the US 10-year yield rose by about 11 bp.

• Gold rose by 1.7% yesterday, roughly the same as on Tuesday. It is the largest two-day advance since July 2-3. The yellow metal reached $4166 yesterday, its best level in two weeks. However, it has been sold to nearly $4087 today and the session low does not appear in place. A close below $4070 weakens the technical tone. Silver rose 2% yesterday after a 4.2% advance on Tuesday. It is the strongest two-day rally since June 11-12. It reached almost $61, its highest level since July 7. It has come back offered today and has been sold through yesterday’s low (~$58.75). Nearby support is seen near $58.

• September WTI reached $88.60 yesterday, which it has not seen since June 11. The high was recorded shortly before the US markets opened. It trended gently lower and briefly dipped below $86 but settled near $86.85. With Hormuz and Bab-el-Mandeb nearly shut, September WTI is testing resistance is seen around $90, a two-month high. The contract high (May 18) is $95.30.

Data

• The light US economic calendar continues today, with weekly jobless claims, Chicago Fed’s June national activity index and the KC Fed’s July manufacturing survey. None are typically market movers. Still, after rising mostly in May and into early June, weekly jobless claims have fallen in four of the last five weeks. The four-week moving average stands at 214.25k, the lowest in two months.

• Canada is expected to report a 1% increase in May retail sales. The monthly average in the first four months of the year was 0.8% (compared with -0.2% average in the Jan-Apr 2025 period). The time series is flattered by higher prices. In real GDP terms, consumption is understood as having slowed in Q2 to about a 1% quarter-over-quarter from 1.5% in Q1 26.

• Mexico reports consumer prices for the first half of July. The headline and core rates have slipped back into the 2-4% target range. The headline CPI is approaching the middle of the range, while the core is just re-entering it.

• The outcome of the ECB meeting is nearly a foregone conclusion. After last month’s hike, it will remain on the sidelines today. The swaps market has around a 90% chance of a hike discounted for the September meeting, and there is no reason for ECB President Lagarde to push against expectations. She may be asked about her future amid speculation she can re-enter French politics to compete for the presidency in next year’s contest. Previously, there was speculation she could lead the World Economic Forum.

• Australia grew 76.3k jobs in June, mostly part-time posts. In the first half of the year, Australia created 161k jobs compared with about 128k in H1 25. Of those jobs, about 88k were full-time posts compared with almost 20.5k in the H1 25. The participation rate rose to 67.0 in June from 66.7% in May, but the unemployment rate was steady at 4.4%. The futures market boosted the odds of a rate hike at next month’s meeting to about a 33% chance from about 20% yesterday. It is the highest since early June.

• Shortly before the preliminary July PMI tomorrow, Japan reports June CPI. The Tokyo report, released a few weeks ago, put the market on notice that Japan’s inflation likely rose. It would be the second consecutive monthly increase, the first back-to-back rise since last September-October. The core rate is expected to rise to 1.6% from 1.4%. It has not been above the 2% target since the end of last year.

Disclaimer

USD is Little Changed as Oil Jumps

noreply@blogger.com (Marc Chandler) — Wed, 22 Jul 2026 06:47:07 -0400

While there is much consternation from the American pundits and think tanks about China’s shock as it dominates auto manufacturing and value-added manufacturing, the two shocks from the US are more pressing for investors. First, The IEA says this is the biggest disruption in the oil market in history. The war in Middle East is escalating and the disruption has lifted September WTI to its highest level since mid-June and encourages investors and policymakers to look through energy-led decline in inflation measures, like we saw in the US last week and the UK earlier today. The disruption of helium, a byproduct of natural gas and essential for semiconductor fabrication, is also being felt. Second, the US is threatening to replace expiring tariffs (implemented on due “balance of payments” issues) with a new set later this week (claiming violation of “forced labor” standards) and this is after threatening Brazil with 25% tariff earlier this month and a 50% tariff on some Canadian goods threatened this week.

The US dollar is narrowly mixed against the G10 currencies, and excluding the oil sensitive Norwegian krone, the other currencies for the most part are +/- 0.1%. Benchmark 10-year yields are mostly firmer, while equities are mixed. The economic calendar for North America is light today and the Fed is in the middle of the “quiet period” ahead of next week’s FOMC meeting. Corporate earnings today include Alphabet and Tesla.

Prices

G10

• In quiet turnover yesterday, the euro settled slightly below $1.1400, where options for around 2.9 bln euros expire there today. The lower end of this month’s range is in the ~$1.1360-80 area. The US two-year yield rose for the past four sessions for a cumulative increase of around a dozen basis points and the US two-year premium over Germany widened from a two-month low last week (~138 bp) to around 146 bp now. A move above yesterday’s high (~$1.1430) would help stabilize the technical tone after lower lows have been recorded for five consecutive sessions.

• The dollar rose for the fourth consecutive session against the Japanese yen yesterday and reached a new 40-year high, almost JPY163.25. This has held today. The recent rhetoric about intervention, if necessary, was repeated earlier today. The dollar settled above the upper Bollinger Band (~JPY163.20 today). It is straddling JPY163 in Europe, where options for nearly $1.6 bln expire today. Speculation that the next rate hike could come sooner saw short-term Japanese rates rise today and the swaps market now has about an 83% chance of a hike discounted in October, up from less than 60% at the end of June.

• Sterling fell for the fourth consecutive session yesterday. It is the longest slump in two months. It was also offered against the euro, where it suffered one of its largest losses since mid-May. The 10-year Gilt yield reached a two-month high yesterday, seemingly a shot across the bow of the new government. Sterling was sold to a five-day low near $1.3360 yesterday. It is holding so far today despite the soft CPI report. That area holds the 20-day moving average and the (50%) retracement of sterling’s rally from the year’s low (June 24, ~$1.3140). A break could spur a move toward $1.3300 next.

• A widening of the US two-year premium over Canada and the new threat of 50% tariffs on an estimated $20 bln of US imports from Canada pressured the Canadian dollar lower yesterday. The US two-year premium jumped nearly seven basis points yesterday and almost six on Monday. At 143 bp, it reached a new high since May 2025. The US dollar pushed to about CAD1.4110 and met the (38.2%) retracement objective of this month’s pullback. It is consolidating in quiet turnover today between about CAD1.4085 and CAD1.4110. The next hurdle is seen in the CAD1.4125-55 area. Options for around $635 mln at CAD1.4075 expire today.

• The Australian dollar traded firmly yesterday but the upside stalled late in the European morning, slightly above $0.7025. It pulled back in North America and settled slightly below $0.7000. Today, the Aussie is struggling to re-establish a hold above $0.7000. The high is a little below $0.7015. Although it has held above $0.6990, it looks vulnerable. A return to Monday’s low (~$0.6965) is a risk.

• Disappointing Mexican May retail sales (-0.6% vs. median forecast in Bloomberg’s survey for a 0.1% increase) stalled the peso’s gains after it reached a three-day high. The greenback straddled the MXN17.40 level for most of the North American session. It spent little time below MXN17.40 today and looks poised to move above yesterday’s high (~MXN17.4375). After weakening in the previous two sessions, the Colombian peso retook the leadership of emerging market currencies yesterday, with around a 0.7% gain. The Colombian peso reached its best level since early 2020 late last week when the US dollar approached COP3200.

• The dollar fell to a new low for the month yesterday against the offshore yuan (~CNH6.7635). The three-year low was recorded on June 17, near CNH6.7540. The greenback is trading with a firmer bias and reached CNH6.7760 today, slightly shy of Monday’s high (~CNH6.7785). The PBOC set the dollar’s reference rate at CNY6.7933 (CNY6.7917 yesterday).

• Rising oil prices helped the US dollar extend its gains against the Indian rupee today. The dollar reached INR96.5760 and settled slightly below there. It reached its highest level since the record was set two months ago, near INR96.9650. A trendline drawn off the lows from late June and early July comes in today around INR95.90 and INR96.10 at the end of this week.

Other Markets

• Yesterday’s rise in the Nasdaq was the largest this month. This coupled with Beijing’s efforts to support local equities, has had limited spill-over today. Large bourses in the Asia Pacific region were mixed, though Taiwan and South Korean markets advanced. Europe’s Stoxx 600 is advancing for the second consecutive session, while US index futures point to a lower opening. Alphabet and Tesla report earnings today.

• Benchmark 10-year yields are firmer today. The 10-year US Treasury yield settled above 4.60% yesterday for only the third time this year. The high for the year was seen on May 19, slightly below 4.69%. It is near 4.63% now. In the past three sessions, the 10-year breakeven (the difference between the conventional yield and the inflation protected security) has risen by about three basis points and the expected year-end Fed funds target rate rose almost three basis points. Between the two, they seem to account for the bulk of the rise of the 10-year yield. Asia Pacific yields were mostly 2-3 bp higher and European yields are 1-2 bp higher as many are pushing to new three-month highs today.

• Gold rose by about 1.5% yesterday, its largest advance since July 2 (disappointing US June jobs growth was reported that day). The yellow metal reached slightly through $4084, s six-day high. Good buying emerged on the pullback in the North American morning to a little below $4045, but sellers blocked the upside on the move back above $4080. Follow-through buying today has lifted gold to almost $4142 but has pulled back to a little under $4120 in late European morning turnover. Silver jumped 4% yesterday, which was its biggest advance since June 11. The session high was recorded in the European morning (~$59.25). On the nearly $1 drop in the North American morning, buyers re-emerged. Silver stalled a fraction of a cent below $60 today and is finding support in Europe near $59.

• September WTI rose another 2.25% yesterday after rising around 5.3% in the previous two sessions. The contract briefly traded above $85. The $84.55 area corresponds to the (61.8%) retracement of the decline from the contract high from May 18 (~$95.30). It has reached $88.60 today and is up almost 4.5% in late European morning activity. There is a band of congestion that extends to about $90.

Data

• The UK reported June CPI edged up by 0.1%, and this allowed the year-over-year rate to slipped to 2.6% from 2.8%. The core rate was steady at 2.6%. It is the third consecutive month that core prices rose less than 3% year-over-year. They had been rising faster than 3% since the end of Q3 2021. Services prices, which remain sticky, pulled back to 3.6% from 3.7%. Lower energy and food prices, coupled with heavy discounting on clothes, were reported. Among the first initiatives of the new government was to eliminate the VAT on electricity, which is estimated to be worth about GBP45 per household this year. The government said it will pay for the break by scrapping the previous government’s plan to create a national digital ID. However, an official in Starmer’s government said that the ID program was not funded.

• Japan reported a larger than expected JPY407 bln June trade deficit. Deviating from the powerful seasonal pattern, it deteriorated from the JPY392 bln shortfall in May. Although the yen is undervalued by various metrics, it has not translated into a trade surplus, but the deficit is shrinking. The average monthly deficit in H1 25 was about JPY393 bln and averaged about JPY169 bln in the first six months this year. Exports have risen 19.3% year-over-year, while imports have risen 25.4% year-over-year.

Disclaimer

Aided by China, Equities Bounce Back, and the Canadian Dollar Recovers from the Drop on US Threat of 50% Tariffs

noreply@blogger.com (Marc Chandler) — Tue, 21 Jul 2026 06:47:10 -0400

The US dollar is mostly softer against the major and emerging market currencies. The yen is an exception, and the market is pushing the dollar closer to the 40-year high recorded at the start of the month near JPY162.85. Oil prices are firm as the de-escalation efforts are proving tricky. Meanwhile, reports that Beijing is supporting the equity market by mobilizing state-backed investors may have encouraged bargain hunting after the tech and chip pullback.

Late yesterday, the US threatened 50% tariffs on some Canadian goods for actions it claims discriminate against US companies. At first the Canadian dollar extended yesterday’s losses, but it has recovered and is now a little higher on the day. The new UK government’s honeymoon may be short-lived following today’s report that the former government borrowed more than forecast in the first three months of the new fiscal year.

Prices

G10

• True to the recent pattern, the rise in short-term US rates yesterday saw the euro sold to four-day lows slightly above $1.14, where large options expire today and tomorrow. It has stabilized today alongside the US two-year yield. Still, the euro has not gone anywhere. While $1.1400 held, it has not been above $1.1430. Yesterday’s high was about $1.1450 and last week’s high was closer to $1.1485.

• The dollar reached a seven-day high against the yen near JPY162.60 yesterday and crept up to JPY162.70 today. The 40-year high was recorded on July 1 around JPY162.85. Finance Minister Katayama warned last week that officials are prepared to intervene at any time if necessary. Tokyo is keen to come up with ways that will encourage Japanese savers and pension funds to boost domestic investments, though the weekly MOF data suggests this is already taking place.

• Sterling appeared to fall victim to buy the rumor, sell the fact, as Andrew Burnham replaced Keir Starmer as UK Prime Minister. There was little reaction to the appointment John Healey, former defense secretary, as Chancellor of the Exchequer. Sterling extended its pullback after approaching $1.3560 in the middle of last week and fell slightly below $1.3415 yesterday. Soft employment data today has left sterling in about a quarter-of-a-cent range, mostly above $1.3425.

• From the late June low for the year, the Canadian dollar rose by about 1.7% through early yesterday before retreating in North America. It was already falling before the softer than expected June CPI (-0.4%, matching the largest monthly decline since the end of 2022). The combination firmer US two-year yields and softer Canadian rates saw the differential widen by nearly seven basis points, the biggest one day jump in two months weighed on the Loonie. The US dollar recorded a bullish outside up day but trading on both sides of last Friday’s range and settled above Friday’s high. The US has threatened a new 50% tariff on some Canadian products under old Smoot-Hawley legislation, and the greenback initially extended yesterday’s gains to CAD1.4085, but the new levy does not come into effect for 30 days, ostensibly giving negotiators time. The greenback was sold to about CAD1.4055 in Europe. The intraday momentum indicators leave room for some additional but limited US dollar losses. Nearby support is around CAD1.4040. The latest Commitment of Traders report, which covered the week through last Tuesday, showed non-commercials (speculators) in the CME futures had amassed the largest net short Canadian dollar position since early 2025.

• The Australian dollar posted an outside up day yesterday and pushed a little above of last week’s high near $0.7020 today. The $0.7025 area corresponds to the (38.2%) retracement of the Australian dollar’s downtrend since the year’s high on May 6 (~$0.7280). A move above there may target the $0.7070-90 area. Still, today’s gains have left the intraday momentum indicators over-extended, warning of the risks of chasing it higher in early North American turnover.

• US and Mexico hold the third round of USMCA talks today. Yesterday, the peso fully recouped its pre-weekend loss. The 0.65% gain meant it was the best performing emerging market currency, squeezing ahead of the South Korea won. Latam currencies were four of the top five emerging market currencies yesterday. The greenback peaked near MXN17.5540 yesterday and fell to almost MXN17.41. Follow-through selling today pushed it to about MXN17.3770. Last week’s low was about MXN17.3575.

• The offshore yuan edged higher yesterday and approached last week’s best level. The US dollar reached CNH6.7815 before the weekend and reached CNH6.7660 yesterday. It slipped to CNH6.7635 today, a new low for the month. The three-year low was recorded on June 17 (when the Fed delivered its hawkish hold) near CNH6.7540. The PBOC set the dollar’s reference rate slightly lower after setting it higher for the previous two sessions, (the first back-to-back increase this month).

• The Indian rupee rose by about 0.2% today, its biggest gain in about two weeks. Reports suggest the central bank intervened yesterday, but not today. Steadier oil prices today may have arrested the rupee’s slide, which approached the record low yesterday. The dollar settled near INR96.24 today, compared with about INR96.28 before the weekend.

Other Markets

• Equities are firmer today. MSCI’s Asia Pacific Index fell nearly 3.8% last week and slipped further yesterday. The large bourses in the region rallied today but Hong Kong and India. China’s CSI 300 was aided by reports that large state-backed investors, insurers, and asset managers were supporting the equities. It rose by a little more than 3%. The Nikkei 225 rose 3.25%, while South Korea’s Kospi gained 3.5% and Taiwan’s Taiex jumped 4.2%. Europe’s Stoxx 600 eked out less than a 0.1% gain last week before falling 0.3% yesterday. It is up 0.45% in late morning turnover. US index futures are trading higher, with the Nasdaq up around 1.3% and the S&P 500 about 0.5% better.

• Benchmark 10-year yields were firmer yesterday. The 10-year Gilt yield jumped eight basis points as investors balked at the new prime minister’s effort to secure “flexibility” within the existing fiscal rules. The 10-year Gilts yield ended June near 4.75% and reached 5.03% yesterday, its highest level since May 19. It is a little softer today. Most European yields are slightly firmer. The 10-year US Treasury yield rose almost six basis points to poke above 4.60% but is near 4.59% now.

• Gold remains pinned its recent trough, and for the third consecutive session yesterday, it traded on both sides of $4000. It is trading firmer today and reached $4084. Last week’s high was near $4102. Silver recorded the year’s low before the weekend (slightly below $54.80). It traded higher yesterday and reached nearly $57.50. Follow-through buying today lifted silver to almost $59.25. The 20-day moving average is ~$58.75 and silver has not settled above it in two months.

• The escalation and widening of the Middle East war over the weekend sent September WTI to $84.60 early yesterday, its best level since June 11. Talk of a new ceasefire proposal saw oil pare its gains and recorded a low in early North American trading yesterday near $79.60. Still, with the lack of visibility and some general skepticism. It is trading in around $1 on both sides of yesterday’s settlement (~$82.50).

Data

• Last week, the -0.2% decline in US June retail sales, excluding auto sales, overshadowed new that the July Philadelphia Fed’s business outlook soared to 41.4 from 10.3. That was its best level since late 2021. Gains in new orders and unfilled orders are promising. Today, the Philly Fed’s July non-manufacturing survey is due. It likely rebounded from the -25.8 reading in June, weakest since May 2025. Friday’s preliminary July PMI (expected to show slight improvement) is the data highlight of the week.

• Mexico reports May retail sales today. It is unlikely to match the 0.8% jump in April, which was the strongest since January. In the first four months of the year, Mexico’s retail sales rose by an average of 0.3% a month. In the Jan-Apr 20025 period, retail sales rose by an average of 0.2% a month.

• Germany’s ZEW investor survey showed a continued recovery in July from the setback seemingly spurred by the Middle East War. Expectations jumped to 59.6 in January from 45.8 in December 2025. That was the highest since July 2021. It had fallen to -17.2, the weakest since the end of 2022 in April. It reached 26.3 in July, up from 10.5 in June, and its best since the Middle East war began. The assessment of current conditions improved in each of the first three months of the year deteriorated in each month in Q2. However, it has begun Q3 with a modest improvement. It rose to -77.6 in July from -81.0 in June, which is also where it finished 2025.

• The UK reported government finances and the provided fresh data on the labor market today. The government finances that the Burnham government is inheriting leaves little room for fresh fiscal initiatives if former Chancellor Reeves’ fiscal rules will be followed. The UK borrowed more than forecast in the first three months of the new fiscal year, and the deficit was GBP2.7 bln more than the Office for Budget Responsibility had forecast in March. The labor update was mixed. Bonus payments saw the average weekly earnings (3-month, year-over-year) slip to 4.3% from 4.4%, but excluding bonuses and private earnings (excluding bonuses) were steady at 3.4% and 2.9%, respectively. The number of employees on payrolls slipped by 4k in June and was the fourth decline in past five months. The ILO measure of unemployment was steady at 4.9%. The claimant count rose by 6.7k in June compared with an average monthly increase of 12.3k through May. In the H1 25, the claimant count fell by an average of 4k a month. The BOE meets next week but the chances of a change in policy are remote. The swaps market has about a 60% chance of a hike discounted at the following meeting in September.

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Markets in Wait and See Mode

noreply@blogger.com (Marc Chandler) — Mon, 20 Jul 2026 06:40:37 -0400

The capital markets are off to a mostly quiet start today, with Japanese markets closed and mixed signals from the Middle East after the war expanded over the weekend. Crude oil prices initially rallied but have come back off. The line-up of the new UK government is awaited. The tech sell-off continued in Asia but US index futures are trading firmer.

The preliminary July PMIs are due at the end of the week, and the ECB meeting on July 23 is seen as paving the ground for the next hike in September. At the end of the week, the US Section 122 tariffs expire. The Section 301 (10%-12.5%) tariffs for using forced labor might not be ready to be implemented before the others expire. The Trump administration will likely address these issues in the coming days.

Prices

G10

• The euro traded in about quarter-of-a cent range before the weekend above $1.1425 and remains in that range today. Options for 1.6 bln euros at $1.1425 expire today. Around 4.7 bln euros of options at $1.1400 expire tomorrow and Wednesday. The high for the month, almost $1.1485, was recorded last Wednesday after the softer than expected US inflation gauges.

• The Japanese yen consolidated last week and remained in the previous week’s range. The small decline in US rates and the threat at the end of the week of material intervention did not give the yen much traction. For the fourth session today, the dollar did not trade below JPY161.90. It did record a marginally new seven-day high today near JPY162.60. The dollar appears bounded by two strikes today. One set, for nearly $3 bln is struck at JPY162 and the other for about $560 mln is struck at JPY162.50. Local markets were closed today for a national holiday (Marine Day).

• Sterling fell to $1.3425 before the weekend. It had recorded a one-month high in the middle of last week (~$1.3560), after the soft US CPI and PPI, and amid speculation that Mahmood would be the next Chancellor of the Exchequer. A formal announcement of the new cabinet is expected later today. Sterling has rallied around a nickel since the late June lows. It is consolidating today between about $1.3450 and $1.3480.

• The US dollar’s May and June gains against the Canadian dollar continued to unwind last week, helped, we think, by narrowing of the US two-year premium over Canada. The premium has narrowed for the past four sessions coming into today. The US dollar fell to a marginal new low since June 17 (the Federal Reserve delivered a hawkish hold that day), almost CAD1.40 today, but has recovered to new session highs late in the European morning near CAD1.4035. The pre-weekend high was about CAD1.4050. The CAD1.3980 area holds the (38.2%) retracement of the greenback’s gains since May 1. A break of CAD1.3955 could signal a move to the next retracement target near CAD1.3900.

• The Australian dollar fell to a three-day low before the weekend near $0.6965. It recovered but stalled around $0.6990. Still, it managed to settle above the previous week’s high (~$0.6970), suggesting that the two-day pullback was corrective in nature. It has traded on both sides of last Friday’s range today and the close is important from a technical perspective. A close above the pre-weekend high (~$0.7000) would be constructive.

• The Mexican peso fell to new lows for the week ahead of the weekend. The dollar reached almost MXN17.5575. It has come back offered today and was pushed to about MXN17.4850. The dollar appears to be in a large channel in recent weeks. The upper end is near MXN17.60, while the lower end is around MXN17.35.

• The offshore yuan slipped to three-day low at the end of last week. The dollar traded above CNH6.7800. Still, it was the third consecutive weekly decline for the greenback. It has held below CNH6.78 today and found support near CNH6.7660. While the offshore yuan was confined to its recent ranges, the PBOC set the dollar’s fix at a new three-year low of CNY6.7909 last Thursday before raising it to CNY6.7934 before the weekend. Today’s reference rate was set at CNY6.7948.

• Intervention by the Reserve Bank of India in both the onshore and offshore markets failed to do more than stabilize the rupee at lower levels. In fact, the dollar settled around INR96.45, its highest level since the record high was set on May 20 (~INR96.9650).

Other Markets

• The S&P 500 and Nasdaq gapped lower before the weekend and although they traded higher than the opening for most of the session, the gap remained open. They extend to about 7504 in the S&P 500 and 25765 in the Nasdaq. US index futures are trading firmer now. Asia Pacific equities were not as fortunate. Most large markets fell, except Hong Kong and China’s CSI 300. Europe’s Stoxx 600 is treading water, and is little changed through almost midday.

• Benchmark 10-year yields were mostly softer before the weekend, though on the week, among the major markets, only the 10-year Treasury, Gilt and JGB yield finished lower. Yields are firmer today, with the 10-year Gilt rising 2.5 bp, the most in Europe. The 10-year US Treasury yield is a single basis point to almost 4.56%.

• Gold was sold to a new low for the week ahead of the weekend, slightly below $3960. It recovered and settled above $4015. It is little changed today but firmer. A move through $4075 is needed to lift the technical tone. Silver recorded a new low for the year before the weekend, a little below $54.80. It recovered and settled higher on the day. It is near $57 now. Still, it must re-establish a foothold above $60 to improve the technical tone.

• September WTI jumped 3.8% before the weekend to around $81.50, its best level since June 12, a couple of days before President Trump suggested a ceasefire with Iran was going to be struck. It has now retraced half of the decline from the May 18 high (~$95.30). It reached $84.60 today before reversing lower amid some hopes of a new mediated effort despite the escalation over the weekend. It found initial support near $81.

Data

• It is a light week for US economic data, and it begins with the Conference Board’s June index of leading economic indicators. It edged up in April and May. The last time it rose in a quarter was Q4 21. Yet, the Atlanta Fed GDP tracker warns that growth likely slowed sharply in Q2 (~1.3% vs. 2.7% in Q1). The median forecast in Bloomberg’s survey is for 2.2% growth in Q2 but anticipates it slowing to 1.7% in the here in Q3.

• Canada reports June CPI today. Given the decline in energy prices, the 1.0% increase in May will not be repeated. An outright decline, as in the US, is possible. The last time Canada’s monthly CPI declined was in December. Bank of Canada puts more weight in the underlying core measures (median and trimmed), which average 2.05% in May compared to 2.65% at the end of last year.

• The eurozone reported a 0.4% increase in construction in May. It was the third consecutive monthly rise, something that has not experienced since 2020. It rose by an average of 0.1% a month last year and fell by an average of 0.1% a month in 2024. The median forecast in Bloomberg’s survey sees 0.2% Q2 GDP after a flat Q1.

• The UK has a new prime minister: Andrew Burnham. He is the seventh British prime minister since the Brexit referendum a decade ago. Despite the political drama, sterling has done relatively well. In Q2, it was one of only two G10 currencies to have risen against the US dollar (the Australian dollar was the other). Sterling also rose to a new 12-month high against the euro.

• Chinese banks let the one-year and five-year loan prime rates steady at 3.0% and 3.5%, respectively.

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