Marc to Market

Week Ahead: Five G10 Central Banks Meet and Reserve Bank of New Zealand and the Bank of Canada are Most Likely to Hike

noreply@blogger.com (Marc Chandler) — Sat, 24 Oct 2026 06:48:23 -0400

The US dollar was mostly softer after the G10 currencies last week. The euro, where the bond tensions escalated, was the notable exception. It finished the week with a modest loss of about 0.35%\. It was the sixth weekly decline in the past seven weeks, Moody's did not downgrade France's credit worthiness, but the prospect of more social unrest this weekend, warns of downside risks for the euro at the start of next week. The French 10-year premium widened by 30 bp over Germany last week to finish at about 167 bp, which nearly double what it was at the end of August, and the most since 1990. The euro was sold to new lows for the year against sterling and the yen ahead of the weekend. A summary of last month's Swiss National Bank meeting downgraded the concern about the exchange rate strength, but since the end of last month, the franc has appreciated by more than 3% against the euro and reached its best level since early July.

Half of the G10 central banks meet next week. It had looked like the Reserve Bank of New Zealand was the most likely to raise rates, but market sentiment has also swung in favor of a Bank of Canada rate increase, too. While the Federal Reserve, the European Central Bank, and the Bank of Japan will most likely stand pat, the most likely scenario is that all three hike rates in December. The US and eurozone report their first estimates of Q3 GDP. The US economy may have accelerated to 3.0% or above on annualized basis, while the eurozone economy looks to have slowed to 0.2% quarter-over-quarter from 0.6% in Q2.

Drivers: The dollar has become more sensitive to changes in the 10-year yield than that two-year, but the correlations are both much less than earlier in the year. The 30-day correlation of changes in the Dollar Index and the two-year Treasury yield is around 0.35, well below the 0.80 correlation seen in May and June. The correlation between changes in DXY and the US 10-year yield is around 0.45. Its peak was near 0.75. Beyond interest rates, the dollar's resilience appears to be partly a function of the conclusion that it is best positioned to absorb the shocks, some of which are its own making.

Data: The most important event in period ahead is the FOMC meeting that concludes on October 28. We did not attribute strong chances of back-to-back rate hikes by the Federal Reserve, and since early this month, the speculation has eased. The Fed funds futures are discounting around a 10% chance of a 25 bp hike, down from a 70% chance in late September. Still, the market has a December hike largely discounted and another one likely by end of Q1 27. September personal income, consumption, and deflators are due the following day (October 29). Spending seems to have slowed from 0.9%, but the median forecast in Bloomberg's survey for a 0.6% increase is still robust. From the CPI and PPI, economists have a good handle on the PCE deflator. The headline pace may tick up to 3.6% from 3.4%, while the core rate is seen firming to 3.1% from 3.0%. However, the highlight of October 29 is the first look at Q3 GDP. The median forecast in Bloomberg's survey is 3.0%, while the Atlanta Fed's GDP tracker is at 3.5%. An increase in capex and government spending is expected to more than offset a modest pullback in consumption and weaker net exports.

Prices: The Dollar Index made marginal new low for the month on October 22, slightly below 101.50, and consolidated ahead of the weekend. A move above last week's high, a little below 102.10, could signal a re-test on the year's high recorded on October 14 near 103.00. Recall that the 102.85 area is the halfway mark of DXY's decline from last year's high (~110.15) and the next retracement is nearly 104.60. Still, note that the momentum indicators have turned down from over-bought readings and the five-day moving average did cross below the 20-day moving average for the first time since mid-September in the middle of last week.

EMU

Drivers: The rolling 30-day correlation of changes in the euro and changes in the US-German two-year and 10-year interest rate differentials is near -0.45. That is around the greatest inversion of the year. The 30-day correlation between changes in the euro and the German-French 10-year differential is around 0.50. After peaking near 0.70 in early June and reached 0.60 recently. The correlation was briefly inverted last month.

Data: The European Central Bank meets on October 29. Like the Federal Reserve, it does not seem prepared to hike key rates at back-to-back meetings. However, the market anticipates that another hike, the third of the year, will be delivered in December (~75%). The swaps market anticipates another hike in Q1 27 (~60%). On October 30, the first estimate of the aggregate Q3 GDP is due. The median forecast in Bloomberg's survey anticipates that the economy moderated after growing 0.6% quarter-over-quarter in Q2 to around 0.2%. On October 30, the four largest members of the eurozone will also report October CPI, although the aggregate estimate will not be reported until November 4.

Prices: The euro toyed with the 20-day moving average last week, which it has not settled above since September 9, but ultimately broke lower. The price action reinforces the cap in the $1.1260-70 area. Although there may be support near $1.1115, the year's low near the (50%) retracement objective of the rally from last year's low (~$1.0140) found near $1.1110 looks vulnerable. There may be some psychological significance of $1.10, the next retracement (61.8%) is around $1.0880. Here, too, we note that the momentum indicators have turned higher but are still oversold.

PRC

Drivers: Beijing continues to signal acceptance of a gradually appreciating yuan. Currently, the signal is sent most clearly by the daily fix. It is possible, as some argue, that the state banks are accumulating foreign assets as a "stealth intervention", though we suspect commercial and pecuniary motivations are the key, but it should be seen as a moderating force. Surely, the PBOC is not consistently setting the dollar's fix lower and trying to engineer weaker yuan.

Data: September industrial profits will be reported on October 27. The year-to-date year-over-year measure improved in first part of the year but has weakened in the last three months. It is the longest decline since 2024. China's CSI 300 equity index is off nearly 10% this year and in mid-October, reports suggested that Beijing was encouraging insurance companies and state funds to support the equities. China's October PMI will be reported on October 31. New modest stimulative measures have been announced in recent weeks.

Prices: The dollar quietly is grinding slowly lower against the yuan. It reached almost CNH6.6685 against the offshore yuan before the weekend, a new multiyear low. While attentive to signals from the PBOC, we suspect the dollar may finish the year near CNH6.62 compared with the CNH6.67 median forecast in Bloomberg's latest survey. The onshore yuan rose it its best level since June 2022 last week (~CNY6.67). The median forecast in Bloomberg's survey for the end of the year is CNY6.68. Our more favorable outlook for the yuan would see it around CNY6.65.

Japan

Drivers: Over the past 30 sessions, changes in the dollar-yen exchange rate is most correlated with changes in the two-year interest rate differential than the other financial variables we track, outside of the Dollar Index itself It is around 0.65, the highest since early June, compared with about 0.62 for DXY. The yen's weight in the Dollar Index is 13.6%. The 30-day correlation between the exchange rate and the US 10-year yield is around 0.58 and the correlation with the US two-year near 0.61.

Data: There are two highlights in the coming days. First, on October 30, Tokyo's October CPI is due. It offers solid insight into national price developments. Tokyo's September CPI jumped to 2.7% from 1.9%, largely a reflection of the effects of childcare and water fee waivers, though underlying price pressures were evident. Yet, the impact on the second highlight, the BOJ meeting is likely to be modest. Like the Federal Reserve and European Central Bank, the Bank of Japan is unlikely to hike rates at back-to-back meeting. The swaps market has about a 75% chance of a December hike discounted and leans toward another hike in H1 27. The BOJ will also update its economic forecasts. Recall that in July, it projected growth to be 0.6% this year, 0.8% in 2027 and 2028. Core inflation was seen at 2.5% this year, 2.4% next, and 2.0% in 2028.

Prices: The dollar forged a cap around JPY158.50 in recent weeks. It broke down last week. It was as if it was pulled down by the sharp drop in US interest rates spurred by the intensification of the retreat from the AI-meme and perhaps as a safe haven from the high yielding eurozone sovereigns. The greenback met the (50%) retracement objective of the rally from the September 9 low (~JPY152.90), found near JPY156 ahead of the weekend. The next retracement (61.8%) is about JPY155.25. The momentum indicators have turned down, and the five-day moving average crossed below the 20-day moving average last week. The JPY157 area may now offer initial resistance.

Drivers: Although changes in the euro and sterling are highly correlated (~0.85 past 100 sessions), sterling is at its best level against the euro since last May. It has appreciated almost 4% against the euro this year and is nursing a negligible loss of around 0.75% against the greenback. Those challenging the dollar's resilience have been better off buying sterling than other G7 currencies.

Data: The UK reports September consumer credit and mortgage lending figures on October 29, but the highlight is Chancellor of the Exchequer Healey's presentation of the budget on October 28. The rise in market rates and increased spending has eaten away at the fiscal cushion. Several measures have already either been announced (temporary reduction in the VAT on gasoline), or hinted at, like the surcharge on the profitability of banks. In 2023, the Tory government cut the bank surcharge on the corporate tax to 3% from 8%. Fully reversing it could raise ~GBP3 bln (~$4 bln) but banks warned that increasing their tax could reduce lending, and Bank of England Governor Bailey warned that higher taxes will translate into high mortgage rates. There is some speculation that Healey also may endorse a "wealth" visa program, resurrecting the broad concept, ended by Boris Johnson, of the "investor visa".

Prices: Sterling reached almost $1.3420 on October 22, its best level since September 16. It likely marks a near-term high. It met the (50%) retracement of sterling's losses since the August 21 high (~$1.3675) and stopped shy of the 200-day moving average (~$1.3435). The pullback, we envisage, could take sterling back into the $1.3280-$1.3300 area.

Canada

Drivers: The 30-day correlation between changes in the Dollar Index and the US dollar-Canadian dollar exchange rate is a little above 0.70. The correlation between the exchange rate and the two-year interest rate differential is around 0.62, where it has steadied after trending higher since mid-June. The correlation between the exchange rate and the US two-year yield is a little above 0.38 and slightly inverted (~-0.10) with changes in Canada's two-year yield.

Data: The Bank of Canada meets on October 28. The swap market boosted the odds of a rate hike from about 35% on October 16 to 80% ahead of the weekend. The odds jumped after the firm September CPI reading on October 19 (3.2% vs. 3.0% in August). On October 30, the August monthly GDP is due after a flat July reading. The downside risks to growth that the central bank has highlighted appear to be materializing. The economy grew by 3.3% at an annualized pace in Q2, and the median forecast in Bloomberg's survey is for 1.6% growth in Q3.

Prices: With the help of falling interest rates and a smaller US premium, the US dollar continued to surrender the gains registered from early September (~CAD1.3760) to the mid-October high (~CAD1.4300). With last week's losses, it nearly met the (61.8%) retracement target, near CAD1.3965. The CAD1.4050 area may offer initial resistance. The momentum indicators are falling hard but are not oversold. The five-day moving average is the below the 20-day. The note of caution comes from the Bollinger Band, which the greenback has settled below for the past four sessions. The Canadian dollar begins next week with a seven-day rally in tow, its longest advance since March 2022.

Australia

Drivers: Australia and Norway have the highest policy rates in the G10, and their currencies are the best performers this year. Hawkish comments by the central bank have boosted the market's waning confidence that even after four hikes this year, weakening of the real estate market, and a disappointing September jobs report, and a disappointing flash October PMI, the tightening cycle may not be over. The futures market has about a 63% chance of a hike at the November 3 meeting, a little more than 70% chance of a hike discounted before the end of the year, up from less than 45% a week ago, and a little more than a 90% chance of hike by the first meeting in 2027 (Feb 9).

Data: The September and Q3 CPI will be reported early on October 28. August CPI rose 4.0% year-over-year. Last September, the CPI 0.5% month-over-month, and 1.3% in Q3 25, quarter-over-quarter. Private sector credit growth has been robust. It rose at an 8.4% year-over-year pace in August. It peaked near 8.6% in June, the strongest pace since October 2022. Slower credit growth would support ideas that the four hikes this year are indeed having impact.

Prices: The Australian dollar reached a three-and-a-half month low in the middle of October ($0.6895) and recovered to about $0.7035 last week. It met the (38.2%) retracement of its leg down from the September 9 high (~$0.7240). The 200-day moving average is near $0.7050 and the next retracement (50%) is about $0.7065. The momentum indicators are trending higher. A close below $0.7000 would disappoint the momentum traders.

Mexico

Drivers: The peso has been hit by three forces that caught the market ill-prepared. The peso's losses, the most among emerging market currencies this month (~3.4%) contrast to the Colombian peso, which leads the EM complex this month (~3.9%) followed by Russian ruble (3.2%) and the Brazilian real (~2.8%). The unwinding of US dollar-funded structures seemed to have initially triggered the move, followed by a surprisingly dovish minutes of the recent Banxico meeting, and now the stymied trade talks with the US.

Data: September trade figures are due on October 27. Mexico's external account has strengthened this year, even though the domestic economy is lackluster. In the first eight months of the year, Mexico recorded a trade surplus of $9.86 bln. In the first eight months of last year, Mexico reported a trade deficit of about $913 mln and a deficit of $17.9 bln in the same period in 2024. Exports are up 29.3% year-over-year through August, while imports 26.7% On October 30, Mexico reports Q3 GDP. The economy grew by 1.4% quarter-over-quarter in Q2. The median forecast in Bloomberg's survey projects a 0.1% quarterly expansion in Q3. An unexpected contraction would reinforce the dovish cast of the recent Banxico minutes.

Prices: The dollar spiked to MXN18.85 on October 22. It has not been this high since September 2025. It seems excessive, but that may speak to market positioning. The dollar recorded two-year lows in early September. It spent the pre-weekend session consolidating within the previous session's range. The next technical area of note is MXN18.95-MXN19.10. Initial support may be near MXN18.60, and then MXN18.50.

Disclaimer

France's Flash October PMI drop below 50 Ahead of Moody's Decision Later Today

noreply@blogger.com (Marc Chandler) — Fri, 23 Oct 2026 06:41:36 -0400

The foreign exchange market looks eerily calm. After the safe haven flows yesterday supported the Swiss franc and yen, today they have diverged. The yen’s minor gain puts its atop the G10, while the Swiss franc’s 0.25% loss puts its at the bottom. The pressure in the European bond market has eased today, but Moody’s review of France’s debt rating late today poses a challenge, and although the Macron government has threatened military assistance to quell the social unrest, more activity is likely this weekend.

The Philadelphia Stock Exchange Semiconductor Index tumbled 6.7% yesterday. It was the largest drop since June and tested the 200-day moving average for the first time since June 2025. December WTI is within pennies of the contract high set on Tuesday (~$101.35). Brazil’s presidential run-off between Lula and Bolsonaro will take place Sunday. It looks like dead heat. The markets responded favorably to Bolsonaro’s lead in the first round.

Prices

G10

• The euro seemed pulled between pressure on France and the sharp drop in US interest rates as the AI-meme showed more cracks. The former pushed the euro slightly below $1.1190 before the latter helped it recover to around $1.1230 after European markets closed yesterday. It is trading quietly but with a heavier bias between $1.1185 and about $1.1225. Options for almost 650 mln euro at $1.12 expire today. The flash October PMI was softer and pressure in European bonds has subsided today.

• The yen was the strongest G10 currency yesterday, gaining about 0.85% against the US dollar, its best session of the month. It also reached a new high for the year against the euro. The dollar tumbled to JPY156.70 yesterday. After the low was recorded in early North American turnover, the greenback consolidated and reached about JPY157.35 before the buying dried up. Yesterday’s low corresponds with the (38.2%) retracement of the dollar’s rally from the Sept 8 low (~JPY152.90). Follow-through selling today saw the dollar approach the next retracement (50%) near JPY156. The greenback recovered to new session highs around JPY157.15 before falling back to almost JPY156.50 in the European morning. Options for almost $1.2 bln at JPY157 expire today.

• Sterling reached nearly $1.3420 yesterday, its best level since September 16. It faltered and was sold to sold to a two-day low (~$1.3355) in late European turnover before sterling recovered and reached almost 1.3410 in the NY afternoon. It is trading quietly today between about $1.3370 and nearly $1.3410. Options for GBP840 mln at $1.3400 expire today.

• The Canadian dollar reached its best level yesterday since September 21. It has recouped a little more than half of its seemingly relentless losses beginning in early September. The US dollar was sold through (50%) retracement near CAD1.4030 and approached CAD1.40, where options for about $570 mln expire today. The US dollar is straddling the CAD1.40 level late in the European morning and is threatening to extend its pullback for the seventh consecutive session. The next retracement (61.8%) is by CAD1.3965.

• Although the Australian dollar traded a few ticks on both sides of Wednesday’s range yesterday, the tone was more consolidative. It probably needs to push above the $0.7050-65 area to be noteworthy. Options for about A$605 mln at $0.7000 expire today. It has been confined to a $0.7005-$0.7025 range so far today.

• The Mexican peso’s slump was continued yesterday. The dollar surged to almost MXN18.86 yesterday in early North American turnover before it largely settled in a MXN17.65-MXN17.75 trading range. It has been another tough week for the peso. It is the seventh consecutive weekly loss, and it does not look complete. The dollar is trading firmly in the upper end of yesterday’s range. The run-off in the Brazilian presidential election takes place this weekend and the polls show a tight race, but Bolsonaro is still favored. The dollar settled last week near BRL5.06 and reached almost BRL5.0 at the start of the week and traded back near BRL5.0555 yesterday.

• The dollar continues to grind lower against the yuan. The greenback slipped slightly below CNH6.6690 today, a new low since July 2022. The onshore yuan is slightly weaker but the two are traveling together. The PBOC set the dollar’s fix at CNY6.7180 today (CNY6.7220 last Friday). It has been set higher on a weekly basis once since the end of July.

• The Indian rupee snapped an eight-session advance yesterday and pulled back a little more today. In the eight-day run, the dollar fell from about INR96.77 to INR94.3225, its lowest level since September 3. It recovered to INR94.9425 yesterday and reached almost INR94.98 today and settled near the highs.

Other Markets

• Equities continue to struggle. Large Asia Pacific bourses mixed lower today and the MSCI index for the region fell for the fourth consecutive week. Europe’s Stoxx 600, with less tech exposure, has fallen by about 1.6% this week, taking today’s 0.5% loss into account. The S&P 500 and the Nasdaq Composite are near the lower end of their recent ranges. The S&P 500 and Nasdaq 100 futures are little changed.

• Benchmark 10-year yields in Europe took heart from the dramatic decline in US rates amid the tech-led equity market sell-off. France was the notable exception. Its 10-year yield rose nearly six basis points and the premium over 10-year German bunds widened to 173 bp. The 10-year Treasury yield fell ~16 bp to about 4.96%, its lowest yield in a month. The US two-year yield fell ~1 6bp to 4.64%, its lowest since September 16. Asia Pacific yields fell 5-9 bp today. European yields are narrowly mixed, but tensions are slightly more relaxed. The 10-year US Treasury yield is nearly three basis points higher (to 4.98%).

• Gold was taken for around $120 yesterday. It fell to almost $4021 for the first time since early August. It traded below $4000 today but recovered and is near $4024 in late European morning turnover. The low for the year was recorded at the end of June near $3943. Silver did not wait for gold. It extended yesterday’s losses and fell to about $53.45, a new low for the year today. It peaked in January a little below $122.

• December WTI consolidated firmly yesterday, above Wednesday’s settlement ($97.15). Although it traded inside Wednesday’s range, which itself was inside Tuesday’s range, the $99.30 close was a new settlement high for the contract. It is trading a little above $101 now, and pennies from the contract high made earlier this week.

Data

• The US preliminary October PMI is expected to soften, and the composite is seen pulling back to 57.1 from 58.4. If so, it would snap a four-month advance. Still, it would be a strong reading. The first estimate of Q3 GDP is due next week (median forecast in Bloomberg’s survey is 2.8%). Activity in Q4 is expected to moderate but hold above 2%. The final October University of Michigan consumer confidence and inflation expectations tend to have less impact than the preliminary report.

• Canada reports August retail sales. After slumping by 0.7% in July, they are expected to have jumped 1.3%, according to the median forecast in Bloomberg’s survey. We already know that light vehicle sales increased in August. Through July, retail sales have risen by an average of 0.6% a month this year compared with an average decline of 0.1% in the first seven months of 2025. More broadly, consumption rose 3.3% at an annual rate in Q2 and may have slowed in Q3.

• Mexico reports August IGAE economic activity, which is similar to a monthly GDP estimate. It is seen rising by 0.3%, but given the base effect, the year-over-year rate may slow to around 3% from about 3.5% in July.

• The eurozone’s flash October PMI slowed. The composite eased to 51.9 from 53.1. It is the first decline since May. It finished last year at 51.5. The manufacturing PMI is at 52.4 (52.9 in September), and the services PMI slipped to 51.7 (from 53.0). Separately, the ECB’s September inflation survey was little changed. The one-year expectation of 3.1% compares with August’s 3.0%. The three-year expectation was steady at 2.9%.

• Late today, Moody’s will announce the conclusion of its review of France credit worthiness. It current Aa3 rating is two notches above the S&P and Fitch. Moody’s has a negative outlook, and a two-step catch-up move seems likely.

• The UK reported September retail sales (-0.1% vs. median forecast in Bloomberg’s survey for a 0.1% decline. On the other hand, the flash PMI was firmer than expected. Recall that unlike most countries, the UK retail sales are reported on a volume basis so rising prices which have lifted other countries’ retail sales do not impact the British report. The composite PMI rose to 53.1 from 52.0. The manufacturing PMI is 52.8 (from 51.9), and the services PMI is 53.1 (from 52.1).

• Australia’s preliminary composite PMI slumped to 47.7 from 51.3 in September. It is the third consecutive decline and suggests that four rate hikes this year are moderating activity. It finished last year at 51.0. The manufacturing PMI is 49.7 (from 49.6 in September) and is the first back-to-back sub-50 reading since the end of 2024. It was at 52.0 in July and August. The services PMI is 47.8 (from 51.9).

• Japan reported September CPI rose to 2.1% (from 1.9%), and for the first time this year, the core rate rose above the 2.0% target (2.1%). The measure that excludes fresh food and energy rose 2.4% (from 1.9%). The report was largely anticipated by the Tokyo CPI data that was released a few weeks ago. The swaps market remains confident that the Bank of Japan will not raise rates next week and assesses around a 75% chance of a hike at the following meeting in December, down from almost 80% at the end of last week. The market does not typically respond much to the PMI. The October preliminary composite PMI is 52.3, unchanged from September. The manufacturing PMI is 53.3 (from 54.1 in September), and the services PMI stands at 52.0 (from 51.3 in September).

Disclaimer

Risk Appetites Wane: AI Jitters Returns, European Debt Stress Continues, Oil Firms

noreply@blogger.com (Marc Chandler) — Thu, 22 Oct 2026 06:46:37 -0400

Market sentiment is fragile. After earnings helped boost sentiment yesterday, a different set of earnings weakened it today. The broad retreat has seen some signs of risk-off in the foreign exchange market with the yen and Swiss franc leading the major currencies. At the same time, pressures European bond market persist, and the peripheral premiums over Germany are wider. The euro is a laggard and was turned back from about $1.1255 today. Moody’s, which assigns France a credit rating two notches above S&P and Fitch and a negative outlook, will announce the conclusion of its review tomorrow. A downgrade looks inevitable and a two-step catch-up move cannot be ruled out.

The US economic calendar is light and participants in the foreign exchange market will be keeping a close eye on equities. Meanwhile, oil prices remain firm and December WTI is bumping around $100 a barrel.

Prices

G10

• The euro was confined to about a quarter-of-a-cent range below $1.1240 yesterday, with a marginal new session high recovered in the NY afternoon. It reached about $1.1255 today in the Asia Pacific sessions, but as French bonds came under pressure in Europe, the euro slipped to session lows near $1.1215. This third time in five sessions it was turned back from the $1.1260-70 area. The 20-day moving average is near $1.1245, and the euro has not settled above it since September 9. The euro has to prove itself, and in a material sense, given the interest rate differential, one is paid to be long dollars, and it hasn’t yet. Options for nearly 2 bln euros expire today at $1.1200.

• The greenback has broken down today against the yen after it straddled JPY158 in each of the past five sessions. Falling US yields and unwinding of short-yen hedges to long Japanese equity positions sent the dollar to almost JPY156.75 today, a new low for the month. Options for about $1.5 bln at JPY157.50 expire today and some pressure on exchange rate may be related. A break of the JPY156.70 area could signal a move toward JPY156.

• Sterling consolidated yesterday in the upper end of Tuesday’s range. It traded in a little more than a fifth-of-a-cent range around Tuesday’s $1.3380 settlement. Still, it settled above its upper Bollinger Band for the second consecutive session (~$1.3390 today). The market seems stretched after its five-session, 2.7-cent rally that brought it to a potentially important technical level. Still, sterling reached almost $1.3420 today before stalling. The $1.3400 area holds the (50%) retracement of the decline from the late August high (~$1.3675) to the mid-October low (~$1.3135). The highs from the brief consolidation in mid-September also are around $1.3400. The next retracement target is around $1.3470.

• After rallying a little less than 2% in the previous five sessions, the Canadian dollar consolidated yesterday. The greenback did not move more than around 20-pips from Tuesday’s settlement, trading between about CAD1.4040 and CAD1.4080. The US dollar edged down today to about CAD1.4015, its lowest level in a month. Psychological support is seen around CAD1.40, but the retracement objective is near CAD!.3965.

• The Australian dollar’s advance extended to $0.7035 yesterday, a new high for the month. The five- and 20-day moving averages crossed for the first time since mid-September. It made a marginal new high today before risk-off forces saw it pullback toward $0.7005. Yesterday’s low was slightly below $0.7000.

• The Mexican peso tumbled to new lows for the year yesterday and fell further today. The dollar reached almost MXN18.73 yesterday and nearly MXN18.8150 today. The greenback closed firmly and the move does not seem over. A move toward MXN19.0 area does not look unreasonable. We are looking for some kind of climactic top or a reversal pattern, and neither has materialized.

• The dollar continues to trade heavily against the offshore yuan. It fell to CNH6.6715 today and new multiyear low. The grind continues and the direction of travel is still clear. The dollar’s reference rate was set at CNY6.7195 (CNY6.7192 yesterday).

• Foreign equity inflows to participate in Jio Platforms IPO yesterday have coincided with new policies that raised the cost of being short the rupee has helped improve the exchange rate. The dollar was approaching May’s record high earlier this month near INR97 and fell a little below INR94.42 yesterday, its lowest level since September 7. As the equity-related flows eased and oil prices rose, the US dollar posted a potential key upside reversal against the rupee today by making a new low for the move and then recovering and settling above yesterday’s high. The dollar recovered from INR94.3225 to INR94.9425.

Other Markets

• The Nasdaq Composite rose to a five-day high yesterday and closed firmly. The Philadelphia Semiconductor Index traded firmer and posted a four-day high close. However, disappointing earnings have seen AI-related companies lead the equity sell-off today. South Korea’s 3.5% tumble led the Asia Pacific equities lower. Even the tech-light European Stoxx 600 has fallen a little more than 1% today. The Nasdaq 100 futures are off 1.8%, and the S&P 500 futures are around 1% lower.

• The US 10-year Treasury yield traded quietly around 5.10% yesterday and is near 5.06% now. Strains in the European bond market were still evident. The French premium continues to widen. The contagion, of course, spreads to other countries seen to have pre-existing conditions first. It is an unstable situation, and a political realistic near-term off-ramp does not seem obvious.

• The debt strains in Europe do not appear to have helped gold, which slid to a new two-week low today, slightly below $4067. A break of this area could see a return to $4000 or the late June low near $3943. Silver traded quietly yesterday in a little less than a $1 range, about half of Tuesday’s range. It has been sold below Tuesday’s low (~~$56.40) today and there is little on the charts ahead of the $55 area, where it bottomed in June and July.

• Reports that oil flows from the Middle East remain strong despite the increased Iranian attacks saw the December WTI contract pull back from the brief excursion above $100. The contract is trading firmly in about a $97.70-$100.10-range so far today.

Data

• The US reports weekly jobless claims today. It is the closest to a real time labor market reading. The four-week moving average, used to smooth the noisy series, stood at 198.50k. It recorded the modern low in September 2022 at 197.50k. Anything below 200k is notable. In the week of October 3, continuing claims were at 1.71 mln, slightly above the three-year low recorded near the middle of last month (~1.699 mln). Former Fed Chair Powell’s characterization of a low hire/low fire economy still is apt. The index of leading economic indicators and the KC Fed survey are also due but tend not to elicit a market reaction.

• Mexico’s CPI for the first half of October looks little changed. The year-over-year headline rate may tick up to 3.59%, according to the median forecast in Bloomberg’s survey, from 3.49% in the last two weeks of September. The median projection anticipates that the core rate slipped to 3.70% from 3.71%.

Disclaimer

Euro Pressure Persists

noreply@blogger.com (Marc Chandler) — Wed, 21 Oct 2026 06:45:23 -0400

Fears over the AI-meme, which took the semiconductor index down more than 10% last week, has stabilized with the help of favorable earnings by Super Micro Computer and SpaceX. South Korea’s Kospi dropped 14.5% last week amid the anxiety. It rallied 3.3% today and is now higher on the week. On the other hand, the pressure in the European bond market continues. The French 10-year yield is edging closer to 5.00% and the premium over Germany is approached 160 bp. The widening of the peripheral premiums over Germany is seeing the euro underperform.

The US and Canadian economic calendars are light today, and the foreign exchange session may take its cues from the stock and bond markets. The firm oil prices are lending support the Norwegian krone. The Australian dollar extended is gains and is at a new high for the month. The faster UK inflation boosted the market’s confidence of a BOE rate hike early next month and sterling is traded at its best level against the euro since May 2025. Tensions in US-Mexican trade talks keep the peso on the defensive.

Prices

G10

• The euro rose slightly above $1.1260 yesterday and stopped shy of last week’s high recorded ahead of the weekend near $1.1270. It is trading subdued between about $1.1215 and $1.1240 so far today as the consolidative tone continues. Options for 4 bln euros between $1.1195 and $1.1200 expire today.

• The dollar continues to trade within the broad sideways trend against the Japanese yen seen this month. It traded in less than a half a yen range around JPY158.20 yesterday. Today, it has been confined to a JPY158.00-40 range. Options for $1.2 bln at JPY158 expire today.

• After a brief pause on Monday, sterling’s advance that began in the middle of last week from a little below $1.3140 continued yesterday. It reached almost $1.3410, its best level in more than a month. That met the (50%) retracement of sterling’s decline from the August high (~$1.3675). The firm CPI reading has helped underpin sterling today. It is trading firmly within yesterday’s range. The 200-day moving average is near $1.3435 and the next retracement objective (61.8%) is about $1.3470.

• The Canadian dollar strengthened for the fourth consecutive session yesterday, though the two-year discount to the US widened for the first time in six sessions. With the greenback’s losses yesterday, it met the (50%) retracement of the rally that began from the CAD1.3760 area in early September. So far today, the US dollar has been confined to about a 15-tick range around yesterday’s CAD1.4060 settlement. The next retracement (61.8%) is found near CAD1.3965. Initial resistance is seen in the CAD1.4070-CAD1.4100 area.

• The Australian dollar is trading at a new high for the month ($0.7030) in European turnover. It settled above the 20-day moving average (~$0.6975 today) for the first time since September 11. The $0.7025 area corresponds to the (38.2%) retracement of the Aussie’s losses since the early September peak (~$0.7240) and the 200-day moving average is near $0.7050. The (50%) retracement is around $0.7265.

• The Mexican peso continues to consolidate around its weakest level of the year. With minor exceptions, the US dollar remains confined to the range established on October 14 (~MXN18.3550-MXN18.6035). News that the US-Mexican trade talks have been stymied over tariffs on steel and aluminum be a new weight on the peso. This week’s high so far has been about MXN18.55.

• The Chinese yuan continues to grind higher. The dollar has risen against the offshore yuan in only one week since the end of August. Through September, the dollar rose in two months this year after it appreciated in three months in 2025. The roughly 4.5% appreciation of the offshore yuan against the greenback does not sound like much but it is one of the strongest currencies of the year. It has appreciated by 8.5% against the euro and 5.2% against the yen. It is flat today, consolidating inside yesterday’s range. The PBOC shaved the dollar’s fix today to CNY6.7192 (CNY6.7200 yesterday), a new four-year low.

• The Indian rupee continues to be squeezed higher by the central bank’s efforts to stabilize the currency. The Reserve Bank of India’s tightening foreign exchange rules spurred a seven-day rally before yesterday’s holiday. Since the high set October 7 (~INR96.85), the dollar fell almost 2.2% by the end of last week. The dollar was sold to INR94.4175 today, a new low since September 7. Last month’s low was slightly above INR94.27.

Other Markets

• US equity indices recovered from early losses, but nervousness about the AI theme saw the Nasdaq underperform. However, favorable tech earning reports have helped lift the tone today. The large bourses in the Asia Pacific region advanced but Hong Kong, China, and India, with South Korea leading the way with a 3.3% rally. Europe’s Stoxx 600 is up for the first time this week (~0.5%). The Nasdaq 100 and S&P 500 futures point to a higher open.

• The US 10-year yield remains in the range set last Thursday (~5.03%-5.16%). It settled slightly above 5.07% last week and is near 5.13% now. In a volatile session yesterday, European benchmark 10-year yields finished lower but the French premium to Germany settled above 150 bp. European yields are 3-7 bp firmer and the peripheral premiums are wider.

• Gold sulked to a three-day low yesterday, slightly below $4112. It looks heavy despite the pullback in rates and softer US dollar. It has edged down to almost $4106 today. Last week’s low was a little above $4073 and that appears to be the next technical target. Silver traded on both sides of Monday’s narrow range and reached a four-day high (~$58.60). It settled above Monday’s high but there has been no follow-through today. It has come back softer and was sold to about $57.10, as it trades softer but within yesterday’s range.

• December WTI traded in a wide range yesterday: ~$95.25-$101.35. It traded on both sides of the range of the past two sessions. It is trading firmly today and is recording session highs late in the European morning above $100.

Data

• Mexico reports August retail sales today. They fell in June (-0.4%) and July (-0.1%). Retail sales have averaged a monthly increase of 0.1% through July. In the first seven months of 2025, Mexican retail sales rose by an average of 0.3% a month.

• The UK CPI rose by 0.4% io September, lifting the year-over-year rate to 3.5% (from 3.1%). That is a new high for the year and a little firmer than expected. The core rate rose to 2.8% from 2.6%, where it had been stuck since May. The September reading is the highest since March. Service inflation accelerated for the first time since May. It has risen 3.7% year-over-year, up from 3.4% in July and August. The swaps market has had more than an 80% chance of a Bank of England rate hike discounted for the next meeting in early November since October 2. The odds have edged up to nearly 100%. Separately, the government’s finances show that British debt exceeded GBP3 trillion for the first time. The deficit in the April-September period widened to GBP97.8 bln, which is about GBP6 bln more than the Office for Budget Responsibility projected in March. This may intensify the challenges for the government when it presents the budget next week.

• There is a strong seasonal pattern for the Japanese trade balance to improve in September. There has been one exception (2014) in the last 20 years. True to form, the deficit fell to about JPY537 bln from JPY1.11 trillion in August. One cannot deduce Japan’s trade balance from the valuation of the currency. The OECD’s model of purchasing power parity has the yen almost 63% undervalued. Through September, Japan has recorded a JPY3.32 trade deficit compared with a JPY3.09 trillion shortfall in the first nine months of 2025 and a JPY4.23 trillion deficit in same period in 2024.

Disclaimer

AI Anxiety Returns, Peripheral Premiums Widen in Europe, and Oil Extends Gains

noreply@blogger.com (Marc Chandler) — Tue, 20 Oct 2026 06:46:48 -0400

The US dollar is mostly softer as AI worries resurface. A dismal showing of an IPO for an AI infrastructure company in South Korea seemed to renew last week’s concerns. The Canadian dollar is leading the charge today after the secessionist referendum in Alberta lost handily. The UK reported better-than-expected employment figures, which helped lift sterling.

In addition to the AI concerns, investors are monitoring two other developments today. First, Iranian strikes are lifting oil prices. Brent is at a five-month high and the December WTI contract is above $100. The Norwegian krone often is sensitive to oil prices, and it is the second strongest G10 currency today behind the Canadian dollar. Second, the social/political tensions in several European countries remain a concern. French 10-years are at new highs, approaching 5% and Italian bonds are also under pressure. The peripheral premiums over Germany are widening.

Prices

G10

• The euro was traded in a narrow range in North America yesterday, mostly between $1.1210 and $1.1230. It spent the entire session below last week’s close (~$1.1240). The early markdown in the Asia Pacific session to slightly below $1.1185, and the single currency largely held above $1.12 since early European turnover yesterday. It continues to trade quietly between $1.1205 and $1.1235 so far today. Options for 3.1 bln euros struck at $1.1265 expire today.

• Firmer US rates helped lift the dollar against the Japanese yen. The greenback made a new session high in North America near JPY158.55. It edged up to JPY158.60 today to fray the 200-day moving average but has come back off to approach JPY158 in Europe. A break could signal a test on last week’s lows, near JPY157.55.

• Sterling traded with a slightly heavier bias yesterday, but it was confined to about a 20-tick range on both sides of the pre-weekend settlement. It slipped ever so slightly below $1.3300 in the NY afternoon. It has held above $1.3300 today and reached almost $1.3360 on the back of better-than-expected jobs data. Last week’s high was a little above $1.3370. It has not settled above $1.34 since September 15.

• The Canadian dollar strengthened for the third consecutive session yesterday. Despite a little softer than expected Canadian September CPI, the two-year yield jumped 10 basis points and the narrowing of its discount to the US may have helped extend the Canadian dollar’s recovery. The greenback was sold to almost CAD1.4070, a three-and-a-half-week low. The US dollar also surpassed the (38.2%) retracement of the rally from the November 8 low (~CAD1.3760). News that the secessionist referendum lost handily in Alberta (~75% rejected it) the Canadian dollar is trading firmer. The US dollar eased to below CAD1.4050. The (50%) retracement is about CAD1.4030. Chart support is seen around CAD1.4000.

• The Australian dollar traded firmly yesterday, and although it reached a three-day high, it stalled in front of $0.7000. It edged a little closer to $0.7000 but has not traded above it, though it could in North America today. It has not settled above $0.7000 in three weeks. In the middle of last week, it reached an intraday high of almost $0.7015. The $0.7025-50 area holds the 200-day moving average and the (38.2%) retracement of the losses since last month’s peak (~$0.7250).

• The US dollar initially rose against the Mexican peso yesterday and poked slightly above MXN18.55. However, the greenback trended lower in Europe and North America and slipped below MXN18.41 before consolidating. A near-term shelf has been forged MXN18.34 in the second half of last week. The dollar slipped to around MXN18.3750 today before it rebounded to MXN18.4735. It looks poised to re-test yesterday’s high amid a risk-off session.

• The dollar slipped against the offshore yuan yesterday and posted a loss for the third consecutive session. That matched the longest losing streak in two months. It has eased again today and reached almost CNH6.6765, encouraged by the PBOC. The PBOC continues to guide the yuan higher. The dollar’s fix was set at CNY6.7351 at the end of September and CNY6.7208 yesterday and CNY6.7200 today.

• Indian markets are closed today for a national holiday (Dasara).

Other Markets

• The Nasdaq Composite rose by about 1.5% yesterday, its best gain in nearly a month, even if not fully retracing the pre-weekend loss of 2.15%. However, the disappointing performance of a South Korean AI-infrastructure company IPO (Elice) renewed the concerns over AI and is weighing on equities more broadly. South Korea’s Kospi fell by 3.7% but all the large bourses in the region fell. A notable exception in Indonesia, where measures adopted to address the MSCI concerns helped lift the Jakarta Composite by almost 5.7%. Europe’s Stoxx 600 is off around 0.75%, and US Nasdaq 100 and S&P 500 futures are trading with a heavier bias.

• Benchmark 10-year yields jumped in Europe and North America yesterday. The French 10-year premium widened by 11 bp over Germany yesterday to 148 bp. It was a new settlement high since the end of 2011. The French yield reached 4.83%. The high from earlier this month was almost 5%. With the Nasdaq rallying, the 10-year US Treasury yield jumped a little more than seven basis points (to almost 5.15%) after falling about 16.5 bp last week. The 10-year JGB yield slipped a basis point today (now below 2.89%). European yields a narrowly mixed, but the 10-year French and Italian bond yields are a couple of basis points firmer, and their premium to Germany is widening. The 10-year US Treasury yield is off a little more than a basis point.

• After reaching $4190 yesterday, gold was sold to new session lows in North America, near $4139. It frayed the 20-day moving average for the second consecutive session but has failed to close above it since September 3. It has been sold to a new three-day low today, slightly below $4112. Last week’s low was around $4073. Silver traded quietly yesterday between slightly above $57.00 to about $57.85. It was also sold to three-day low today, around $56.40, before recovering back above $57 in late morning European turnover.

• December WTI traded firmly within the pre-weekend range. The early pullback to almost $96.70 was bought and the contract recovered to $98.80 in the North American afternoon. The pre-weekend high was about $99.35, and it took it out today, rising to almost $101.

Data

• The US reports September housing starts, which the median forecast in Bloomberg’s survey anticipates the first increase since June. Still, despite higher prices and interest rates, housing starts in the first eight months of the year are a modest 1.1% lower year-over-year. Permits, a leading indicator, are off less than 1%. Pending home sales had a strong Q2 but fell in July and August. Still, they are nearly flat on year-over basis this year. The October Philadelphia’s Fed non-manufacturing survey is also due. The manufacturing survey, released last week, was weaker than expected at 20.9, down from 37.8. The non-manufacturing survey has been negative this year, except in July, and also contracted every month last year.

• The eurozone’s August current account surplus stands at 8.7 bln from 27.6 bln in July and nearly 20.6 bln euros in August 2025. Despite China’s import penetration, EMU’s current account surplus is modestly lower this year. It averaged 23.1 bln euros in the first eight months of 2025 and about 20.9 bln euros in the first eight months of this year. The ECB’s staff expects it to narrow to about 1.5% of GDP this year from 1.7% last year. Separately, construction output in August jumped 1.8% after July’s flat reading was revised to +0.2%. Despite the infrastructure efforts, construction output has fallen by an average of 0.1% this year after rising by an average of 0.2% a month in the first eight months of 2025.

• Germany’s ZEW survey showed a deterioration of expectations (28.1 vs. 34.7). It was the first decline since April. The assessment of the current situation improved (-35.9 vs. -47.1). It was the fourth consecutive improvement and is the best since June 2022.

• UK labor market was little changed. Average weekly earnings were narrowly mixed, and the ILO measure of unemployment rate fell to 4.7% from 4.9%. That matched the lowest rates since April 2025. The number of payrolled employees (similar to the establishment survey in the US) unexpectedly rose by 13k and the August loss of 26k was revised to an increase of 1k. by 8k in September. The number of people on payrolls had not risen since January. The claimant count jumped by 30.3k, but the sting was lessened by the revision in the August series to 7k from almost 28k. September CPI is due tomorrow and the market the headline to accelerate to 3.4% from 3.1% and the core rate to 2.8% from 2.6%.

• As widely expected, Chinese banks left the loan prime rates steady at 3.0% and 3.50% for the one-year and five-year tenors. The PBOC signaled that its overnight reverse repo rate will replace the current seven-day rate as the new policy benchmark. Since the effective rate is lower than the seven-day rate, there is a modest easing implication.

Disclaimer

Euro Marked Down, China's GDP Firmer than Expected, AI Equities Stabilize

noreply@blogger.com (Marc Chandler) — Mon, 19 Oct 2026 06:42:10 -0400

The US dollar is mixed against the G10 currencies to start the new week. The dollar-bloc and Scandis are firmer, while the euro, Swiss franc, sterling and yen are softer. The euro is weakest after being marked down initially on the social strife in Europe, especially France, the weekend. Peripheral premiums have widened against Germany and is a drag on the euro. On the other hand, equities, including some AI-related names stabilized today. South Korea’s Kospi, which was tagged for nearly 14.5% last week, settled 1.75% higher today, and the Nasdaq 100 futures are up 1%.

China’s Q3 GDP was reported a little stronger than expected (1.2% quarter-over-quarter vs. 0.9% in Q2), though the growth in retail sales (used as proxy for consumption) lagged behind industrial output (used a proxy for exports). The PBOC set the dollar’s reference rate at a new multi-year low. The highlight today’s North American session is Canada’s September CPI and Alberta referendum, where the secessionists appear likely to lose. The Canadian dollar is around a three-and-a-half week high.

Prices

G10

• After approaching a key retracement objective near $1.1110 in the middle of last week, its lowest level since May 2025, the euro recovered to almost $1.1270 before the weekend, an eight-day high. The euro was marked down to slightly below $1.1185 in early trading as the French protests over the weekend took a toll. It recovered to about $1.1235 before European markets opened. It as sold back to $1.1185 as the peripheral yields widened over Germany. It is hovering near $1.12 where options for 1 bln euro expire today. We note that the US two-year premium over Germany has narrowed from a little more than 175 bp earlier this month, the most since August 20325 to about 160 bp before the weekend.

• The dollar recorded an inside day against the Japanese yen before the weekend. It was in roughly a 30-tick range on both sides of JPY158. It remains within that range today. The key still appears to be changes in US rates. The US two-year yield fell for the third consecutive week, the longest pullback in two months. The US 10-year yield fell for the second consecutive week, which was the first back-to-back decline since the end of H1.

• Sterling traded slightly above $1.3370 ahead of the weekend, which was its best level in almost four weeks. It settled well off its high but still posted its highest close since September 22. It is trading quietly between about $1.3305 and $1.3340 today. A move back below $1.3280 would be disappointing.

• The US dollar peaked at CAD1.43 in the middle of last week and pulled back to about CAD1.4135 before the weekend. It settled below the 20-day moving average for the first time since September 10. It looks like a downside break and previous support (CAD1.4200) may now offer resistance. US rates softened and the premium narrowed to approach 150 bp after peaking near 160 bp. Speculation that Alberta secessionists will lose today’s referendum saw the Canadian dollar extend its gains today. The greenback fell to slightly below CAD1.4090 and remains near its lows near midday in London.

• The Australian dollar penetrated both sides of this month’s $0.6900-$0.7000 range last week and settled near the middle of it. It is trading in a narrow range of roughly $0.6950-$0.6980.

• The Mexican peso has a six-week slide in tow, coming into this week. It is the longest drop since July-August 2019. And the price action warns that a low has yet to be forged. The peso was resilient to the unwind of yen carry trades but has fallen victim to the unwinding of US dollar-funded carry trades and the unexpected dovishness of the minutes from the recent central bank meeting. The US dollar found support in the second half of last week around MXN18.34-MXN18.35. A convincing push below there would seem to be a prerequisite for any sense that a top is in place. The greenback is trading firmly and is and is above MXN18.50. Last week’s high was near MXN18.6030.

• The offshore yuan reached a new high since July 2022 at the end of last week. The greenback traded down to almost CNH6.6830. It edged a little closer to CNH6.68 today. Since the end of H1 26, the dollar has risen against the offshore yuan in only three of the 16 weeks. The signal has been sent by the PBOC, which set the dollar’s reference rate before the weekend at CNY6.7220, its lowest level since July 2022. The fix was set at CNY6.7208 today. Since the end of H1 26, the dollar’s fix has risen on a weekly basis, twice.

• The Indian rupee rallied about 1.85% last week, the most in almost four years. The central bank has engineered a short squeeze the boosts the costs of selling the rupee. It is trading quietly today. The greenback has been confined to INR94.7565-INR94.9675, inside the pre-weekend range. Initially, it appeared the restrictions applied to Indian banks, but the RBI clarified that the new capital requirements applied to deals for hedging foreign exchange risk, not the market-making function. Yet, raising the cost of hedging foreign investment in India may deter investors, perhaps more from bonds than equities. Through late last week, foreign investors sold about $32.7 bln of Indian equities this year and bought about $8.2 bln of Indian bonds.

Other Markets

• AI-related equities were a drag last week. They are part of the reason South Korea’s Kospi fell almost 14.5% last week. It is off a little more than 20% this month. The Nasdaq Composite was off about 4.5% last week, its second biggest decline since the first week of April 2025 (“Liberation Day”). Europe’s Stoxx 600 gained a little more than 2% last week. Stocks are firmer today, though Japan was narrowly mixed (Topix up, Nikkei down). China, Hong Kong, South Korea and Australia advanced. Europe’s Stoxx is threatening to snap a three-day rally, while US index futures are higher, led by a 1.1% bounce in the Nasdaq futures and 0.50% in S&P futures.

• Benchmark 10-year yields fell last week. Japan and Australian rates fell 8-9 bp. In Europe, they were mostly 5-10 bp lower, and the peripheral premiums narrowed a little. The 10-year Treasury yield slumped almost 17 bp, which is the largest weekly decline since last April. Although the10-year JGB yield slipped, European bond yields are higher, with the 10-=year French yield up nearly 10 bp and Italy up seven. The 10-year German bund yield is up one basis point. The 10-year Treasury yield is little changed, near 5.08%.

• Ahead of the weekend, gold traded above the 20-day moving average on an intraday basis for the first time since early September. The 20-day moving average is around $4183 today. The yellow metal has not settled above $4200 since September 25. It is trading quietly between about $4161 and $4190. Silver was sold as it approached its five-day moving average before the weekend. It is found a little below $57.90 today. Silver was sold to a three-month low last week, near $55.40. The low for the year was recorded in mid-July slightly above $54.75. In subdued trading, it has been confined to ~$57.25-$57.85 so far today.

• December WTI rallied nearly 7.5% between last Thursday’s low (~$92.45) to Friday’s high ($99.35). It set a new contract high and settled above the upper Bollinger Band for the second consecutive session ($97.95 today). It is consolidating between about $96.70 and $99.25 today. According to AAA, the average retail price of gasoline has fallen this month by about 17-cents a gallon to $4.30, and the average price of diesel has fallen by about 12-cents a gallon to $6.33.

Data

• It is a light week for US data. The main feature is September housing starts and pending home sales. Fed officials are in the pre-meeting blackout period. Despite the firm CPI print last week, that derivatives market sees around a 20% chance of a hike next week, but has the next move fully discounted for the December meeting. Another hike is priced in by the end of Q1 27 and one more is nearly fully discounted by the end of Q2 27.

• Canada reports September CPI today. The Bank of Canada has noted upside risks to inflation and downside risks to growth. The latter may be materializing after the economy shed 70k full-time positions in August-September and unemployment rose to a three-month high (6.5%). The swaps market sees a little more than 10% chance of a hike next week and about an 85% chance of a hike before the end of the year. Two hikes are fully discounted before the end of Q1 27. Alberta holds its referendum today. The surprise would be if there was majority support for the beginning of a legal process for secession, and that would likely be expressed by sales of the Canadian dollar. However, the impact of preferring the status quo would likely have negligible impact.

• The eurozone reports August current account tomorrow. Despite ongoing anxiety over China Shock 2.0, the current account surplus is holding up rather well this year. The average monthly surplus this year through July is about 22.7 bln euros. In the first seven months of 2025, the average monthly current account surplus was about 23.5 bln euros. In the same period in 2024, the average monthly current account surplus was a whopping 36.4 bln euros and in 2023, the average through July was a lowly 16.8 bln euros.

• Japan reported at the end of last week that August industrial output was weaker than it has initially estimated. Industrial production fell 2.4% instead of -1.7%. And earlier today, it reported that its service sector (tertiary industry index) fell by 0.1% and the July gain of 0.4% was revised to 0.2% (0.4% in July). The swaps market is pricing in about a 5% chance of a rate hike by the BOJ next week. The market’s confidence of a hike in December has been pared back a bit. The swaps market still has about an 80% confidence of a hike in December and at least two more moves next year.

• China reported Q3 GDP rose 4.5% year-over-year (4.3% in Q2). The quarterly pace edged up to 1.2% from 0.9% in Q2. The September details were mildly encouraging. Retail sales and industrial output appear to accelerate slightly, but fixed asset investment and property investment continued to contract. Given the campaign again involution, the decline in capex may be desired. Recall, several stimulus measures, mostly, apparently on the supply side, were announced over the past couple of weeks.

Disclaimer

Week Ahead: Rates, AI, and Oil

noreply@blogger.com (Marc Chandler) — Sat, 17 Oct 2026 06:52:24 -0400

In understanding and anticipating exchange rate movement we often privilege interest rates and the drivers of capital flows instead of trade flows. However, a new player may have entered the game. Or perhaps, more aptly, left the game. The AI meme may have cracked. From 30k feet, the semiconductor index illustrates this. The index fell by more than 10% last week, the biggest weekly slump since the first week of April 2025 (Liberation Day?). Given the AI-related contribution to US growth, and the wealth effect through the stock market, the mark down of the chip stocks seemed to cap yields. Imagine: Last Wednesday and Thursday, the yield on the 10-year Treasury note fell from almost 5.33% to 5.03%. The two-year Treasury yield fell from 4.95% to 4.68%.

Yet, ahead of the weekend, as US rates traded higher, the dollar was lifted from its lows but still finished lower against the G10 currencies but the Japanese yen, which was practically flat. The semiconductor index finished art new lows since mid-September, and in what appears to be a fairly light economic calendar but for the flash PMI at the end of the week ahead, it may continue to influence activity. The UK and China are notable exceptions of the light economic calendar generalization. The UK reports jobs data, CPI, and retail sales ahead of the following week's much awaited budget. From Beijing, which continues to signal the acceptance of a gradually appreciating yuan, we will get the estimate of Q3 GDP. In recent weeks, the PBOC and Beijing have taken steps to help provincial governments and provide lower interest rates for targeted projects. Lastly, the other 800-pound gorilla in the room is the price of oil. December WTI jumped almost 9% last week, its third consecutive weekly gain. It set a new contract high before the weekend (~$99.35). The generic futures (what a continuous contract would look like) rose more than 10% last week, the most in three months. It reached almost $101.50 before the weekend. Last month's high was $106.75.

Drivers: The 30-day correlation between DXY and the US two-year yield fell to a seven-month low before the firmer than expected September CPI last week, slightly below 0.30. The correlation may turn more robust, but the data schedule is light, and Fed officials have entered the "blackout" period ahead of the FOMC meeting on October 27-28. Given the US growth, which the Atlanta Fed GDP tracker sees 3.5% annualized in Q3, and that it is a significant energy exporter, it is still seen in the best positioned to cope with the global shocks. There may be parallels between the internet bubble and dollar rally and the AI build-out. As we saw a little last week, signs that the AI trade may be cracking is also recognized as dollar negative, at least partly through the rate channel.

Data: After last week's CPI sand PPI, the upcoming data is unlikely to significantly alter market expectations for next week's FOMC meeting. Inflation accelerated but after the Fed's leadership seemed to lean against the need for back-to-back rate hikes, even while recognizing that the central bank is not done, the pricing in the futures market suggests about a little more than 15% chance of a hike this month but is convinced of two hikes between now and the end of Q1 27. The market may be most reactive to the flash PMI at the end of the week, while the Philadelphia Fed's non-manufacturing survey may pose headline risk. September, it seems widely recognized that to the extent that higher interest rates are pinching, the real estate market may be the most sensitive. Housing starts are slower than last year, but marginally. The monthly average through August this year is for a decline of 0.3%. In the first eight months of 2025, housing starts fell by an average of 1.5% a month.

Prices: The Dollar Index met the (50%) retracement of its losses since the 2025 peak, a week before President Trump's second inauguration, last week when it approached 103.00. However, it retreated sharply in the past two sessions and slipped slightly below 101.60 ahead of the weekend. Nearby support may be around 101.40. The momentum indicators have turned down. However, we suspect that consolidation is more likely, and ahead of the Fed, ECB, and BOJ meetings in the last week of the month.

EMU

Drivers: The changes in the euro have become more correlated with changes in the US-German two-year interest rate differential than changes in the US two-year yield over the past 30 sessions (~-0.45 vs -0.22) or changes in the German two-year yield (~0.18). Over the past few weeks, the tension in the European bond market has become a new driver. Consider that as recently as late September, the 30-day correlation between changes in the euro and changes in the French premium over Germany for 10-year rates was slightly inverse and now it is near 0.60, the highest in four months. The correlation of changes in the Italian premium over Germany is around -0.60, which is also the highest since June.

Data: The preliminary October PMI is the most impactful of the data in the coming week. However, with Europe's move to more directly confront China's trade practices, the eurozone current account shows greater stability than one might expect given what is happening in the auto sector. Last month's ECB staff forecasts were that the aggregate eurozone current account was 1.5% this year and next year. It is down from 1.7% in 2025 but is projected to be there again in 2028. It has averaged about 1.7% in the past five years. It is true average that for the previous five years (2015-2019) was almost 2.8%, but that is really an anomaly. It averaged a little more than 1% in the prior five years (2010-2014) and was actually a small deficit on average in the five years before that (2005-2009). Germany's ZEW survey attracts attention. The expectations component has risen for five months through September, but at 34.7, it is still has not fully recovered from the decline in March (new energy shock from the Middle Est war). It was at 58.3 in February and 45.8 at the end of last year. The assessment of the current situation still seems dour at -47.1 in September. Yet, it was the least negative reading since May 2023. At the end of the week, the ECB's one- and three-year inflation survey results will be reported. They are running 2.9%-3.0%, which is 0.2%-0.3% higher than at the end last year, despite the two rate hikes the ECB delivered.

Prices: In the middle of last week, the euro approached $1.1110, which we previously noted was the (50%) retracement of the euro's rally from the early February low last year, near $1.0140. The euro recovered strongly and reached almost $1.1270 before the weekend. The 20-day moving average is near $1.1285, and the single currency has not traded above it since September 10. The momentum indicators are turning higher, but the euro could not sustain the upside momentum ahead of the weekend. The price action seems more suggestive of consolidation than a recovery at this juncture. For that, it may require a close above $1.13.

PRC

Drivers: Through the daily setting of the fix, the PBOC has signaled the desire for gradual appreciation of the yuan. That some still focus on "stealth intervention' by Chinese banks seems somewhat beside the point. The signal is clear, and while we cannot "disprove" that reports of dollar buying by Chinese banks is done at the behest of the central bank, the fact of the matter is that the yuan is among the strongest currencies this year and the dollar fix has been steadily falling. The rest seems like conjecture. The huge trade surplus suggests that the appreciation has not been sufficient to curb Chinese competitiveness.

Data: China reports Q3 GDP and the details for September. The median forecast in Bloomberg's survey is for 0.9% growth quarter-over-quarter, the same as in Q2, and putting the year-over-year rate at 4.4% (from 4.3%). It is too early to see the impact of the modest efforts of Beijing and the PBOC to support the economy. Still, the PMIs point to the likelihood of a minor increase in activity in September. However, property market, including new and used house prices and sales will underscore an unresolved drag. Without stronger guidance by the PBOC, there is no reason to expect that the banks will cut their prime lending rates.

Prices: The yuan continues to slowly grind higher. The offshore yuan reached its best level since July 2022 before the weekend. The greenback slipped below CNH6.6850. The next important psychological target is CNH6.60. If the pace of the yuan's appreciation is sustained, the US dollar could be below CNH6.40 in a year. The median forecast in Bloomberg's survey is for it to be at CNH6.62 in the middle of next October.

Japan

Drivers: The dollar-yen exchange rate has become more correlated with changes in the US two-year yield than the 10-year over the past 30 sessions (~0.45 vs. 0.35). The correlation of changes in the exchange rate and the two-year interest rate differential is near 0.45, while the correlation between the exchange rate and the 10-year interest rate differential is near 0.35.

Data: Japan's September CPI on October 22 will draw the most attention, but the key signal for it has already been released: the Tokyo CPI. It was reported on October and showed a large rise (2.7% from 2.5% on the headline and 2.7% from 1.8% on the core). Yet, because of idiosyncratic elements owing to Tokyo's own subsidies, the increase on the national level is likely to be slightly less. The Bank of Japan has introduced a new measure that strips out "institutional factors" and is released a couple of days after the CPI. Japan will also report September trade balance. Seasonal factors favor improvement. Indeed, there has been only one September in the past 20 years that trade balance deteriorated. By most metrics, the yen remains terribly undervalued, yet it continues to record a persistent trade deficit. In the first eight months of the year, the trade shortfall averaged about JPY347.5 bln (~$2.2 bln). In Jan-Aug 2025, Japan's average monthly deficit was JPY351.2 bln. In the same period in 2024, the average monthly trade deficit was JPY599.3 bln. Japan reports its tertiary activity (services) index. We already know that industrial output tumbled 1.7% in August (preliminary estimate). It increased by 0.4% in July and rose a cumulative 1.0% in the three months through July compared with a 0.6% contraction in the previous three months. The week ends with the preliminary October PMI. In September, the composite PMI was at 52.3, down from 53.5 in August and the lowest since May. It was at 51.5 in October 2025.

Prices: When US rates were rising after the firm CPI reading, the greenback reached almost JPY159, its best level since last September. Japan's finance minister offered some verbal intervention, but it seemed to be the sharp pullback in US yields that took the dollar to JPY157.55 the following day. Despite slipping below the 20-day moving average (~JPY157.95) on an intraday basis in the past two sessions, the greenback settled above it, as it has for the past month. The five-day moving average could fall below the 20-day moving average in the coming days. Since early September, the dollar has not spent much time above JPY159. Nor has the dollar spent much time below JPY157.50 in the past two weeks.

Drivers: Changes in sterling are among the least correlated with changes in the US two-year yield since late Q1 (-0.27). Sterling's 30-day correlation with changes in the UK's two-year yield turned slightly positive for the third time since the end of Q1 but slipped back into a small inversion at the end of last week. Its inverse correlation with the Dollar Index is around -0.89, the most extreme since mid-May. Although the euro was sold last week to new lows for the year against sterling, the two currencies continue to enjoy a robust correlation (~0.90).

Data: On one hand, in the coming days, the UK reports high-frequency economic data that is among the most important in the monthly cycle: employment, prices, and retail sales. The preliminary October PMI at the end of the week is a little kicker. On the other hand, only significant downside surprises or a new shock will dissuade the market, which very confident (~88% in the swaps market) that the Bank of England will hike the base rate 25 bp when it meets in early November. The number of payrolled employees may shrink for the eighth consecutive month. Average weekly earnings growth is slowing gradually, and some measures are not rising as fast as inflation. The core rate of inflation, which excludes not only food and energy, but alcohol and tobacco too, has gradually slowed from the 3.2% year-over-year pace at the end of last year to 2.5% in April. It has been stuck at 2.6% since May but likely accelerated (2.8%?) in September. UK differs from many by reporting retail sales on a volume rather than a price basis. And despite the slowing of earnings and softness in the labor market, retail sales have held up well this year. They have posted an average monthly gain of 0.3% through August. Retail sales rose by 0.2% a month on average in the first eight months of 2025. Still, with the rise in gasoline and diesel prices, there may have been some demand destruction. Lastly, the composite PMI was 52.0 in September, which is slightly above the year's average, though it hit a soft patch in May and June when it slipped below 50. It finished last year at 51.4. Dragged down by services, the composite PMI may have slipped a little in October.

Prices: Sterling made a new low for the year in the middle of last week by a few hundredths of a cent to approach $1.3135. It recorded an ostensibly bearish outside down day on Wednesday, but the signal was wrong. In the past two sessions, sterling rallied from about $1.3185 to a little above $1.3370 ahead of the weekend. It posted its highest settlement since September 22. The five-day moving average kissed the 20-day moving average before the weekend for the first time since early September. The momentum indicators have turned higher. Note that sterling's recovery was so dramatic that after fraying the lower Bollinger Band in the middle of last week, it traded above the upper Bollinger Band ahead of the weekend. Recall that the Bollinger Band is two-standard deviations above/below the 20-day moving average. Sterling's momentum faded as the weekend approached. We anticipate near-term consolidation below $1.34.

Canada

Drivers: Over the past 30-sessions, changes in the US dollar against the Canadian dollar have become less correlated with the two-year interest rate differential and more correlated with changes in the two-year US yield (~0.45 vs 0.37). However, changes in the exchange rate have become even more correlated with the US 10-year premium over Canada (~0.47). Yet, this seems to reflect the increased significance of the US 10-year yield. The 30-day correlation of changes in the US yield and the exchange rate is approached 0.50, the most robust in a year. The correlation of the exchange rate and changes in Canada's 10-year yield is a little more than 0.15. Alberta holds a referendum on October 19. Of the 10 issues, the one that captured the attention of international investors is the one about pursuing independence. It seems unlikely to appeal to a majority, but even a close vote may disappoint because polls in Alberta suggest the issue might not be closed for long. And the investors are aware that the new government in Quebec supports a referendum of their own for secession but only after the 2028 US election.

Data: The September CPI and August retail sales are the data highlights in the coming days, and the Bank of Canada's business survey will be released. Canada's CPI seems relatively tame. Although the year-over-year rate was 3.0% in August, the three-month annualized rate was zero. That might exaggerate the last of pressure and the comparable for September 2025 warns of the risk of an uptick in the year-over-year rate. Still, the underlying core rates are hovering near 2%. Although Canadian consumers took July off (retail sales fell by 0.7%), the monthly average through July is 0.6%. In the first seven months of last year, retail sales fell by an average of 0.1% a month. Even though retail sales likely rebounded in August, the data would seem to give the Bank of Canada little urgency to raise rates on October 28.

Prices: The US dollar chopped between CAD1.42 and CAD1.43 this month until October 15, when it broke down convincingly and fell to about CAD1.4135 before the weekend. Previous support--CAD1.4200--may now be resistance. The momentum indicators are falling, and the five-day moving average is likely to fall below the 20-day moving average next week for the first time since mid-September, which, as it turned out, was before the greenback rallied nearly 3% in the following month. The next technical target is around CAD1.4100, though some consolidation, here too, after a breakout, is a common pattern, as if the market were deciding.

Australia

Drivers: Changes in the Australian dollar have become more correlated over the past 30 sessions with changes in the two-year interest rate differential with the US than changes in US two-year yield (~0.45 vs. ~-0.37). The correlation between the Aussie and changes in Dollar Index is also around -0.40. The correlation of exchange rate and gold has weakened. Below 0.30, it is the lowest this year. It peaked in June near 0.85.

Data: The preliminary October PMI is the only data of note in the week ahead. The central bank has lifted rates four times this year. The impact may be seen in survey/sentiment, but the unexpected weakness in the September employment report was a yellow flag. Manufacturing may be the most vulnerable. It lurched lower in September to 49.6 from 52.0 in July and August. The service PMI softened for the second consecutive month in September. It stands at 51.9. It reached a six-month high in July of 53.6. The composite PMI also fell for two months through September (to 51.3) from a six-month high in July (53.2). The futures market is pricing in about a 35% chance of another hike at the November 3 meeting, which seems rather high.

Prices: In the past week, the $0.6900-$0.7000 range the Australian dollar has traded in this month was violated in both directions, days apart. It finished the week around the middle of the range. The disappointing jobs report and the pressure in the property market encourage investors to begin suspecting central bank is on the sideline after delivering four hikes this year. The futures market has about 20 bp of tightening priced by the middle of next year, the least in a little more than a month. The risk is that the September CPI (October 28) comes in higher and RBA Governor Bullock will not signal an end of the tightening cycle when the central bank meets on November 3. Such reasoning aligns with a break higher but with the five- and 20-day moving averages still falling, it is difficult to be confident of strong price action. Continued consolidation is the default setting.

Mexico

Drivers: Changes in the dollar against the Mexican peso remains strongly inversely correlated with the JP Morgan Emerging Market Currency Index over the past 30 session (~-0.74), though it is the least in two months. Changes in the exchange rate are almost equally correlated with changes in the US two-year yield and the Dollar Index (~0.35-0.40). The exchange rate has become less sensitive to changes in Mexico's two-year yield (~0.03), the least since late February. It peaked in April near 0.70. The peso continues to be sensitive to the overall risk environment, for which we use the S&P 500 as proxy. The correlation is near -0.50. It has been fairly steady since early September, around the least inversion since February.

Data: Mexico's economy contracted by 0.3% in Q1 26 and bounced back smartly in Q2, growing 1.4% quarter-over-quarter. Both numbers exaggerated underlying state of the Mexican economy, which is slow growth of around 1.5% a year. Last year's disappointing 0.6% year-over-year growth spilled over into the early part of this year. The upcoming data, August retail sales, September unemployment, and the CPI for the first half of October are unlikely to change policy makers' nor investors' minds about the outlook. At the end of the week, the IGAE economic indicator, which serves the function of a monthly GDP estimate, will be reported. This year, it has averaged a monthly increase of 0.26 through July, compared with a 0.10 average in the first seven months of the 2025 and 0.17 average in the same period in 2024.

Prices: The dollar extended its surge against the Mexican peso and reached slightly above MXN18.60 in the middle of last week. It consolidated in the last two sessions but there is little to say that a top is in place. The momentum indicators are still rising even if over-extended. It is well below the upper Bollinger Band, found around MXN18.7650. That area may be the initial target on a convincing break of MXN18.60. On the downside, a push below the MXN18.2150 area could signal a consolidative/corrective phase.

Disclaimer

China's Trade Surplus Swells and the Market Awaits US CPI

noreply@blogger.com (Marc Chandler) — Wed, 14 Oct 2026 05:54:12 -0400

(Business travel disrupts the commentary for the next two days, but the weekly will be posted October 17. Thank you for your patience.)

Investors are wary of the unwinding one of the most crowded trades, long the AI ecosystem. Despite cracks, the market remains resilient. So far, the rise in interest rates has not derailed the narrative. The dollar’s fortunes also seem to be to some extent linked the AI. It seems clear that the significant US current account deficit has been largely financed by foreign flows into the US equity market. While some observers see shades of the tech bubble, it is notable that while the Nasdaq Composite peaked in March 2000 and the S&P peaked six months later, the Dollar Index did not peak until January 2002. Even then, the sharp dollar decline did not begin in earnest until April 2002.

The dollar is mixed. The Australian dollar and Norwegian krone are the strongest in the G10, gaining 0.3%-0.4%. The euro, Japanese yen, and Swiss franc are slightly softer. The euro has derived little support from the easing of the tensions within European bond markets. The French premium, for example, as narrowed from over 150 bp to about 135 bp today, while the euro remains trapped in its trough, having recorded new lows for the year on Monday, slightly below $1.1155. Meanwhile, India has engineered a short squeeze of the rupee and the PBOC continues to encourage a gradual appreciation of the yuan through its daily fix.

Prices

G10

• The euro consolidated yesterday but was unable to rise above Monday’s high (~$1.1220). The tone remains fragile. It is in a narrow range today ahead of the US CPI (~$1.1195-$1.1210). A move above $1.1235 would help improve the technical tone, but the $1.1280-$1.1300 area offers more important technical resistance.

• The dollar is consolidating against the yen at the upper end of where it has been since early September. It is in less than half of a yen range today but is bid note JPY158.50 in late morning European turnover. It stalled yesterday after it settled above the 200-day moving average on Monday for only the second time since September 2. If the JPY158.75 represents the near-term high, support is seen in the JPY157.50 area.

• For the better part of three weeks, sterling has been in a roughly $1.3180-$1.3310 trading range. The lower end held on Monday, and sterling reached almost $1.3260 yesterday. The gains have been extended to $1.3275 today. A push above the 20-day moving average (~$1.3265), which it has not settled above since late August could be promising.

• For nearly two weeks, the US dollar has been chopping between CAD1.42 and CAD1.43. It tested the upside at the end of last week, following the disappointing jobs report and yesterday, it approached the lower end of the range. It slipped slightly below CAD1.42 in Asia Pacific turnover today but returned to around the CAD1.4220 area in the European morning. The Canadian dollar has been weighed down by a wide policy rate differential and reflected in the two-year interest rate differential. The greenback’s momentum indicators are stretched, and we favor a downside break but remain concerned that the policy gap may persist well into next year.

• The Australian dollar recovered from a three-day low yesterday (~$0.6950) but still held below Monday’s high near $0.6995. Follow-through buying today lifted it above $0.7000 for the first time this month. It is probing the $0.7010 area and a convincing move above it would be constructive, but the Aussie must re-establish a foothold above the $0.7030-40 area to boost confidence a low has been forged.

• After the dollar held MXN18.20 on Monday, it rebounded against the Mexican peso yesterday and reached almost MXN18.40. The dollar edged up slightly through MXN18.42, but it is making new session lows in Europe near MXN18.3550. Most Latam currencies slipped yesterday. The Colombian peso was the notable exception. It rose by almost 0.6% and briefly edged above last week’s highs.

• The dollar traded quietly against the offshore yuan yesterday. It traded on the CNH6.69-handle. It remains there today. We note the decoupling of the offshore yuan and broadly dollar move. As recently as early September, the 30-day correlation between changes in the Dollar Index and changes in the USD vs. CNH was about 0.74. It is now around 0.25, the lowest since February. The PBOC set the dollar’s fix at a new low today, CNY6.7249 from CNY6.7298, yesterday. It is the fourth consecutive lower dollar fix in the five sessions since the mainland markets re-opened from the Golden Week holidays.

• The dollar gapped lower against the Indian rupee on Monday and Tuesday as the Reserve Bank of India engineers a powerful short squeeze. The dollar approached INR97 last week and INR95 yesterday. The dollar gapped lower again today and fell to almost INR94.75 today. However, the greenback recovered, closed the opening gaps and returned to above INR95.00.

Other Markets

• US equities settled a little lower yesterday. Still, both S&P 500 and Nasdaq settled above opening levels. Asia Pacific equities traded heavily today. Among the large bourses, only Taiwan and New Zealand expanded. Europe’s Stoxx 600 is up around 0.6% in late morning turnover. If sustained, it would be the third gain in four sessions. The US index futures are trading with a slightly firmer bias.

• Benchmark 10-year yields continue to pullback today. Most European yields are 1-3 bp lower and the peripheral premiums are narrowing slightly. Bank of England Chief Economist Pill was skeptical over the market pricing in four BOE rate hikes, and this appears to have helped support UK Gilts, where the 10-year yield is off five basis points (to 5.39%). The 10-year US Treasury yield is off 1.5 bp to slip back below 5.20%.

• Gold held below Monday’s high (~$4217) yesterday and slipped to session lows in the North American afternoon near $4147. It slipped to around $4141 in Europe today and may retest last week’s low (~$4066) broad consolidation continues. Silver looks heavier and has taken out last week’s low (~$58.50). The next area of support is seen in the $55-$56.50 area.

• November WTI reached a new two-week high yesterday, slightly above $95. It settled a little lower and has not closed above $95 since September 18. It reached $95.40 today but has pulled back to a little below $94.40 in Europe. Market sentiment has soured and optimism has been replaced with fear that the war will persist. The March 2027 WTI contract rose to $90.55 yesterday, a new contract high. It settled a little below $83 on September 14.

Data

• The focus is on today’s September US CPI. According to the median forecast in Bloomberg’s survey, the headline rate may have risen by 0.6% (0.4% in August) for a 3.6% year-over-year pace. In August it was 3.4%. The core rate is seen rising by 0.2% (0.3% in August for a 2.5% pace (2.4% previously). Expectations of an October Fed hike peaked in late September around 70%. Encouraged by comments from the Fed’s leadership, though not Chair Warsh, market expectations have retreated to around 20%, where they continue to hover.

• China reported that September CPI edged up to 0.9% (from 0.8%) and PPI rose 5.0% (from 3.8%). Food prices continue to fall. The 1.7% year-over-year decline matches the most this year. Non-food prices rose 1.5%, matching the most since May. Core CPI was flat at 1.0%. The September trade surplus widened to $133.5 bln from $119.1 bln in August. Exports were up 36.3 year-over-year (25.0% in August), while imports were up 31% (28.2% in August). Lastly, aggregate financing in September rose a little more than expected. On Monday, China reports Q3 GDP. The quarter-over-quarter pace is expected to tick up to 1.0% from 0.9%.

Disclaimer

Softer Rates, Heavier Dollar

noreply@blogger.com (Marc Chandler) — Tue, 13 Oct 2026 06:43:57 -0400

The pullback in bond yields is the main development in the global capital markets today. Rates eased in Asia Pacific, but the eye of the storm has been in Europe and benchmark 10-year yields are off mostly 4-7 bp today. The move is being led by France and Italy. However, the fundamental driver, outside of lower (~2%) oil prices seem elusive. The protests in France continue. In the US, where the 10-year yield is off around five basis points to below 5.20% for the first time in a little more than a week, there is speculation that the Treasury is considering reducing the coupon supply in quarterly refunding and perhaps doing away with the 20-year bond altogether and replaced with bills.

The US dollar is trading softer amid the lower interest rate environment. The Canadian dollar is the laggard. The disappointing jobs data before the weekend make it more difficult for the Bank of Canada to close the policy rate gap, which is the widest since the late 1990s. Among emerging market currencies, Indian officials have engineered a powerful short-squeeze, and the rupee is up around 0.5% today. It gained almost 1% yesterday. Even as China’s 10-year yield slipped it lowest level (below 1.65%) in more than a year, the PBOC set the dollar’s reference rate at its lowest level since January 2023.

Prices

G10

• Although the narrative of China Shock 2.0 would have suggested that the EU-China trade agreement might have taken some pressure of the euro, but this was not the case. The euro was sold to new lows for the year, slightly below $1.1155. The more immediate cause of pressure in Europe, domestic unrest in several countries seems less a function of China’s import penetration and more like homegrown dissatisfaction with the policy. French bonds underperformed again yesterday and the peripheral premiums over Germany widened. It stabilized today and reached almost $1.12 before the buying dried up.

• The dollar has been knocking against a cap against the Japanese yen around JPY158.50, which, in thin markets yesterday, it overcame. That also was where the 200-day moving average was found. It reached about JPY158.75 yesterday and has held below there today. Lower US rates have arguably helped drag the dollar to around JPY157.85 in early European turnover. It is straddling the JPY158 area ahead of the North American session. Options for almost $685 mln struck there, expire today.

• Sterling initially reached a three-day high, near $1.3260, before losing the momentum and returning to the $1.3200 area in quiet turnover yesterday. The low held today and sterling recovered to around $1.3245. The broad consolidation continues. outperformance of the euro continues, and sterling was a new low since June 2025. The euro reached almost GBP0.8440 today. There is little on the charts before GBP0.8400.

• An unexpectedly poor September jobs report weighed on the Canadian dollar before the weekend. It fell to a marginal new low for the year, with the US dollar stalling ever so slightly shy of CAD1.4300. Last week’s price action reinforced the significance of US dollar support at CAD1.4200. It is consolidating within last Friday’s range (~CAD1.42-CAD1.43) and within yesterday’s range (~CAD1.4240-CAD1.4290).

• The Australian dollar tested a nine-day high, near $0.6995 yesterday. It held, and the Aussie slipped back toward $0.6955. The Australian dollar is trading quietly today in about a quarter-of-a-cent range above $0.6950, where options for A$850 expire today.

• Dovish Banxico minutes and slightly softer-than-expected September CPI last Thursday fueled a sharp two-day loss for the Mexican peso at the end of last week. Those two sessions saw the peso tumble by about 1.4% to a new low for the year. The greenback reached almost MXN18.50. Stronger than expected August industrial production figures yesterday helped stabilize the peso. The dollar eased to about MXN18.2150. It is consolidating below MXN18.28 today. A break below MXN18.20 would be constructive, but the dollar must fall below the MXN17.90 area of boost confidence a high is in place.

• The dollar made a marginal new low against the offshore yuan yesterday; finding support slightly above CNH6.69. It is holding today, and the greenback is capped near CNH6.70. Since April 2025, when the appreciating trend began, the offshore yuan has appreciated by almost 10%. The PBOC continues to signal willingness to accept the gradual appreciation of the yuan and set the dollar’s fix at a new low since 2022 today (CNY6.7298 from CNY6.7313 yesterday).

• The Indian rupee consolidated today after surging nearly 1% yesterday in response to broad measures unveiled by the central bank to defend the currency. Among the steps announced, the central bank created a new facility to meet the state-run oil companies’ dollar needs and boosted the reserve requirement for certain types of foreign exchange derivatives. Last week the Reserve Bank of India hiked its repo rate for the first time in almost four years. The dollar gapped lower yesterday, and with the help of intervention, fell to about INR95.5940, its lowest level since September 23. Still, the greenback settled (~INR95.78) slightly above where it opened (~INR95.7575). The US dollar gapped lower again today and fell to almost INR95.00 Like yesterday, the greenback settled near session highs (~INR95.31) and above the open. The rupee gained another 0.50% today. It was the strongest currency in the Asia Pacific.

Other Markets

• Asia Pacific equities were mostly lower yesterday, though among the large bourses, Hong Kong, Australia, New Zealand, and Singapore were exceptions. Equities are mixed today, though the chip sector in Taiwan and South Korea were under pressure. Indian equities led the region with a little more than a 1.5% gain. Europe’s Stoxx 600 enjoyed a firmer tone yesterday amid follow-through buying after the pre-weekend gain of almost 1%. It is advancing for the third consecutive session today and testing last week’s high. With the US Treasury market closed yesterday, US indices managed to eke out a small gain. Nasdaq Composite futures are off by around 0.45%, while the S&P 500 futures little changed.

• With holidays in Japan, Canada, and the US yesterday, the focus was on European yields, which had pulled back a little before the weekend. Yesterday’s rates were mostly softer, but the French 10-year yields rose by about three basis points and the premium over Germany edged higher. However, today, bonds enjoy a strong rally, though the 10-year JGB yield only edged slightly lower to settle below 3%. Benchmark yields are off mostly 4-7 bp in Europe, with France and Italy leading the way. Peripheral premiums are narrower today. The yield of the 10-year US Treasury yield is off almost five basis points to slightly below 5.20%.

• Gold met sellers yesterday after it reached a six-day high, slightly above $4217. The 20-day moving average is nearly $4225, and the yellow metal has not traded above for more than a month. It is trading firmly but mostly within yesterday’s range. Silver reached a three-day high (~$61.45), but sellers emerged and pressured it back to $60.40. Follow-through selling pushed it slightly below $59.60 before it recovered to nearly $60.75.

• November WTI posted an ostensibly bullish outside up day yesterday by trading on both sides of the pre-weekend range and settling above its high. Indeed, the Nov contract settled above the 20-day moving average (~$92.70) for the first time since September 24. It is difficult to verify the “energy ceasefire” between Ukraine and Russia. There has been no follow-through buying today, and instead it has come back offered. It reached $94.30 yesterday and it is hovering near $92 in late European morning turnover, off around 1.8%.

Data

• The US reports existing home sales and the September Federal budget balance. Existing home sales are expected to have fallen for the fourth consecutive month in September. Yet, the average annual pace through August was, if anything, slightly above the average in the first eight months of last year. The US monthly budget report tends not to elicit much of a market reaction, but still the US fiscal position is part of the larger macro story. In the first eight months of the calendar year, the deficit averaged about $170.4 bln. That compares with an average monthly shortfall of almost $157.8 bln in the Jan-Aug 2025 period and $173.4 bln in the same period. Tomorrow’s September CPI arguably is the most important data point of the week, through retail sales and PPI out on Thursday. The median forecast in Bloomberg’s survey is for a 0.6% month-over-month increase in the headline, which would match biggest increase since March.

• Mexico’s August industrial production was reported yesterday. It rose by 0.6 after a 0.5% gain in July. That was the data highlight of the week.

• The minutes from last month’s Reserve Bank of Australia’s meeting that resulted in the fourth hike of the year appeared to shed little fresh light the path going forward. The futures market recognizes the risk that the central bank is not done. Still, does not see better than a 50/50 chance until February 2027. Another move is not fully discounted until next May. The week’s highlight is the September employment report on Thursday.

• Japan reported an unexpected 0.3% decline in September’s PPI. The median forecast in Bloomberg’s survey was for a 0.5% gain. August’s 0.2% decline in August was revised to a 0.3% decline. The year-over-year pace eased to 6.8% from 7.6%. The swap market has about a 5% chance of BOJ hike at the end of the month priced in but is nearly fully discounting another hike in December.

• China will report September CPI and PPI first thing tomorrow. PPI is seen rising to 4.3% from 3.8%. CPI is expected to tick up to 1.0% from 0.8%. That would match the highest reading since May. It was at -0.3% last September. Separately, Visa was granted regulatory approval to begin preparations (that could last a year) to establish a domestic bank card clearing business in China. Mastercard and Amex’s joint venture were given similar period several years ago.

Disclaimer

Week Ahead: Firm US CPI and Unresolved European Challenges Despite Deal with Beijing may Drive Markets

noreply@blogger.com (Marc Chandler) — Sat, 10 Oct 2026 07:06:49 -0400

It is too early to have much confidence that the fever in the bond market has broken, but benchmark 10-year yields in North America, most of Europe, including France and Italy, settled lower on the week. The 10-year JGB yield fell seven basis points to return to 3%. Following successful coupon auctions this past week, the 10-year US Treasury yield eased by almost six basis points to settle near 5.25%. The social strife, especially in Spain and France, continues. France's budget issue has not been resolved. Spain will hold national elections in late November. In the US, the risk is for a hot CPI report on Wednesday.

The US dollar rose against most of the G10 currencies. The Scandis and the Australian dollar were exceptions. They rose by about 0.3%-0.5%. Still, the dollar rose to new highs for the year against the euro, Canadian dollar, Swedish krona, and New Zealand dollar. Since returning from the Golden Week holiday, the PBOC set the dollar's reference rate at a new low since early 2023 (CNY6.7330) before the weekend. Although the momentum indicators for the dollar remain mostly over-extended, we are concerned that a firm CPI will translate into a higher dollar.

Three notable developments took place, outside of the calling of a snap Spanish election and the firewall in Germany cracking as an AfD member was elected to a role like speaker of the lower house of the state of Saxony Anhalt. First, the German government doubled this year's growth forecast to 1.3%, which would be the best 2017 due to government spending and strong foreign demand. That is a nice segue into the second development. The EU struck a deal with the EU that will dramatically reduce the imports of Chinese-made hybrid cars. The details are not yet clear, but the Stoxx 600 autos and parts index rallied on the announcement. The arrangement could be sufficient to hold off more drastic action by the EU. Third, adding to the modest stimulus measures already unveiled, at the end of last week, Beijing announced that it would allow provincial governments to access CNY550 bln (~$82 bln) of unspent bond quotas in previous years to help meet this year's growth target.

Drivers: The DXY rally from a couple of days before last month's FOMC meeting seemed to have been driven by the sharp rise in US rates. The US two-year yield peaked on September 29 near 4.96%. The Dollar Index may have peaked a few days later on October 5. The rolling 30-day correlation of the changes in DXY and the two-year US yield fell from nearly 0.60, the upper end of a three-month range to a little below 0.35, the lowest since March. The strength of the US economy owes in no small measure to government and household borrowing. No other major high-income country is willing to borrow as much as the US as a proportion the its annual output. Wages have not kept up with US inflation for the last five months, the Conference Board and the University of Michigan, surveys point to dismal consumer confidence, yet consumption remains strong, in part, with the help of a 35% increase in the extension of consumer credit, more home-equity loans and drawdown of financial assets (savings).

Data: The US CPI on October 14 is arguably the most important data point of the week. In the three months through August, headline CPI rose at an annualized pace of 0.4%. The core rate has risen by 2.0% at an annualized pace. The PPI is also important, but especially because it provides inputs to the forecast of the PCE deflator, which the Fed targets. The retail sales and industrial production reports may help economists tweak Q3 GDP forecasts. The median projection in Bloomberg's most recent survey is for 2.8% annualized pace, while the Atlanta Fed's GDPNow tracker is 3.6%. The US corporate earnings season kicks into high-gear with the large banks reporting. Bloomberg's survey found expectations that Q3 S&P 500 earnings increased 25% from a year earlier.

Prices: The risk is that an acceleration of US inflation pushes the pendulum back toward a more aggressive Fed stance. The market has been vacillating between discounting 75 bp and 90 bp of rate cuts by the end of H1. The pendulum is at the lower end of the range now. A rise in short-term US rates may see the correlation with the Dollar Index improve from near six-month lows.

EMU

Drivers: The strife in Spain, France, and Germany and dramatic widening of the core-periphery spreads made the dollar, even if, more so, the Swiss franc, a bit of a safe haven. But unlike the Swiss franc, one is paid to be long dollars, in the sense that US ultra short-term rates are above Europe's. At the same time, US equities continue to outperform Europe (over the past three months and year-to-date). The rolling 30-day correlation of the changes in the euro and the German premium over France was slightly inverse as recently as September 22. It was first inversion since January. It is now a little above 0.50, the highest since early June.

Data: August industrial production and trade figures will be reported this week. The markets do not often react to these aggregate figures even if they inform the economic assessments. After growing by 0.6% in Q2 (following a flat Q1), the eurozone economy is expected to grow more steadily but around 0.3% a quarter for the next several quarters.

Prices: The euro fell to almost $1.1160 at the start of last week, its lowest level since May 2025. It reached almost $1.1280 the following day. It chopped in that range for the rest of last week. It does not to have put in an important low yet. Since breaking $1.13 or so, we have warned of risk toward $1.11, which corresponds to the (50%) retracement of the euro's rally from last year's low (~$1.0140). A break may find initial support around $1.1050, but the next retracement target is near $1.0880.

PRC

Drivers: Coming back from the extended national holiday, the market will look for clues of Beijing's intent from the dollar's fix. During the holiday, the offshore yuan chopped the range it set in the week before the holiday. It almost seems as if the market is reluctant to push much below CNH6.70 (~CNH6.6910 was the low on September 21) without continued official confirmation. At the end of last week, the PBOC fixed the dollar at a new three-year low. The signal is that Beijing favors managed gradual appreciation over a rapid adjustment.

Data: Three data points will capture the market's attention this week. Beijing reports September CPI, PPI, and trade figures. Headline CPI rose 0.8% year-over-year in September, while the core rate was 1% higher. Producer price inflation rose to 3.8% year-over-year from 3.5% in July. It peaked at 4.1% in June. The trade surplus continues to be a source of tension especially but not only the US and Europe. It averaged $100.7 bln a month in the first eight months of the year. In the Jan-Aug 2025 period, the monthly average was $97.7 bln. In nominal dollar terms, August exports had risen by a quarter compared with a year ago. Imports were up a little more (28.2%). At the end of last week, reports indicated that Beijing would allow the provinces to access CNY550 bln (~$82 bln) in unspent bond quotas from previous years. This is part of the stimulus effort to support the economy.

Prices: Encouraged by the PBOC's fix before the weekend, the market took the dollar to nearly the four-year low against the offshore yuan recorded on September 21 (~CNH6.6910). The CNH6.67 area may be the next initial target but there may be scope toward CNH6.60 by the end of the year. The median forecast in Bloomberg's survey sees the dollar finishing the year at CNH6.70.

Japan

Drivers: Changes in US two-year interest rates and the dollar-yen exchange rate are not as correlated as they were in May (~0.67) over the past 30 sessions, but it is well above the low in early August (slightly below 0.20) at almost 0.50. The correlation between the exchange rate and the US 10-year yield nearly reached 0.50 in late September. It is now near 0.40. After the intervention, it briefly was inverted. Recent comments by BOJ Governor Ueda have given the market no reason to expect back-to-back hikes and the swaps market has downgraded the chances of a hike later this month to about 10% from around 40% two weeks ago.

Data: Japan reports September producer prices, core machine orders, and the final estimate of industrial production. The data, however, are unlikely to rebuild expectations for a hike at the end of this month. The swaps market is pricing in around a 20% chance, down from 40% as recently as September 28. Japan's economy grew at an annualized rate of 1.9% in Q1, 1.4% in Q2, and the median forecast in Bloomberg's survey is 1.0% in Q3 (and Q4).

Prices: The dollar traded in a little more than a one-yen range below about JPY158.50 last week. It is knocking on the 200-day moving average (~JPY158.55) but has not closed above it since September 2 with the exception of September 24. It roughly corresponds to the (50%) retracement of the dollar losses from the 40-year high on July 23 near JPY164. The daily momentum indicators are stretched but still moving higher and US yields do not appear to have peaked. A push above the JPY158.55 area sees the late September high, near JPY159 next, and the September high was closer to JPY160.40. The market will feel more comfortable challenging the JPY160 area with fundamental cover, like a firm US CPI reading.

Drivers: The rolling 30-day correlation of changes in sterling and UK's two-year yield has not been positive since early April. It is around -0.05, though it did approach -0.50 in June. The correlation of the exchange rate and the US two-year yield is near -0.25. The inversion is more intuitive than with UK rates. Sterling accounts for a little less than 12% of DXY, yet its 30-day inverse correlation is almost 0.80. The euro, which is about 57% of DXY, has an inverse correlation of nearly 0.90.

Data: The week's highlight is the August GDP and details on October 15. The UK economy has been unexpectedly resilient in H1. It grew by 0.6% quarter-over-quarter in Q1 and 0.5% in Q2. It seems off to a fine start in Q3 after July's growth was estimated at 0.4%, the quickest since February. Economists surveyed by Bloomberg anticipated growth slowed to about a 0.2% in Q3, primarily because of projections for slower fixed investment and worsening net exports. The market may be particularly sensitive insight into these sectors.

Prices: For a little more than two weeks, sterling has been chopping in a range, slightly above the low recorded in late June (~$1.3140). Since it broke below $1.33 on September 23, sterling has not managed to close back above it but has not traded below $1.3180 either. Sterling might have traded heavier against the dollar if it were not for the demand on the cross against the euro. The euro was sold to a marginal new low for the year in middle of last week, slightly below GBP0.8450. It does not appear to have bottomed, and near-term potential may extend toward GBP0.8400.

Canada

Drivers: The most important weight that has dragged the Canadian dollar persistently lower has been the inability of Canadian rates to keep up with US rates. The policy rate differential in this cycle is the widest since the late 1990s. The same can be said of the US two-year premium over Canada. The rolling 30-day correlation of the change in the exchange rate and the US premium is around 0.60. It was inverse in late May through mid-June. Changes in the exchange rate are less correlated with changes in Canadian or US two-year rates, and that holds for 10-year yields as well. Some observers still insist that the Canadian dollar is a petro currency but the correlation between the USD-CAD exchange rate and WTI has had three phases this year. Through much of the Q1, there was an inverse correlation that reached -0.44 before the Middle East war. The correlation turned positive, which is to say the Canadian dollar tended weaken against the US dollar as oil prices rose, and stay positive through early July. It is now inverted again, around -0.22.

Data: The disappointing employment report before the weekend, which saw Canada lose more than 35k full-time jobs for the second consecutive month saw the market downgrade the chances of a 25 bp hike before the end of the year to about 85%, the least in about a month, from more than 100% the previous week. The Bank of Canada's decision on October 28 does not hinge this week's data, which is mostly housing starts, building permits, and existing home sales. The monthly portfolio flow report at the end of the week will underscore what we already know; namely the improvement in Canada's external balance this year. Consider that through July, foreigner investors bought a net of almost C$180 bln of Canadian bonds and stocks. In the same period last year, foreign investors bought C$3.5 bln. At the same time, Canada merchandise trade balance has swung into a nearly C$5 bln surplus from a deficit of almost C$22 bln in the first seven months of 2025.

Prices: If the policy and rate gap have weighed on the Canadian dollar, the poor jobs data and the prospect of a firm US CPI reading, warn against expecting near-term convergence. The US dollar held support near CAD1.4200 after testing it several times in recent days. The CAD1.4300 area, which has been approached, corresponds to the (61.8%) retracement of the greenback's losses since the 2025 high, near CAD1.48. A push above CAD1.4300 could target the CAD1.4400-20 area next.

Australia

Drivers: Changes in the Australian dollar's exchange rate and the Dollar Index are inversely correlated (~-0.62), and a smidgeon more but positively correlated with changes in the S&P 500. Similarly, the Aussie is inversely correlated with changes in the two-year US yield (~-0.55) and is nearly as positively correlated with changes in gold (~0.50). Changes in the exchange rates and Australia's two-year yield is near 0.20 and the correlation with the two-year differential is almost 0.50.

Data: The minutes from last month's central bank meeting that resulted in a dovish hike may offer insight on October 13 of the significance of the September employment data on Oct 15. Although Australia lost full-time positions in August (6.3k) the three-month average of a little more than 18k is at the upper end of where it has been for the past couple of years. The economy has added an average of 20.4k jobs a month this year through August, compared with 8k average in the first eight months of 2025. The unemployment rate has marched steadily higher from 4.1% in January to 4.6% in August, the highest level in five years. Job growth trails the rise in the participation rate, which has risen this year from 66.7% in January to 67.1% in August. That matches the high since January 2025.

Prices: The Australian dollar consolidated last week between about $0.6930 and $0.6990. It recorded a three-month low on October 1 slightly above $0.6900. The Aussie must re-establish a foothold above the $0.7030 area to lift the tone. That area holds the (38.2%) retracement of the losses from the September 9 high (~$0.7240), the 20-day moving average, and the 200-day moving average. The momentum indicators are turning up but still overextended.

Mexico

Drivers: The minutes from the recent central bank meeting struck the market has more dovish than expected. A majority said they would be willing to consider a rate cut if inflation conditions permitted. It sounds conditional and benign, but when coupled with the signal that it would not react mechanically to what the Federal Reserve does, and elimination of the phrase from previous statements that is expected to hold rates steady, gave the dovish tilt to the third consecutive meeting that the central bank stood pat. This sent the peso reeling. The Mexican peso is often best thought of as a proxy for emerging market currencies broadly. The correlation of the dollar-peso exchange rate and the JP Morgan Emerging Market Currency is fairly stable and robust. The 100-day rolling inverse correlation of change in the two is near -0.73. The 30-day correlation is around -0.76. Changes in the dollar-peso exchange rate over the 30 sessions are more correlated with silver (~-0.40) than gold (~-0.30). The exchange rate correlation with changes in the US 10-year yield over the past 30 sessions than with changes in the US two-year yield have converged around 0.35.

Data: Mexico reports August industrial production on October 12. It has been a choppy time series this year. In the first seven months, it contracted three times, yet it has risen by an average of 0.16% a month compared with an average of 0.01% a month in Jan-July 2025. Mexico's merchandise exports were about 36% of GDP last year. Its goods exports have risen by about 30% this year. The domestic economy looks weak, and growth might have nearly stalled in Q3 after a 1.4% quarter-over-quarter surge in Q2 (-0.3% in Q1).

Prices: The dovish Banxico minutes trigger sharp losses of the peso. Before the weekend, it reached new lows since last November. The dollar reached almost MXN18.50. Between the BOJ intervention and encouraging the unwinding of yen-carry trades and then the jump in US rates, forcing the unwinding dollar-funding trades, the peso was already on the defensive. Even though Banxico's rate guidance was conditional, the market understood the dovish bias. The next target may be around MXN18.55, which corresponds to the (38.2%) retracement of the greenback's decline from the February 2025 high (~MXN21.2930). Above there, and the high from last November (~MXN18.77 comes into view).

Disclaimer

Renewed Pressure in Europe Helps Lift the Greenback

noreply@blogger.com (Marc Chandler) — Wed, 7 Oct 2026 06:41:10 -0400

(Business travel on October 8-9 will disrupt the daily analysis. The commentary will resume with the weekly on October 10. Thank you for your patience. Good luck.)

Renewed pressure in European bonds has sent the euro back below $1.12, nearly a cent off yesterday’s high. Its loss of about 0.6% today leads the G10 currency complex lower. The greenback is also firmer against most emerging market currencies. French, Italian, and Greek bonds yields are up 11-13 bp. British, Spanish, and Portuguese 10-year benchmark yields are up more than 7 bp, while Germany, who reported much stronger than expected industrial output figures is seeing less than a three basis point increase. The 10-year US Treasury yield is up four basis points to 5.32%, a new high.

The risk-off impulse from the rising yields is weighing on equities and precious metals. November WTI is hovering around $90. The Reserve Bank of India hiked its repo rate, as widely expected, and its forward guidance indicated more tightening was likely, but like we have seen several times last month, with the exception of the Federal Reserve, the currency, in this case, the rupee, sold off. With the French government threatening to use its constitutional powers to push through a budget without parliament’s support, sets a danger precedent with Le Pen running ahead in the polls for next year’s presidential election. It is difficult at this juncture to see a near-term path toward resolution.

Prices

G10

• The euro reached slightly above $1.1275 in early North American trading to record the session high yesterday. The roughly 0.20% gain was the euro’s best showing in a little more than a month. However, new pressure on French bonds has dragged the euro back to about $1.1180 today. The 30-day correlation of changes in the euro and the German French 10-year spread is around 0.40, the highest since early June. Monday’s euro low was closer to $1.1160. The (50%) retracement of the euro’s gains from the February 2025 low (~$1.0140) is found slightly above $1.1100.

• The dollar was confined to about a half of a yen range yesterday below JPY158.25. It was the narrowest range since late August. The greenback held its own despite the decline in US yields. Last week’s dollar high and the 200-day moving average are around JPY158.50, which is where it peaked so far today.

• Sterling reached a four-day high yesterday, slightly below $1.3285. Last week’s high was about $1.3310. There has been no follow-through sterling buying. It has pulled back to around $1.3230. In the past four sessions, sterling appears to have forged a shelf in the $1.3180-$1.3200 area. The same does not look true for the euro against sterling. It settled lower yesterday for the eighth consecutive session, and today the euro has fallen to a marginal new low for the year slightly below GBP0.8450. A convincing break could spur a move toward GBP0.8400 next.

• Despite the PQ win in Quebec, the Canadian dollar posted its best session yesterday in nearly a month. True to the pattern, Canada’s two-year discount to the US eased slightly. A break of CAD1.42 could be the first indication that the greenback may have peaked. If that is the case, an initial retracement target may be in the CAD1.4070-CAD1.4100 area. However, CAD1.42 is holding and the wider two-year interest rate differential could lift the greenback to the CAD1.4240-60 area before challenging Monday’s high for the year (~CAD1.43).

• The Australian dollar reached a four-day high yesterday, near $0.6990. A move above $0.7000 targets the $0.7030-35 area, which holds the (38.2%) retracement of the leg lower from the Sept 9 high (~$0.7240) and 200-day moving average. The Aussie is consolidating inside yesterday’s range, but it looks vulnerable on a break of $0.6960. Last week’s low was almost $0.6900.

• The dollar fell for the third consecutive session against the Mexican peso. It is the longest slide since late August/early September. The greenback peaked on October 1, near MXN18.4320 and yesterday, recorded a five-day low near MXN17.9110. The peso was the strongest currency in the region yesterday, with around a 0.60% gain. Follow-through buying of the Brazilian real was limited after Monday’s post-election surge. It mostly consolidated yesterday. After jumping nearly 3.5% in the previous two sessions, the Colombian peso pulled back by around 0.80% yesterday. However, the tone is less constructive today and the greenback is higher against most emerging market currencies today. The dollar has risen to MXN18.07. A move above MXN18.11 could signal a move toward MXN18.17-MXN18.25.

• The dollar traded quietly against the offshore yuan yesterday. It stayed between about CNH6.6995 and CNH6.7060. It is trading quietly today between about CNH6.70 and CNH6.7075. Mainland markets re-open tomorrow. When it closed for the extended holiday, the dollar was at CNY6.7060 and against the offshore yuan, it was about CNH6.7085.

• The Reserve Bank of India hiked its repo rate today for the first time in four years and signal additional hikes will be considered given the currencies weakness and the risk of rising inflation. It lifted its projection for CPI in the year ending March 2027 and upgraded growth to 7.1% from 6.7%. Yet, it was insufficient to underpin the rupee. The US dollar rose to INR96.85, its best level since May 20, when it reached a record high (~INR96.9650).

Other Markets

• The S&P 500 and Nasdaq Composite gapped higher yesterday and new all-time highs were record. However, the mood in the equity market is more somber today. Leaving aside a few small markets in the Asia Pacific area, it was a sea of red, led by the Kospi’s nearly 2% decline and the 1.6% fall in Singapore. Europe’s Stoxx 600 is poised to snap a three-day advance and is off a little more than 0.5% in late morning turnover. US index futures are off around around 0.2%-0.4%.

• The French 10-year yield fell 10 bp yesterday. It was the third consecutive decline and the largest since late May. Italy’s 10-year yield fell by almost 10 bp yesterday, which is also the largest drop since late May. However, tensions have returned today. The French government is threatening to use its constitutional powers to circumvent parliament to push through the 2027 budget. This will antagonize its critics, could further support the political extremes that a running ahead in the polls for next April’s presidential election. The 10-year French benchmark bond yield is up 14 bp today and is approached the recent high of 4.91%. Italian and Greek bond yields are also jumping by nearly as much. The 10-year Germany Bund yield is up two basis points, and the yield of the 10-year Gilt is up eight. The 10-year UYS Treasury yield is up almost five basis points to nearly 5.33%, a new high.

• Gold traded on both sides of Monday’s range yesterday. After being sold to a new two-month low yesterday, slightly below $4105, it recovered to almost $4180. However, it was unable to settle above Monday’s high (~$4170.50). Rising rates and a firmer dollar appear to be dragging it lower today. It is setting session lows in European morning turnover near $4115. It has not traded below $4100 since early August. Silver traded in a roughly $59.70-$62.10 range before the weekend and has remained in that range. However, it looks set to challenge the lows, and a break could signal a move to the $56.50 area next.

• November WTI fell to almost $86.85 yesterday, its lowest level in a month. Reports of higher Mideast flows, and the success of Saudi-led forces against the Houthis appeared to be the main factors. However, Nov WTI recovered to about $89 in the North American morning before stalling. It reached $90.60 earlier today but is struggling to sustain the momentum and is straddling the $90 area.

Data

• There are two US highlights today. First, is the August consumer credit. Wage growth has trailed CPI for the past five months, but spending remains robust. Part of this is due to consumer credit. Consumer credit extension has averaged almost $12.5 bln a month this year up from about $8.4 bln average in the first seven months of 2025. Home equity withdrawals rose by about 9.4% year-over-year in Q2 and there appears to be a withdrawal from investment accounts. Second, the FOMC minutes from the September 16 meeting that resulted in a unanimous decision to hike rates. The Fed funds now imply about a 20% chance of another hike later this month. Still, a hike at the December meeting is fully discounted and the market has 84 bp of tightening priced in before the end of 2027, down about 12 bp from the peak in late September.

• Germany’s August industrial production rose 2.0% after falling 1.2% in July (initially -1.1%). The median forecast in Bloomberg’s survey was for a 0.5% rise. With today’s report, German industrial output has risen by an average of about 0.1% a month this year after it declined by an average -0.1% a month in the first eight months of 2025. Separately, note that the AfD secured sufficient representation in Saxony Anhalt that with support of a small local party to name the speaker of the state’s parliament. The secret ballot gave the AfD four more votes, which may have come from the CDU. It will take a few weeks to form the next government, but the AfD appears to be in a strong position.

• Labor earnings growth slowed in Japan in August. Cash earnings slowed to a 3.8% year-over-year pace, down from a revised 4.3% pace in July (initially 4.7%). When adjusted for inflation, the real cash earnings slowed to 1.5% from a revised 2.0% in July (2.4% originally). On the other hand, the cash earnings, using the same sample base, were flat at 2.8%. Household spending is due later this week, and despite the better labor earnings, it has not risen on a year-over-over year basis this year.

Disclaimer

Collective Sigh of Relief as Oil Prices Drop, Yields Fall, and Stocks Rise

noreply@blogger.com (Marc Chandler) — Tue, 6 Oct 2026 06:44:26 -0400

The US dollar is mixed today, the general tone in the capital markets is constructive. Success by the Saudi-back Yemen forces have recapture strategic territory from the Houthis, which has held drive oil prices lower. Bond yields in Europe have tumbled and the wide peripheral premiums over Germany have narrowed. Equities are higher.

Five Fed officials speak today but barring a surprise, expectations for this month’s FOMC meeting are unlikely to change significantly until next week’s CPI report, where early projections point to a small increase in price pressures. The futures market has about 83 bp of tightening between now and the end of next year, which is down from around 95 bp peak seen in the past two weeks.

Prices

G10

• The euro recorded a low in the Asia Pacific session, near $1.1160 yesterday. It spent the European and North American session in a roughly $1.1185-$1.1220 range. French bonds stabilized yesterday and the 10-year premium over Germany narrowed to 136 bp, which is still elevated. A combination of Le Pen, the leading candidate to become the next French president, promised to reduce public spending and limit further borrowing, a drop in oil prices as the Saudi-backed Yemen forces push the Houthis from strategic territory has seen French and Italian bond yields fall 11-12 bp, narrowing the premium over Germany, and sending the euro higher. The single currency approached $1.1250 in the European morning. A move above yesterday’s high (~$1.1260), which is also where the five-day moving average is found, would help stabilize the technical tone. Still, the options (for more than 7 bln euros) at $1.1300 expire tomorrow and Thursday.

• The dollar recovered from the Asia-Pacific low near JPY157.45 against the yen to the session high around JPY158.30 in North America yesterday. Although that was above the pre-weekend high, last week’s high (~JPY158.45) and the 200-day moving average (~JPY158.50) remained intact. Even then, the dollar’s high from September 24-25 (~JPY158.95-JPY159.05) may be a more important technical level to breech. The dollar is firm today, but within yesterday’s range.

• Sterling recorded an inside day yesterday, trading within the pre-weekend range, which itself was inside the range set last Thursday (~$1.3180-$1.3275). The spring coils further today with sterling confined to slightly less than a half-cent range above $1.3200. The euro approached the low for the year against sterling yesterday that was recorded in mid-July (~GBP0.8455). It recovered to about GBP0.8485 and reached almost GBP0.8495 today. Overcoming yesterday’s high near GBP0.8510 would steady the tone.

• The greenback reached almost CAD1.43 yesterday, and the US two-year premium over Canada widened to almost 159 bp. It was nearly 126 bp three weeks ago. It is a new high for the US dollar since early April 2025 and the widest premium since mid-1997. Parti Quebecois won yesterday provincial election. It promises to hold a referendum on succession during its four-year term, but only after US President Trump’s term ends. Alberta holds a referendum on October 19 and one of the questions is whether it should pursue secession as well. The US dollar is trading firmly but within yesterday’s range.

• The Australian dollar recovered from approaching $0.6930 in the local session to almost $0.6975 in North America yesterday. It stalled a couple hundredths of a cent in front of the pre-weekend high. It settled above the five-day moving average (~$0.6955 today) for the first time in nearly two weeks. The Aussie made a marginal new high today but held below $0.6980. A move above $0.7000 helps lift the technical tone.

• For the first time in two weeks, the dollar settled below the previous session’s low against the Mexican peso. Bolsonaro’s stronger-than-expected showing in Sunday’s election lifted most currencies in the region. The Brazilian real was the best performing, surging by about 4.2%. The Colombian peso rose by 2.0%. The Mexican peso’s gain of about 0.5% was more modest, but sufficient for the dollar to settle below the five-day moving average (~MXN18.14) for the first time since September 9. Follow-through peso buying today saw the greenback approach MXN18.00, a four-day low. A convincing break would initially target the MXN17.85 area.

• The dollar was confined to its pre-weekend range against the offshore yuan yesterday (~CNH6.70-CNH6.72). It slipped slightly below CNH6.70 today for the first time in almost two weeks. Mainland markets re-open on Thursday.

• Despite the pullback in oil and global yields today, the Indian rupee remained under pressure today. The dollar closed the gap from late July, which extended to INR96.3450. Reports suggest the central bank intervened, but the greenback settled near the session high (~INR96.45). The July high (~INR96.6725) is the next important chart point.

Other Markets

• The S&P 500 gapped higher on Friday and the gains were extended yesterday. It reached its best level since August 14. The Nasdaq Composite also gapped higher on Friday and reached a new record yesterday. And these advances are materializing as US long-term rates rise. The US rally lent a positive backdrop for equities today. Nearly all the bourses in the Asia Pacific region advanced today. Europe’s Stoxx 600 is up almost 1%, for its third consecutive advance. US index futures also are enjoying a firmer tone.

• Benchmark 10-year yields in the Asia Pacific region played catch-up today after US 10-year yield rose by 3.5 basis points after being up more than seven intraday. The 10-year JGB yield edged higher and the Australian and New Zealand 10-year yields rose about six basis points. Still, European benchmark yields are off mostly 3-10 bp and the peripheral premiums have narrowed. French, Italian, and Greek yields are off around 10 bp, the German Bund three. The 10-year US Treasury yield is off three basis points as well, to a little below 5.28%.

• Gold popped above $4200 before the weekend but was rejected. It was sold to a new four-day low yesterday, a little below $4123. It took out last week’s low (~ $4111) and fell a little below $4105 before recovering. It is little above $4150 in late European morning turnover. Silver traded with a firmer bias, but it was unable to push above the four-day high set before the weekend (~$62.10). Between $60 and $62.30, it is hard to get excited about silver, and it remains within tht range today.

• November WTI traded yesterday within its well-worn ranges. It was confined to a roughly $89-$92 trading range. The success of the Saudi-backed Yemen forces took back some strategic territory in its attempt to regain control over the Bab el-Mandeb Strait. November WTI was sold to almost $87 today, its lowest level in a month. Around $85 is the next important technical area.

Data

• The US reports the August trade balance today. We already know from the advanced goods trade figures out late last month that the trade balance deteriorated to $132.6 bln from $118.9 bln. It is the largest deficit since March 2025, the month before “Liberation Day”. The median forecast in Bloomberg’s survey is for a $102 bln shortfall after $88.6 bln in July. Note that US gold exports this year are running a little more than twice last year’s pace at around $89.3 bln through July (4.4% of US goods exports vs ~2% in first seven months of 2025.

• Canada reports August’s merchandise trade figures today. There has been a swing in Canada trade balance from a C$21.7 bln deficit in the Jan-July period to a C$4.9 bln trade surplus in the first seven months of this year. Given trade tensions with the Us, the bilateral trade figures may drat attention. In July, Canadian exports to the US fell 6.6%, which was the steepest since April 2025. Overall, 2/3 of Canada’s goods exports were destined for the US market. Canada’s trade surplus with the US narrowed to C$5.9 bln (~$4.3 bln) in July from C$10 .3 bln. The September IVEY PMI is due. It was a four-year high of 64.3 in August.

• The eurozone reported August aggregate retail sales edged up by 0.1% after falling 0.6% in July. Germany reported a whopping 10.6% decline in August factory orders. The median forecast in Bloomberg’s survey was for a 1% decline. The drop was driven by a decline in large orders. Excluding large orders, Germany would have reported a 0.1% decline in August factory orders. Tomorrow Germany reports August industrial output, and it is expected to have risen by 0.5% (median in Bloomberg’s survey) after falling 1.1% in July. France reported a 0.3% decrease in its August industrial production (the median in Bloomberg’s survey was for a 0.2% increase. Still, manufacturing output increased by 0.3%, as expected. Spain reported its August industrial output fell 0.7% after a 0.6% increase in July. Separately, note that Germany and France proposed that at next week’s summit new powers be granted that for the EU that will lower the bar to blocking Chinese imports and that would allow faster action (days). The announcement of the proposal is part of the effort to bolster the EU’s hand in talks with Chinese officials this week. It requires unanimous support and many of the advocates seem to be assuming it, but this still must be proven. Meanwhile, the most immediate and pressing challenge, like the widening of the student (and now teachers and university students strike in France, the demonstrations against the draft in Germany, and the collapse of the Spanish government, and the rise of the AfD in Germany seems to have little to do with China. The people in the street are objecting to their country’s policies and the German and French leadership focused on the challenge from China.

• The UK reported that its September construction PMI rose to 46.1 from 44.3. It is the third uptick in the past four months and the best level since January. It has not been above the 50 boom/bust level since the end of 2024. The AI build-out is not fully compensating for the decline in construction in other sectors.

Disclaimer

European Politics Drag the Euro Lower

noreply@blogger.com (Marc Chandler) — Mon, 5 Oct 2026 06:42:12 -0400

The US dollar is mostly narrowly mixed today. The political woes in Europe weighed on the euro, which was driven to nearly $1.1160, a 17-month low. The market does not like the developments in France and the 10-year premium over Germany is nearly 150 bp today. The two leading parties in next year’s presidential contest scare investors. The far-right wants to lower the age to qualify for pensions and the far-left has advocated for the central bank to forgive the government’s debt it holds. Meanwhile, Spain’s minority socialist government, lost a key vote on housing reform last week, and called for an election next month. Tomorrow, the local parliament of Germany’s Saxony Anhalt convenes tomorrow and Afd won a plurality of votes and could sit in a state government for the first time.

The combination of forward guidance by the Fed’s leadership, though not Chair Warsh, and softer data have prompted the market to re-consider the likelihood of a rate hike later this month. A week ago, the futures market had about a 70% chance of a hike. Now, it is slightly less than 20%. Data this week may not change that much. Still, the early call on the September CPI (due October 14) is for a rise in the year-over-year headline and core rate.

Prices

G10

• The European political morass drove the euro to almost $1.1160 in thin Asia Pacific turnover earlier today. It stabilized and reached almost $1.1220 in the European morning. In less than a 2 ½ hour window in the North American morning ahead of the weekend, the euro set the session low near $1.1220, holding a few ticks above the year’s low recorded the previous day (~$1.1215) and the session high, near $1.1280 after the disappointing US jobs report. French bonds remain under pressure today and Spain’s Sanchez who lost a key vote in parliament on housing reform, called for a snap election on November 29.

• The recovery in the US 10-year yields from a nine-basis point decline to a five-basis point increase appeared to help the greenback recover against the yen before the weekend. It was bought on the brief dip below JPY157 to almost JPY158. The gains were extended to around JPY158.15 today. Support is seen in the JPY157.50-60. The special session the Diet began today, and the Takaichi government has two significant initiatives: a reduction of the tax on food and fewer seats in the lower chamber of the Diet.

• Sterling rose by about 0.3% before the weekend, which pared the week’s decline to a little less than 0.1%. Still, it was the third consecutive weekly decline and the fifth in the past six weeks. It is trading within the pre-weekend range today and has been confined to about $1.3190-$1.3250. The oversold daily momentum indicators look poised to turn higher, and a close above $1.33 would lift the tone.

• The Canadian dollar struggles to sustain even the most modest of upticks. In the past eighteen sessions, it has risen twice. Over this stretch, the US two-year premium over Canada rose about 125 bp to around 157 bp. It is the widest US premium in nearly 30 years. The US dollar reached nearly CAD1.4295 in the Asia Pacific surge but trended lower through early European turnover and briefly slipped below CAD1.4240. It looks poised to recover toward CAD1.4260-70. US reports little progress in trade talks with Canada (and India).

• The Australian dollar, the high yielder in the G10, strengthened before the weekend when US rates were pulling back. It reached $0.6975, but as US rates recovered the Aussie’s gains were pared and it fell back to around $0.6945. It is trading inside the pre-weekend range today and reached the session high, slightly above $0.6965 in the European morning before stalling.

• The dollar reached the session high before the weekend against the Mexican peso slightly above MXN18.35. The peak the day before was above MXN18.43. After the US jobs report the greenback approached MXN1811. However, as US rates rose the dollar recovered and straddled the MXN18.20 area in the waning hours of the week’s activity. Today, is drawing little benefit from what=looks like a market-friendly response to the Brazilian election results, which saw Bolsonaro and his party do considerably better than the polls had suggested. Not only is Bolsonaro favored to win the presidential run-off on October 15, but his Liberal Party did well in congressional and gubernatorial races.

• The offshore yuan was mostly firmer ahead of the weekend. The dollar spent the bulk of the European and North American session chopping between almost CNH6.70 and CNH6.71. The greenback was bid to almost CNH6.7150 today the Asia Pacific session today before returning to CNH6.7070 area in Europe, where the dollar stabilized.

• The Indian rupee traded quietly today and enjoyed slightly firmer tone. The dollar held the pre-weekend range but settled firmly, near session highs (~INR96.3075). The central bank meets in the middle of the week and quarter-point hike in the repo rate to 5.50% is widely expected.

Other Markets

• Equities in North America and Europe finished last week on an up note. Asia Pacific stocks mostly rallied today. The regional MSCI index fell 1.1% last week, its largest loss since mid-July. Europe’s Stoxx 600 fell 1.15% last week. It rose 0.75% before the weekend and is about 0.20% better in late morning turnover today. US index futures are nursing small losses.

• Benchmark 10-year yields in Europe and North America had a volatile session at the end of last week, but when the dust settled, the US 10-year yield was up four basis points and German, French, and Spanish 10-year rates were around five basis points lower. The Japanese 10-year yield was nearly flat today, while European yields are mostly firmer. The French premium over Germany is about 145 bp. Italy’s yield up four basis points and Spain’s benchmark yield is up nearly as much. The 10-year Treasury yield is up about half of a basis point to almost 5.28%. The yield of Brazil’s 10-year dollar bond is off about 8 bp to 6.65%.

• Gold posted an outside day ahead of the weekend. It first made a four-day high near $4226.50 and then proceeded to fall by $100 and but settled above the previous day’s low (~$4139.50). Last week’s low was nearly $4111. It is trading quietly but firmly between about $4125 and $4170 so far today. Silver also posted an outside day and settled within the previous day’s range. It traded down to about $59.70, its lowest level in two months. It is also trading firmer today and is a little below last week’s high, set before the weekend, near $62.

• Buyers emerged when the November WTI contract approached $88 before the weekend. It has not traded below $88 since September 4. It recovered and briefly poked above $92 in late North American dealings before it settled near $91.10. It is consolidating between about $89.30 and $91.90 today.

Data

• The US ISM September services index will likely draw more attention today than the final PMI services and composite index. The ISM services index tends to run a little lower than the PMI but after the jobs data last week, next week’s CPI appears to be the next important factor that can materially shape expectations for the FOMC meeting at the end of the month (Oct 28).

• Canada sees its September services and composite PMI today. While manufacturing is above the 50 boom/bust level, services and the composite have been below 50 since June. The swaps market is pricing in about a 45% chance of a hike at the October 28 Bank of Canada meeting.

• Mexico’s July capex and private consumption reports are unlikely to capture the market’s attention. The focus has been the dramatic unwinding of dollar carry-trades. The data highlight of the week is the September CPI on October 8. The headline rate is expected to tick up but the core rate is seen easing slightly.

• The eurozone final September services and composite PMI had little impact. The services PMI was confirmed at 53.0 and 51.6 in August. The composite PMI was confirmed at 53.1, after 52.0 in July and August. The PPI rose as expected to 1.9% from 1.6% in July. Note that Germany’s state government of Saxony Anhalt convenes tomorrow for the first time since the election that saw the AfD do unexpectedly well. The issue is can it still be blocked from entering the government for the first time, and is so, at what cost? Meanwhile, Spain’s PM Sanchez called for an election November 29, after last week’s parliament defeat. The polls suggest a center-right alliance between the People’s Party and the populist right; Vox party will likely form the next government.

• The UK’s final services and composite PMI readings were revised high. The composite was revised to 52.0 from the preliminary estimate of 51.7. That reflects a pullback from 52.5. With the data out of the way, it is a light week for UK high-frequency economic reports. While there are plenty of data points in the coming weeks, the swaps market has about an 85% chance priced in for the next BOE meeting on November 5.

• The final Australian September services and composite PMI have little bearing on the outlook for the central bank, which has delivered four hikes this year, but withheld forward guidance at its recent meeting. For the record, the services PMI is at 51.9, from the preliminary estimate of 51.4, and the second consecutive decline (53.2 in August and 53.6 in July). The composite PMI is at 51.3 (50.8 flash estimate and 53.2 in July).

• Japan’s final services and composite PMI were mixed. The composite peaked in February at 53.9. The composite averaged 52.9 in Q3 after 52.0 in Q2 and 53.3 in Q1. It is at 51.3 in September (51.6 preliminary estimate). Last week, encouraged by some details in the Tankan and record of the recent BOJ meeting, the swaps market downgraded the chances of a hike this month (October 31) to around 15% today from about 40% last Monday.

Disclaimer

October 2026 Monthly

noreply@blogger.com (Marc Chandler) — Sat, 3 Oct 2026 07:00:00 -0400

The third quarter closed with the world economy looking more resilient than it has any right to look. The wars in Iran and Ukraine continue. Energy markets have been disrupted. Food prices are broadly rising again. Central banks have resumed tightening.

Yet, the high-income economies have not buckled. Despite the US tariff provocations, most countries have not retaliated. The downward spiral that followed Smoot-Hawley has not materialized. Countries are muddling though the pace of the interest rate adjustment is unsettling. Many observers thought Japan was the weak link, but instead the strain in France is palpable with knock-on effects on other peripheral European markets, like Italy, and arguably a drag on the euro.

Resilience

The immediate issue for businesses and investors is not recession. It is the persistence of inflation, the policy response to it, and the extent to which capital spending, especially on artificial intelligence, can continue to offset the drag from higher real interest rates and geopolitical fragmentation.

The US economy has surprised on the upside. The Atlanta Fed’s GDPNow tracker puts Q3 growth at 3.7%. It is not official forecast. Still, it captures the essential point. US growth is running materially faster than the consensus had expected only a few months ago, arguably helped by a budget deficit the Congressional Budget Office estimates to be 5.8% of GDP and a consumer whose confidence is poor but continues to shop.

The strength is uneven. Consumption remains supported by employment, income, and asset prices. Fiscal policy remains more stimulative than many assume. But the investment impulse is increasingly concentrated. AI-related spending is the conspicuous driver. It is lifting orders for chips, servers, networking equipment, power equipment, construction, and data-center capacity. The narrowness of the investment boom and the circulatory financing (e.g., producer-financed sales) is a vulnerability.

By a broad measure of information-processing equipment, data centers, and software investment suggest AI accounts for almost half of US growth requires over the past several quarters. qualification. However, this may overstate the case. A narrower calculation that adjusts for imported computers, peripherals, and semiconductors makes the contribution closer to a third.

Still, the direction of travel is clear. The US expansion is increasingly dependent on capital-intensive investment in computing infrastructure, and on the wealth, effects generated by the equity market’s enthusiasm for it. This is an investment boom that uses electricity, concrete, copper, turbines, transformers, memory, chips, and skilled labor. It is not merely an exercise in software valuation.

Nor is it only an American story. Taiwan’s July export orders rose 61.9% from a year earlier, led by information and communication technology orders, which jumped 89.5%. Machinery orders rose 31.3%, while orders from the US increased nearly 89%. This is the AI cycle showing up in the real economy and in cross-border trade. China’s machinery trade has also been strong, approaching $700 billion, while its industrial firms continue to move up the value chain despite export controls, weak domestic property markets, and trade frictions.

Japan participates from another angle. Its exporters supply capital goods, precision components, factory automation, and materials. The important point is not that Japan is becoming the center of the AI boom. It is that global investment demand is providing a source of external support at a time when domestic Japanese demand remains uneven.

Monetary Policy

The third quarter ended with rate hikes by the Federal Reserve, European Central Bank, and Bank of Japan. The ECB had already delivered a 25 bp increase, lifting its deposit rate to 2.50%, and explicitly linked the move to the Middle East conflict’s effect on prices and to inflation remaining above target for an extended period. Despite uneven growth, and inflation which has not been above target this year, the Bank of Japan lifted is overnight rate target to 1.25%. It was also its second hike of the year.

After sounding hawkish but not advocating a rate hike, Fed Chair Warsh came under increasing pressure following the stronger than expected August job growth and what still appeared to be sticky price pressures. The US two-year premium over Fed funds has widened to over 90 bp the most since 2022, when the Fed was engaged in the most aggressive tightening cycle in decades. It ultimately proved untenable for a Chair who suggested that the bond market was the smartest economist. With a unanimous decision, the Fed hiked rates in September.

The ECB, the BOJ, and the Federal Reserve will likely hike again in the fourth quarter. The Fed faces stronger activity, sticky inflation, and an economy not behaving as if monetary policy is restrictive. The ECB faces the same energy-price shock with weaker underlying growth, which makes its task more difficult rather than easier. The BOJ is caught between inflation, a still-vulnerable currency, and the risk that additional tightening damages a fragile domestic recovery. The Bank of England may join the tightening cycle, especially if services inflation and wage pressures do not ease. The Bank of Canada is also likely to hike in Q4, even though October is a close call.

China’s economic growth continues to disappoint, while is trade surplus in high-tech sector brings new trade frictions. And despite the widening of China’s discount to US Treasuries, the Beijing has continued to endorse gradual appreciation of the yuan. The yuan is at its best level since early 2022. Recognizing the disappointing growth prospects, at the end of September, Beijing announced a series of modest initiatives, including mortgage subsidies, and expanded central bank support for key sectors.

Broader Challenge

For many high-income countries and businesses there are five major disruptions: Russia’s war on Ukraine, the US war on Iran, the US tariffs, China’s export penetration, and AI. They are taking place as the old order, which, for most part, accepted the post-WWII borders, is fragmenting and being challenged. There was more or less free navigation of the seas.

Whether it was the General Agreement on Trade and Tariffs, or its successor, the World Trade Organization there were rules of trade. Of course, as in sports, the violation of the rules was part of the game. Yet there were rules and now, well, it seems like there is none but national self-interest.

Ian Bremmer’s 2012 book, the G=Zero World declared that no country or group of countries could provide those public goods, like international security, financial stability, freedom of navigation, open global trade, and nuclear non-proliferation. While it may not have been a good description of the time, it certainly resonates more now.

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. It fell in September for the first time in three months, reflecting the weakness of most of the components. The nearly 0.4% decline offset the August gain in full. BWCI is up about 0.65% this year after a 3.7% advance last year, which was the first increase since 2020. Broadly speaking, BWCI has chopped in a range so far this year between about 90.85 and 92.45. It tested the upper end of the range in the first part of September and has traded with heavier bias over the past few weeks. It finished September slightly below 91.75.

All of the G10 components fell against the dollar in September, but the Japanese yen. The threat of intervention and speculation that Japanese assets managers, like pension funds and life insurance companies, would repatriate capital, in the higher Japanese interest rate environment, support the yen. It appreciated by almost 1.5% against the dollar in September. The Australian dollar lost a little more than 3% against the greenback. The Canadian dollar and euro fell by about 2.65% and 2.50%, respectively. Sterling depreciated by a little more than 2%. These currencies make up about a third of the BWCI. The dollar also accounts for about a third of our GDP-weighted index.

Emerging market economy currencies fared somewhat better collectively. The Chinese yuan, which accounts for almost 21% of the BCWI rose by an insignificant 0.20% in September. The roughly 3.15% rise in the Russian rouble was the strongest component in September, but its contribution was more than offset by the 5.95% decline in the Mexican peso. The rouble has a 2.75% weight, while the peso's weight is slightly less than 2%. The Indian rupee fell by 0.70% and accounts for 4.25% of the BWCI. The Brazilian real (2.44% weight) and the South Korean won (2.01% weight) rose 0.20% and about 0.85%, respectively.

U.S. Dollar: The dollar's rally last month began before the Federal Reserve delivered a 25 bp hike on September 16. The market was unpersuaded by the median projection in the Summary of Economic Projections, which pointed to an unusually short tightening cycle. At the peak, visited several times in September, the Fed funds futures implied strong confidence in four rate hikes by the end of next year. Yet, the pendulum of expectations swung too far, and a combination of comments from the Vice Chair of the Federal Reserve Board and the Vice Chair of the FOMC and disappointing September employment data spurred a reconsideration. The futures market downgraded the likelihood of a rate hike this month to about a 25% chance from 70% as recently as September 28. The most important data point ahead of the October 27-28 FOMC meeting may be the September CPI on October 14. A 0.3% rise would leave the year-over-year headline pace at 3.4% and could see the core rate tick up to 2.5% from 2.4%. The Atlanta Fed's GDP tracker sees puts Q3 growth at 3.7% as of October 1. It is likely to be among strongest economies, suggesting the US may still be in the best position to weather the shocks, some of which may be self-inflicted. On balance, given the reduced interest rate support and the stretched technical indicators, our bias is for a consolidative to weaker dollar in the coming weeks.

Euro: The eurozone faces several disruptions, and the euro which is near the year's trough is paying the price. The energy shock does Europe no favor. As the ECB recognizes it generates upside risks for inflation and downside risks for growth. European officials have still not managed to check the import surge from China, and it does not appear to have the leverage to encourage a "voluntary restriction on exports". The US continues to threaten more tariffs, and the next round could be for "excess capacity". Although the ECB has hiked twice this year compared with one move by the Federal Reserve, the derivatives market has more Fed tightening than the ECB over the next 12 months, and the US two-year premium over Germany widened by more than 25 bp over the past three weeks. It is approaching the year high set early July near 167 bp. The governments in France and Germany are unpopular, and this weakens European leadership. French President Macron's term is up in April, and German Chancellor Merz is barely hanging on. It will be clearer in the coming week or so whether the AfD can be kept out of government in Saxony Anhalt. ECB President Lagarde has signaled she will step down before October 2027. Speculation of her competing for the French presidency has diminished, and many expect to her go to the World Economic Forum.

(As of October 2, indicative closing prices, previous in parentheses)

Spot: $1.1255 ($1.1585) Median Bloomberg One-month forecast: $1.1380 ($1.1599) One-month forward: $1.1270 ($1.1600) One-month implied vol: 6.5% (5.4%)

Japanese Yen: September was a month of two halves for the yen. The intervention in late July/early August was challenged as August progressed and the dollar reached JPY160.40 on September 3 before rate hike speculation and that yen-carry trades were being unwound. The dollar was sold aggressively and fell through JPY155 for the first time since February. It briefly slipped below JPY153 on September 9 before trending back to JPY159 two weeks later, despite the BOJ's rate hike and signal that additional tightening will likely be necessary. The rate hike was well discounted, and the greenback rallied from about JPY156 to JPY159 after BOJ's announcement. Contrary to both theory and conventional wisdom, the dollar-yen exchange rate is more correlated with changes in US rates than Japanese raters of the interest rate differential. Over the past 30 sessions, the exchange rate and the changes in the US two-year yield have a correlation of almost 0.60. The correlation with the US 10-year yield is around 0.95. Turning to Japanese yields, the correlation of changes in the exchange rate and Japan's two-year yield is negligible at -0.04. The correlation with the 10-year JGB is a little more than 0.30, which means that higher Japanese 10-year rates tend to be associated with a firmer US dollar. The correlation between the exchange rate and the interest rate differentials are around 0.55. A key takeaway is that officials will find it difficult to hold the dollar back during periods of rising US yields.

Spot: JPY157.85 (JPY160.09) Median Bloomberg One-month forecast: JPY157.00 (JPY159.07) One-month forward: JPY157.45 (JPY159.72). One-month implied vol: 9.1% (7.0%).

British Pound: We suspect sterling is ending its third multi-week decline of the year. The was nearly a 5.2% swoon from late January through the end of Q1. The second was from mid-May through late June and it took sterling down about 3.75%. The third began in late August through late September. It was a little less than a 3.5% decline. We look for sterling to recover into the $1.3400-50 area in the coming weeks. The Bank of England stood pat in September but seemed to signal a hike was coming, and the swaps market has a little more than an 85% chance that it will be delivered at the next meeting in early November. Between now and the end of Q2 27, the swaps market has about 100 bp of tightening discounted, which seems aggressive. The October 28 presentation of the budget by Chancellor Healey will be the first opportunity for the new Labour government to showcase its fiscal priorities. Given the rise in borrowing this year, due in no small part to rising prices, and greater debt servicing costs, there is little room to maneuver. Prime Minister Burnham is likely backing a small down payment of his larger vision with a selected increase in taxes and a small increase in targeted spending. In his party address, Burnham offered a critical assessment of Brexit and unambiguously more pro-EU vision than had been previously endorsed. The UK does not have to hold elections until August 2029, but Burnham seems to recognize he needs a mandate and there is speculation of an election next year.

Spot: $1.3240 ($1.3538) Median Bloomberg One-month forecast: $1.3300 ($1.3408) One-month forward: $1.3245 ($1.3540) One-month implied vol: 6.4% (5.6%)

Canadian Dollar: The Canadian dollar fell by a little more than 2% in September. It was weighed down by the broad strength of the US dollar and the widening of Canada's interest rate discount to the US. Canada's two-year discount reached approached the 28-year high seen last year near 155 bp. Canada's discount on 10-year yields reached about 120 bp, the most since May 2025. The divergence of the policy rate is the most since early the early 2000s and the pricing of in the swaps market suggest it may begin narrowing early next year. The market is discounting a little more than a 50% chance of a hike by the Bank of Canada at meeting in late October, and three hikes are nearly fully priced in by the end of Q1 27. Prime Minister Carney's is combining privatization, with state help for companies negatively impacted by trade tensions with the US, drawing closer trade ties with others, including the European Union. He enjoys strong domestic support. That, coupled strengthening nationalism, may be sufficient to encourage Alberta voters on October 19 to refrain from initiating a process that could lead to a new referendum on leaving Canada.

Spot: CAD1.4250 (CAD 1.3905) Median Bloomberg One-month forecast: CAD1.4120 (CAD1.3994) One-month forward: CAD1.4230 (CAD1.3888) One-month implied vol: 4.4% (4.3%)

Australian Dollar: The Reserve Bank of Australia delivered its fourth rate hike of the year in late September. Its 4.60% cash rate target is the highest since 2011 and stands atop the G10. The central bank may not be finished. The futures market has about a 40% chance of another hike before the year is out. August inflation rose to 4.0% (from 3.5% in July) and is now the highest since April. Still, the tightening of monetary policy appears to be adversely impacting the housing market. The unemployment rate has also risen from 4.1% in January to 4.6% in August, the highest since October 2021. Meanwhile, despite the rise in commodity prices, Australia goods trade balance has deteriorated this year. In the first eight months of the year, Australia's trade surplus has narrowed to an average of about A$1.3 bln a month, down from an average of $4.06 bln a month the first eight months of 2025 and $6.1 bln January-August 2024. In late September, the Australian dollar tested support near $0.7000. A convincing break targets the $0.6920-40 area.

Spot: $0.6955 ($0.7019) Median Bloomberg One-month forecast: $0.7010 ($0.7104) One-month forward: $0.6950 ($0.7015) One-month implied vol: 8.0% (7.3%)

Mexican Peso: The jump in US rates and sharp appreciation of the dollar spurred an unwinding of carry trades in a way that the yen's surge in late July/early August and again in early September did not. Some of the yen's funding role appeared to have been shifted to the Swiss franc and US dollar. High yielding emerging market currencies suffered in September, and the Mexican peso was the weakest in that universe, losing nearly 4%. The dollar reached above MXN17.70 for the first time since April. The market is stretched and we will look for some kind of technical sign that a top may be in place. Still, the next upside technical target may be around MXN17.85. While the domestic economy is fragile, the external account is solid. In the first eight months of the year, the average monthly trade surplus averaged $1.32 bln a month compared with $168 mln a month in Jan-July 2025. Worker remittances averaged about $5.17 bln a month through August this year, slightly more than the average in the first eight months of last year (~$4.97 bln).

Spot: MXN18.1635 (MXN17.0360) Median Bloomberg One-month forecast: MXN17.8470 (MXN17.2680) One-month forward: MXN18.2040 (MXN17.0765) One-month implied vol: 12.1 (6.3%)

Chinese Yuan: Chinese officials used the setting of the daily reference rate to signal the acceptance of a gradually appreciating yuan. The 0.2% rise in September seems to be small beer and inconsequential. The year-to-date rise of 4.2% makes it among the strongest currencies this year, but given China's competitive advantages, it is likely too small to impact the large trade surplus. Meanwhile, economic activity has continued to disappoint, and the Bloomberg's economic data surprise index is near a five-year low. Beijing has not provided fresh monetary or fiscal support for the flagging economy. The 10-year yield is hovering new record lows (below 1.70%). The new support measures announced seem too modest to have much impact but could be an accelerant if the September PMIs are signaling a cyclical upswing. The US-China tariff truce was extended for two months, until January 10, while officials work toward a potentially larger agreement. The next key date for the US-China talks is the APEC meeting in Shenzhen November 18-19. On September 24, following the quarterly meeting, the PBOC's statement warned that it will "prevent the 'herd effect' and the self-reinforcement of irrational expectations" in the foreign exchange market. Still, the central bank continued to lower the dollar's reference rate to new lows since early 2022.

Spot: CNY6.7060 (CNY6.7290) Median Bloomberg One-month forecast: CNY6.7085 (CNY6.7494) One-month forward: CNY6.7265 (CNY6.7650) One-month implied vol: 2.3% (2.4%)

Disclaimer

US Jobs Report to Help Resolve Tension between Firm Greenback and Softer Short-Term Rates

noreply@blogger.com (Marc Chandler) — Fri, 2 Oct 2026 06:48:04 -0400

The US dollar is mostly firmer ahead of today’s important US employment report. The Japan yen and Swiss franc are exceptions and are 0.30%-0.40% higher. The greenback’s resilience is notable because comments by the vice chair of the FOMC (Williams) and the vice chair of the Federal Reserve Board (Jefferson) both seemed to suggest that the Fed’s leadership did not see the sense of urgency that was reflected in the market, which had, as of Monday, discounted a 70% chance of a hike later this month. It is being trimmed for the fourth consecutive session and is now pricing in about a 25% chance. The Us two-year yield peaked on Monday near 4.96% and is now a little below 4.80%.

We had anticipated that the pendulum of market expectations had swung quite far and there was little juice left. However, thought the pullback would weigh on the dollar. Perhaps, the calendar effect, i.e., the end of the month and quarter, or today’s US jobs report have delayed the expected market reaction. Today’s price action, following the US employment data, may clarify the technical and fundamental picture.

Prices

G10

• The euro was tagged for a 0.75% loss yesterday, its largest decline in three-and-a-half months. It briefly traded to $1.1215, the lowest level since the end of May 2025. Despite the nearly 10 bp decline in the US two-year yield and the almost five basis point decline in the US 10-year yield, the euro settled well below Wednesday’s low (~$1.1320). It remains soft today. After it held $1.1270, it has slumped t a new session low below $1.1230 in late European morning turnover.

• The dollar remained firm against the yen in choppy session yesterday. Despite the pullback in US yields, the dollar still settled above highs from the previous three sessions (~JPY157.70). The firmer than expected Tokyo CPI failed to rebuild expectations for a hike later this month. At the start of the week, the swap market was pricing in a 40% chance of a hike, and now it is a little less than 20%. Nevertheless, the dollar is trading with a heavier bias, but inside yesterday’s range. Options for $2.6 bln at JPY158 expire today. The trend line connecting last month’s two peaks comes in near JPY158.55 today, which is also around where the 200-day moving average is found.

• Sterling was sold to a three-month low yesterday, near $1.3180. Its loss might have been steeper if it were not for the cross-rate demand against the euro. Sterling reached a two-month high against the euro yesterday. The euro fell to about GBP0.8505, the lowest since July 21. It is consolidating, slightly softer today. Against the dollar, sterling found support at the end of Q1, near $1.3160. Late in Q2, it made a marginal new low, closer to $1.3140. It is trading in the lower end of yesterday’s range. So far, it has been capped, near $1.3220. Options for almost GBP600 at $1.3230 expire today.

• The Canadian dollar’s drop continued. It is off for the past nine sessions, coming into today, and has risen once in the past 17 sessions. The greenback reached nearly CAD1.4265 yesterday, its best level since April 2025. The CAD1.4300 area corresponds to the (61.8%) retracement of the US dollar’s losses from the February 2025 high (~CAD1.4800). The US dollar eased to CAD1.4210 today where buyers emerged to take it to CAD1.4240. We have found that US dollar is tracking the two-year interest rate differential. It rose by a little more than 25 bp in the past three weeks. It has been consolidating in recent days after reaching 155 bp. It is now little changed on the week. The reaction to today’s US employment data may be key. The market is stretched. Be on guard for a reversal pattern.

• The Australian dollar held above $0.6900 yesterday, barely. It had not traded closer since it last traded below $0.6900 on July 2. At the end of March, the Aussie found support near $0.6835 at the end of Q1 26 and about $0.6865 at the end of Q2. Today, it is holding above yesterday’s lows and testing the $0.6950 area.

• The Mexican peso was the worst performing emerging market currency last month. It fell by nearly 6%. It was taken for another nearly 1.3% yesterday. The dramatic move reflects market positioning, and the key fundamental development has been the jump in US rates, which is an integral part of the risk-off phase. The dollar rose to a little above MXN18.43 yesterday. It is consolidating today between about MXN18.2050 and MXN18.3430. It finished last week around MXN17.68. A close below MXN18.15 would be an early indication that the surge may be over.

• With the mainland markets closed, the dollar seemed almost to have been marked higher yesterday against the offshore yuan and reached about CNH6.7220. It spent most of the European and North American session chopping between around CNH6.7160 and CNH6.7200. Today, the dollar was sold to almost CNH6.70, a seven-day low. It recovered to almost CNH6.7070 in the European morning.

• Indian markets are closed for a national holiday.

Other Markets

• US equities recovered yesterday, and the enthusiasm did not carry over into Asia Pacific activity today. The markets were mixed. Tokyo and Hong Kong fell, while Taiwan and South Korea rose. Australia rose, but New Zealand fell. After falling 1.3% yesterday, Europe’s Stoxx 600 is up around 0.6% through the European morning. US index futures are up (~0.4%-0.8%).

• Benchmark 10-year yields in Asia Pacific played catch-up today after the US 10-year Treasury yield fell by five basis points and the US two-year yield tumbled about 10 basis points yesterday, the day before the market-sensitive US jobs report. The 10-year JGB yield eased a couple of a basis points to a little below 3.08% It is up about one basis point this week. European yields are softer. German and UK yields are off 7-8 bp, while the French yield is practically flat. The German yield is down almost 22 bp this week, while the French yield is up 15 bp and Italy’s is nearly nine basis points higher. The 10-year Gilt yield is off almost 10 bp this week. The 10-year US Treasury yield of a little less than 5.23%, it’s down a single basis point this week.

• Gold settled a bit firmer yesterday, but it was still below the five-day moving average (~$4162 today) and below $4200. Gold traded on both sides of yesterday’s range and a close above $4200 would help steady the tone. Silver settled firmly, though also below the five-day moving average (~$61.50 today). It is holding above $60 but must push above $61.70 to improve the technical tone.

• November WTI appears to have forged a base in the $88.60 area. The contract settled near $92.85 yesterday. It initially probed the $93.50 area and was greeted with sellers that have pushed to a little below $88.90. Last week, it settled around $92.40.

Data

• The US monthly jobs report remains among the most important high-frequency economic reports, even though it is subject to persistent revisions. The median forecast in Bloomberg’s survey has settled at 90k (vs 162k in August). The unemployment rate is seen steady at 4.1% and a 0.3% increase in average hourly earnings will keep the year-over-year rate at 3.1%. A slight decline in the workweek could impact output measures. August factory orders are unlikely to have much impact. Durable goods orders, out earlier this month, were flat in August.

• The eurozone aggregate CPI rose 0.6% in September for a 3.8% year-over-year rate, which is up from 3.2%. It was a little firmer than expected and is the third consecutive month that the CPI has accelerated. Recall that in January before the US shock 2.0 (the war in Iran and 1.0 was the tariff hikes) eurozone inflation was at 1.7%. In September core rate edged up to 2.5% from 2.4%. The core rate was at 2.2% in January. The swaps market has about a 15% chance of a hike at the ECB meeting on October 29. However, the market has about an 85% chance of a hike at the mid-December meeting. A week ago, the swaps market had about a 40% chance an October hike and almost 34 bp before the end of the year. The swaps for both tenors are falling for the seventh consecutive session today.

• Tokyo CPI rose was a little stronger than expected. It rose to 2.7% in September from 1.9% in August. It is the highest of the year. The jump was mostly fueled by the fading of government support programs. Last year’s childcare-fee waiver offered a low bar for the 12-month comparison. The core rate rose to 2.7% from 1.8%, which is also the highest of the year. Processed food prices rose 3.6% year-over-year and twice the number of food and beverage companies raised prices compared with a year ago. Service prices rose by 2.3% year-over-year, the most since late 2023. The Tokyo CPI might exaggerate the translation to the national figure, which is due October 23, as Tokyo’s water-fee waiver also ended.

Disclaimer

New Month, Same Market Dynamics

noreply@blogger.com (Marc Chandler) — Thu, 1 Oct 2026 06:48:07 -0400

A new month begins, but the market dynamics are familiar. Rising oil prices and rising yields have lifted the greenback broadly. The euro and Canadian dollar have been sold to new lows for the year. Interest rate premiums over Germany within the eurozone widen as the focus is on the French and Italian budgets. The combination of the uninspiring Tankan Survey in Japan and record of the recent BOJ meeting saw the market downgrade the chances of a hike this month in Japan. The dollar is above JPY158 for the first time this week.

The dollar’s strength comes despite the futures market reducing the chances of a Fed hike later this month to about 40% from 70% at the beginning of the week. In yesterday’s update the Atlanta Fed GDP tracker estimate for Q3 GDP was cut to 3.7% to 5.0%. Still, the US is seen best able to cope with the shocks. At least seven Federal Reserve officials are expected to speak today. Tomorrow sees Tokyo’s CPI and the US employment report.

Prices

G10

• The euro reached the session high yesterday, near $1.1380, around the time of the US data were reported. As US interest rates recovered from their early decline, the euro eased back to the session low of almost $1.1320 late in the session. It has broken below $1.13 today for a new low for the year (~$1.1265). There may be some support near $1.12, but the $1.11 area represents the next important retracement (50% of the rally from last year’s low ~$1.0140).

• Poor Japanese data yesterday and the recovery of US rates helped the greenback trade higher against the yen after it reached an eight-day low near JPY156.40. The dollar’s high in the North American session was a little above JPY157.50 late in the session. It has soared to almost JPY158.50 today after the Tankan saw slightly lower inflation than previously, a slight reduction in companies planning to raise prices, and the summary of opinions from last month’s BOJ meeting did not seem sufficiently hawkish as to signal back-to-back rate hikes. The odds of a hike late this month were scaled back. The next nearby target for the dollar is the last week’s high (JPY158.95-JPY159.05). Options for almost $1.60 bln at JPY158.25 expire today.

• Sterling traded above $1.33 in the North American session yesterday for the first time in five sessions. However, it faltered there and retreated to almost $1.3250. Still, it settled above Tuesday’s high (~$1.3260) and posted its highest close since September 22. Yet, it has come back offered today and briefly slipped below $1.3200, where options for GBP840 mln expire today. The year’s low was recorded in late June, near $1.3140.

• The recovery of US rates yesterday saw the greenback recorded an outside up day against the Canadian dollar. It traded on both sides of Tuesday range and settled above its high. In fact, the US dollar rose slightly above CAD1.4235, its highest level since July 6. It was the eighth consecutive gain for the US dollar. It reached a marginal new high for the year today, near CAD1.4260. The CAD1.4290-CAD1.4300 area holds the (61.8%) retracement of the US dollar’s losses from last year’s high (~CAD1.4795). Still, given the move, implied volatility is restrained. Benchmark three-month implied vol is slightly above 4.65%. It was at 4.2% early last week, which was near the year’s low. It was 4.5% at the end of the week. The month’s high was near 4.75%.

• The Australian dollar traded below $0.6950 yesterday for the first time in two months. It continues to trade heavy today, and the smaller than expected trade surplus did not help its cause. The Australian dollar has been sold to almost $0.6930 in European turnover. Options for A$475 mln at $0.6940 expire today. The next technical area of support may be in the $0.6900-15 band. A break could target the $0.6830-50 area.

• The Mexican peso could not sustain upticks for the third consecutive session yesterday. The dollar made a marginal new high for the move (~MXN18.1530 yesterday), and the forward momentum stalled. It settled within the upper Bollinger Band (found ~MXN18.2360 today) for the first time in six sessions. Pressure continues today and the greenback reached almost MXN18.28 today. Colombia unexpectedly hiked rates this afternoon to 12.25% from 12%. CPI is running around 6.2%-6.3%. In Bloomberg survey only 2 of 29 economists expected a hike. COP trading for the day was over before the announcement. This would seem to be positive for the COP today, yet the dollar is firmer against most emerging market currencies today. The swaps market has another hike discounted in the next six months.

• The offshore yuan market turned quiet after the mainland markets closed for a weeklong holiday yesterday. The broad dollar gains have seen it reached CNH6.7220 today. The week’s high was set Monday, around CNH6.7265. The PBOC set the dollar’s reference rate at new multiyear lows yesterday, seemingly signaling acceptance for further yuan strength. Its recent statement seemed to warn the market against taking it to excess. Ahead of the holiday, Beijing announced some targeted fiscal support, including mortgage subsidies, and the PBOC cut the rate on its supplementary lending facility for policy banks to fund investment by 25 bp to 1.5%.

• The dollar jumped to INR96.32 today, its best level since July 24. Firmer oil prices, and a broadly stronger US dollar weighed on the rupee, despite the intervention. Some reports suggest importer demand ahead of tomorrow’s holiday.

Other Markets

• US equity indices finished poorly yesterday. Still, the resilience of the S&P 500 and Nasdaq Composite in the face of the jump in US yields in September was remarkable. The S&P held its own and was slightly better than flat. The Nasdaq rose almost 2.5%. In contrast, Europe’s Stoxx 600 was off about 2.5% in September, and the MSCI Asia Pacific equity index lost a little more than 0.5%. Most of the large bourses in the Asia Pacific region rose today, lift by a 3.3% rally in the Nikkei, and a nearly 2% rally in South Korea. Australia’s ASX 200 was among the hardest hit in the region, it dropped 1%. Europe’s Stoxx 600 is off for the third consecutive session. It is down a little more than 1% today. While the Nasdaq futures are firmer, the Dow and S&P 500 are weaker.

• Benchmark 10-year yields are mostly higher today after the six-basis point jump in the yield of the 10-year Treasury yesterday. The 10-year JGB yield rose 6 bp (to nearly 3.10%). European yields are mostly 2-4 bp higher. The French premium over Germany has widened to around 130 bp, though Italian bonds are under more pressure today than French bonds. The 10-year Treasury yield is up couple of basis points to poke above 5.30%. The US Treasury says it will buy back as much as $6 bln of long-dated Treasury bonds today. Its actual operations have been closer to a third of the maximum as many offers have been rejected. At the same time, the market reassesses the odds of a rate hike late this month. The odds of a 25 bp hike have been reduced to a little less 40% from about 70% on Monday.

• Gold’s push above $4200 was rejected and it was sent back to a little below $4150. This week’s lows were around $4111-13. It is practically flat today. Silver traded on both sides of Tuesday’s range but settled barely inside its range. Indeed, silver recorded its lowest close since August 4. It frayed $60 today for the first time in two months. A convincing break of $60 could signal the next leg down, which could be in the $56.50-$57 area.

• November WTI recovered yesterday after slipping marginally through last week’s lows (~$88.65-70) and reached the session high near midday in NY of almost $92, before settling near $90.40. It has come back bid today and reached almost $93. If the lows seen are the lower end of the range, then the upper end of the range may be around $96.50.

Data

• In today’s slate of US data, the markets will be most sensitive to the ISM manufacturing. The initial manufacturing PMI jumped to 57.0 from 53.9, the best since 2022. The ISM runs a little lower and it is expected to edge up to 54.9 from 54.6 in October. It peaked in July at 55.6. August construction spending is due, and after a 0.5% decline in July, it is expected to be flat. The AI datacenter build-out is not quite enough to offset the weakness elsewhere. Through July, construction spending has fallen by an average of 0.4% a month this year, compared with an average decline of 0.1% a month in the Jan-July 2025 period. September auto sales will trickle in over the course of the session. On a seasonally adjusted annual basis, US vehicle sales averaged 16.07 mln a month through August. In the first eight months of 2025, US vehicles sales averaged 16.26 mln.

• Canada sees the September manufacturing PMI today. It stood at 53.0 in August. It peaked in July at 53.5.

• The eurozone September final manufacturing PMI was revised to 52.9 from 52.7 preliminary reading where it also was August. It is the strongest since before Russia’s invasion of Ukraine. August unemployment for the euro area was stead at 6.4%. It has been mostly at 6.4% this year after spending 2025 at 6.3% and Q4 24 at an EMU-era low of 6.2%. Tomorrow, the September aggregate eurozone CPI is due. It is seen rising 0.5% for a 3.7% year-over-year rise (from 3.2%). The core rate is expected to edge up to 2.5% from 2.4%.

• The UK’s final September manufacturing PMI is at 51.9. The flash estimate was 52.0. Still, it was the first increase since May, when it peaked at 53.9. It was at 46.2 in September 2025.

• The Reserve Bank of Australia delivered its fourth hike of the year earlier this week, while the manufacturing PMI stand at 49.6 (49.3 preliminary estimate and 52.0 in July and August). It is the weakest since the end of 2024. Meanwhile, Australia’s trade balance deteriorated. It fell to A$495 mln in August from a revised A$1.35 bln in July (from A$1.92 bln initially) and well below the median forecast in Bloomberg’s survey for A$2 bln. The average monthly surplus through August this year is about A$990 mln compared with an average of a little over A$4 bln in the first eight months of 2025.

• Japan’s Tankan survey showed small to modest improvement in most categories, but the capex plans were reduced to 11.3% from 11.5%. The pullback was led by smaller businesses. Inflation expectations eased to 2.5% on a five-year view from 2.6% in Q2. Among large non-manufacturers, the percentage planning to lift prices exceeded those planning on cutting prices by 38%, down from 40% previously. The final September manufacturing PMI was confirmed at 54.1. It peaked in August at 54.9 and was at 48.5 in September 2025. More importantly, tomorrow the Tokyo CPI is due. It is expected to jump as last year’s childcare-fee waiver creates an important base-effect. The median forecast in Bloomberg’s survey sees a rise to 2.5% from 1.9%. The core rate is expected to rise to 2.3% from 1.8%.

Disclaimer

The Lack of Urgency Expressed by NY Fed President Williams Pushes Rates Lower and Weighs on the Greenback

noreply@blogger.com (Marc Chandler) — Wed, 30 Sep 2026 06:47:16 -0400

The combination of lower oil prices yesterday and less hawkish comments by NY Fed President Williams helped steady US interest rates yesterday. Williams, who has a permanent vote on the FOMC as its vice chair, open speaks as part of the Fed’s leadership, and downplayed the sense of urgency. The Fed funds were discounting about a 70% chance of a hike at the October FOMC meeting, a few days before the midterm election. The implied odds of a 25 bp cut are now nearer 40%.

The dollar is trading with a heavier bias today against nearly all the G10 currencies. A less than hawkish statement following yesterday hike by the Reserve Bank of Australia, and today’s slightly softer than expected August CPI has weighed on the Aussie today. Ahead of the week-long holiday beginning tomorrow in China, the PBOC unexpectedly set the dollar’s reference rate relatively sharply lower today (CNY6.7351), a new low since January 2023. New monetary and fiscal measures to support the economy have been unveiled over the last couple of days.

Prices

G10

• The euro was sold to new lows since mid-2025 yesterday. It reached nearly $1.1310 in the North American session. It was the sixth decline in the past seven sessions. It settled a little below the middle of the session’s range. The euro is consolidating with a slightly firmer bias today and reached almost $1.1365 in early European turnover. It must settle above $1.14 to be anything notable. There is little on the charts until closer to $1.12, and the (50%) retracement of the euro’s rally from 2025 low (~$1.0140) is near $1.11.

• The yen traded in the lower half of Monday’s range yesterday. After recording the session low in early North American turnover yesterday, near JPY157, the greenback bounced back toward the session high (~JPY157.70) before drifting back to the lower end of the session’s range in North American afternoon. The fiscal half-year end in Japan related flows drove the dollar to about JPY156.40 in Tokyo, an eight-day low and it quickly recovered to around JPY157.20. It has been trading between roughly JPY156.70 and JPY157.10 in Europe. Options for $1.4 bln at JPY157 expire today.

• Sterling slipped couple of hundredths of a cent yesterday to draw a little closer to $1.32. It has not traded below there since late June, and it recorded the year’s low (so far) around $1.3140. It recovered to settle near the middle of the day’s range and reached nearly $1.3280 today, which is almost Monday’s high. A close above $1.33 would lift the tone.

• Canada’s local markets are closed today. The Canadian dollar’s losses were extended yesterday. The last time it rose was on September 18. The greenback frayed CAD1.42 yesterday for the first time since early July. The year’s high was recorded on June 24, near CAD1.4250. We argue the exchange rate is particularly sensitive (robust correlation) to the US two-year premium over Canada, which has shot up from 122 bp in early September to almost 158 bp yesterday. However, late in the day, as the US two-year yield pulled back the premium narrowed for the first time in more than two weeks, and the greenback drifted back toward the session low (~CAD1.4170-75). It is trading inside yesterday’s range today.

• As has been the case with the other G10 central banks that have lifted rates recently, the Australian dollar was sold yesterday. The RBA’s hiked but Governor Bullock might be satisfied pending the evolution of the data. Still, even when the RBNZ, BOJ, and ECB signaled they would likely raise rates again, their currencies declined. The sole exception in this latest round was the Federal Reserve and US dollar. The Aussie was sold to about $0.6965. Slightly softer inflation and a larger than expected drop in building approvals seemed to weigh on the Aussie, which slipped slightly below $0.6960. Nearby chart support is seen around $0.6950, where options for A$340 mln expire today. If that yields, the $0.6900 area comes into view.

• The Mexican peso continued to be walloped yesterday. Its headlong plunge has seen it dive nearly 5.5% over the past six sessions. Not to put too fine of a point on it but consider that at the end of August one-month implied volatility was slightly below 6.5%. It was one of the characteristics that made it a favorite for carry trades. One-month implied vol reached almost 12% yesterday. The dollar approached the high for the year, recorded six-months ago, near MXN18.1650. A move above it may target the MXN18.25 area next. The greenback is trading firmly but inside yesterday’s range. The momentum indicators are overextended, but respecting the price action, means waiting and looking for some sign the surge is over. Taking out the previous session’s low would be the bare minimum necessary. It has not happened for seven sessions. Yesterday’s low was about MXN17.8730.

• The greenback recovered after approaching CNH6.7035. The dollar returned to approach the session high against the offshore yuan in the North American afternoon. It reached CNH6.7115. The dollar is recording an inside day, However, ahead of the extended holiday, starting tomorrow, the PBOC set the dollar’s reference rate unexpectedly lower. The CNY6.7351 fix today is a new cyclical low. It was set at CNY6.7411 yesterday and CNY6.7828 at the end of August.

• The Indian rupee edged higher today for the first time this week. The pullback in oil prices and broadly softer US dollar helped. The dollar reached a high near INR96.1540 yesterday and eased to INR95.7475 today, its lowest level since the middle of last week.

Other Markets

• US equities continued to wilt under the deluge of raising yields. Since early August, the S&P 500 has fallen for three sessions each week. It has a two-day slide coming into today. US index futures are narrowly mixed. The MSCI Asia Pacific Index snapped its two-day slide today, led by a nearly 2% rally in the Nikkei. South Korea, India and Singapore did not participate in today’s regional rally. Europe’s Stoxx 600 is flattish and has settled pennies above 638 for the past three sessions and it is still there now.

• The 10-year Treasury yield rose four basis points yesterday to a little above 5.28% before pulling back Comments by NY Fed President Williams sounded dovish compared with many of his colleagues who have spoken recently. He played down the sense of urgency and US rates softened. Benchmark yields are off mostly 2-5 bp today. Still, it has been a terrible month for bonds. The US 10-yield yield is up almost 50 bp, France 60 bp, Italy 40 bp, Germany 25 bp, the UK 30 bp, and Japan 12 bp.

• Gold steadied yesterday after plunging $169 (~4%) on Monday. It held above Monday’s low (~$4111) and made new session highs late in the session near $4180. Follow-through buying today lifted it above $4200 but it is consolidating ahead of the US open. Silver initially traded below Monday’s low to draw a little closer to $60. It recovered and settled near $61.50, the help of late buying. It reached about $61.65 today before stalling and is now below $61. Gold is off almost 5.6% this month and silver has lost about 8.6%.

• November WTI broke down late in North America and fell to almost $89, a new four-day low. It briefly slipped through last week’s lows (~$88.65-$88.70) but is now back above $90. The next technical target could be the around $84.50 next if last week’s lows are convincingly violated. Saudi pipeline figures reported, the further draw down of US Strategic Petroleum Reserves, added pressure on other countries to at least make good on their early commitments on tapping strategic supplies weighed on prices.

Data

• The US reports personal income and consumption and deflators. It will include annual revisions for GDP and personal income. There is also a methodological change in the calculations of the deflators. The changes focus on portfolio management and investment advice, legal services, and computer and software accessories. The changes are expected to show slightly less price pressures. After slowing in June and July, personal consumption is expected to have jumped back strongly in August. The median forecast in Bloomberg’s survey is for a 0.9% increase, which would match the largest this year, which was the most since December 2024. Adjusted for inflation, the 0.5% increase that is anticipated, would match the strongest since March 2025. The ADP private sector employment estimate for September is due. The median forecast in Bloomberg’s survey is for 74k after 38k in August. Through August, ADP estimated the US private sector added an average of 68k jobs a month. The BLS estimate says the US private sector added an average of 84k jobs a month. Last year, ADP estimated an average of almost 64k jobs a month and the BLS, 68k.

• Germany reported a 1.3% jump in August retail sales, which cut the year-over-year decline to 0.4% from -2.2% in July. September unemployment was steady at 6.4%. The German states reported September CPI figures, and the national reading is due shortly. The EU harmonized measure is seen rising by 0.5%, which will lift the year-over-year rate to 3.2% from 2.9%. Separately, France reported a 0.4% decline in the EU-harmonized CPI, but due to the base effect (-1.1% in September 2025), the year-over-year pace accelerated to 3.4% (from 2.6%). Tomorrow, the September aggregate eurozone CPI is due. It is seen rising 0.5% for a 3.7% year-over-year rise (from 3.2%). The core rate is seen edging up to 2.5% from 2.4%. France also reported consumer spending fell by 0.5% in August after revised 0.4% (initially 0.5%) increase in July. France unveils next year’s budget tomorrow and the French 10-year premium over Germany is a little more than 120 bp.

• The UK revised Q2 GDP estimate to 0.5% from 0.4%. Better net exports seemed to be the driver. The swaps market remains confident that the Bank of England will hike the base rate at its next meeting in early November. The market has nearly 100 bp discounted through the first half of next year.

• A day after the Reserve Bank of Australia’s fourth rate hike of the year, August CPI was released. It rose 0.4% after a 1% jump in July. The year-over-year rate rose to 4.0% from 3.5%. The trimmed mean rose 0.2%, leaving the year-over-year rate steady at 3.6%. Separately, it reported a dramatic 6.1% decline in building approvals and a 0.6% increase in private sector credit extension (the year-over-year pace was unchanged at a lofty 8.4%).

• Japan reported a 1.2% decline in August retail sales after a 2.1% rise in July. August industrial output unexpectedly fell 1.7% following the 0.2% decline in July. The median forecast in Bloomberg’s survey was for a 1.3% increase. The Japanese economy grew by about 1.6% annualized in H1 26 and is seen slowing to 1% in H2. The swaps market had about a 40% chance of a hike at the next BOJ meeting in late October discounted on Monday and it has been halved now.

• China’s PMI was ticked up and this coupled with the new modest stimulus efforts may help boost sentiment after the holiday with closes mainland market starting tomorrow and re-opening next Thursday, October 8. The manufacturing PMI did poke above 50 (50.1 vs. 49.8). It is the first reading above the 50 boom/bust level since June. The slowing of the non-manufacturing sector PMI rose to 50.2 from 49.0, which matches the highest reading since June 2025. The composite edged up to 50.7 from 49.5. It had not been above 50 since June and finished last year at 50.7. The RatingDog version runs a little firmer and was narrowly mixed. The composite stands at 52.4 from 52.1. It was at 51.3 at the end of 2025.

Disclaimer

The Dollar Remains Firm and the RBA Delivered its Fourth Hike of the Year, though Sounded Less Hawkish

noreply@blogger.com (Marc Chandler) — Tue, 29 Sep 2026 06:49:51 -0400

The US dollar continues to trade with a firmer bias. We are still struck by the over-bought technical momentum indicators, arguably encouraged by the aggressive pricing of the trajectory of Fed policy. In the Fed funds futures, the odds of an October hike six days ahead of the midterm election. In recent years, there is some precedent for a move six days before a national election (e.g., 2008, 2018, and 2022). The market is pricing in almost 100 bp of hikes over the next 12 months. Sentiment seems vulnerable to any disappointment with the economic data in the coming days.

Throughout the North American session today, no fewer than six Fed officials speak today. Most has spoken recently and it seems clear, as the dot plot indicated, many are prepared to hike rates again this year. The question is when. However, also recall that the dot plot less than two weeks old showed the median projection was for no hikes next year. That said, it is possible the under new management, the Summary of Economic Projections are dropped next year.

Prices

G10

• The euro slipped below $1.1355 yesterday to match the late July low. It remains under pressure today, having been sold below $1.1335. The low for the year was recorded in late June, near $1.1325. A convincing break of $1.1300 could warn of scope for another two-cent decline.

• More verbal intervention by Japanese officials to support the yen saw the dollar drop yesterday from about JPY157.50 to JPY156.50. It recovered to trade near JPY157.60 toward the end of the European session and spent the North American afternoon mostly chopping mostly between JPY157.00 and JPY157.50. It is trading quietly today between about JPY157.20 and JPY157.70. Options for almost $500 mln at JPY157.50 expire today.

• Sterling did reasonably well yesterday. Its low (~$1.3220) was higher than the low of the past two sessions. It recorded a three-day high (~$1.3280) near midday in New York but settled below last Friday’s high (~$1.3265). It is trading with a heavier bias inside yesterday’s range. A break of $1.3200 signals a test on the late June lows near $1.3140.

• The Canadian dollar’s drop continues. It fell for the sixth consecutive session yesterday and 13 of the past 14 sessions. It is a little softer today. The US two-year premium over Canada also continued to widen. It has risen for the past ten sessions. At 154 bp, it has not been wider since mid-February 2025, when peaked near 160 bp. The greenback peaked in early March 2025 and fell by nearly 7% through mid-June 2025. The US dollar reached nearly CAD1.4180 yesterday and settled above last week’s highs. It is probing the CAD1.4200 area late in the European morning. The high for the year was recorded in late June, near CAD1.4250.

• The Australian dollar traded inside last Friday’s range yesterday (~$0.7005-$0.7045). The central bank’s rate hike was seen less than hawkish, and the Aussie has taken another leg down today. It has been sold slightly through $0.6980. The next chart area is around $0.6950.

• After falling by more than 4% over the past two weeks, the Mexican peso continued to be pulled lower yesterday by rising US rates and a broadly stronger dollar. The greenback breached the MXN18.00 level for the first time since that end of March. It settled for the fourth consecutive session above its upper Bollinger Band (found near MXN17.9350 today). It reached a little above MXN18.02 today. The MXN18.04 area corresponds to the (61.8%) retracement of the US dollar’s decline from last November (~MXN18.77) to the two-year low set earlier this month (~MXN16.8575). Above there is little until the late March/early April highs (~MXN18.1650). We suspect the unwinding of the yen carry trade was not as disruptive because the trade was switched into dollar-funded, but now with the surge in US rates and dollar, a large unwind is taking place. The JP Morgan Emerging Market Currency Index is off about 1.5% in the past month. It is off a little more than 1.8% this year.

• The dollar posted a potential key reversal against the offshore yuan yesterday. It first traded above the recent highs to reach almost CNH6.7265 before reversing and settlings slightly below the pre-weekend low (~CNH6.7135). The dollar has fallen to a four-day low near CNH6.7045 today. The cyclical low was set on September 21 around CNH6.6910. After seemingly cautioning the market against thinking the yuan is a one-way market, the PBOC confusingly lowered the dollar’s fix yesterday by the most since April. Today’s fix was at CNY6.7411 (CNY6.7399 yesterday).

• The Indian rupee fell to two-month lows today despite reports that the Reserve Bank of India sold dollars in the onshore market. The dollar reached almost INR96.1540 today but settled slightly below INR96.00.

Other Markets

• US equity indices opened lower yesterday and extended their sell-off. However, with the pullback in yields, equities stabilized, though the major US indices settled below opening levels. US index futures are narrowly mixed. Most Asia Pacific bourses were weaker today. China and Australia were notable exceptions. Europe’s Stoxx 600 was flat yesterday but is up around 0.45% today.

• Benchmark 10-year yields have steadied today after yesterday’s surge in the US and Europe. The 10-year JGB yield was slightly softer, while most yields are around a basis point lower in Europe. The US 10-year yield reached 5.27% before settling near 5.23%. It is slightly firmer today. The two-year yield reached 4.95% and settled near 4.92%. It is nearly 4.94% now. Given the context of the Atlanta Fed’s GDPNow tracker pointing to 5% growth, US CPI at 3.4%, the Fed funds futures implying an end of 2027 overnight rate of about 4.80%, and no serious progress to rein in the deficit (supply), a 5.25% 10-year yield does not seem extreme.

• Gold was nearly 3.8% less precious at the close yesterday than it was before the weekend. Yesterday’s loss was the largest since June 10. It had traded to around $4510 earlier this month, and yesterday’s losses took it to $4111. It settled well below the lower Bollinger Band and has been unable to re-enter it today (~$4157 today), though it is trading with a firmer bias. Silver was tarnished by yesterday’s slide that took it to nearly $60.75. It also settled below its lower Bollinger Band (~$61 today) and is struggling to re-enter it. A break of $60 brings the year’s low (~$54.80) into view.

• Conflicting signals about the outlook of the war, US-Iran talks, and the extent oil is making its way of the Middle East saw the November WTI contract swing within the range established last Thursday (~$91.25-$96.80). It is little changed in the European morning and has been confined to yesterday’s range.

Data

• With the PCE deflator tomorrow and US jobs data on Friday, July US house prices and the Conference Board’s consumer confidence survey are unlikely to have much impact. While consumer confidence is weak, consumers continue to demonstrate resiliency. The August JOLTS is seen pointing to a steady labor market.

• Canada is expected to report a flat July GDP after a 0.3% increase in activity in June. StatCan is also expected to provide an advance estimate for August GDP. The Canadian economy grew by 3.3% (annualized) in Q2 and is expected to have slowed to about half that pace in Q3. Still, the swaps market has a little better than a 50% chance of a hike at next month’s Bank of Canada meeting.

• The EC’s September confidence surveys were released today. They were mixed, but the market impact seemed negligible. Separately, Spain reported firm September inflation. The EU harmonized measure rose 0.6% for a 5.0% year-over-year rate, up from 4.6% in August. It also reported a 1.1% year-over-year drop in August retail sales (-0.3% in July). Germany reports its September CPI tomorrow. The EU harmonized measure is expected to rise by about 0.5%, which would lift the year-over-year rate to 3.2% from 2.9%. Separately, civil servants are striking in France ahead of the government’s budget bill later this week.

• The UK reported August consumer credit figures. Consumer credit was a little stronger than expected and it has risen 9.6% year-over-year (9.3% in July). Mortgage approvals slowed a little but net lending increased.

• The Reserve Bank of Australia hiked its overnight cash rate target for the fourth time this year. The key rate now stands at 4.60%, the top in the G10. It is the highest in about 15 years. Australia also reported that household spending was flat in August, which defied expectations for a modest increase. Australia reports August CPI tomorrow. The median forecast in Bloomberg’s survey is for a 0.5% increase, which would raise the year-over-year rate to 4.1% from 3.5%. Yesterday, the futures market was discounting almost a 65% chance of another hike before the end of the year and after less than hawkish comments by Governor Bullock, the odds have been pared to a little less than 60%.

• China revised slightly lower its estimate of the Q2 current account surplus to $193.7 bln from $195.1 bln. That follows the $184.3 bln surplus in Q1. The Q2 25 current account surplus was $128.7 bln. China’s trade surplus is larger, but it reports a $37.6 bln deficit on primary income. Primary income includes interest on bonds and loans, dividends on shares, and profits from businesses owned abroad. It also includes pay earned when a worker is resident in one country but works and is paid by an employer from a different country. Separately, the Beijing indicated that it will move “with greater urgency” to provide support for the economy, promising to introduce a package of “practical and effective additional policies”. In yesterday’s statement, the State Council (~China’s cabinet) recognized that “emerging issues” in the economy required the government to “step up counter-cyclical adjustments”. China’s September PMIs will be released first thing tomorrow.

Disclaimer

War in Middle East Sends Oil Prices and Yields Higher, Underpins the Dollar

noreply@blogger.com (Marc Chandler) — Mon, 28 Sep 2026 06:46:48 -0400

The US has rejected Iran’s latest offer and appears to be moving more force into the region. Oil prices have jumped, which is also serving to push up yields. The dollar is firmer against most of the G10 currencies. New verbal intervention by Japanese officials, clinging on to the cooperation of the US, to warn against yen weakness.

Yet, with rising US yields, it will be difficult to suppress the greenback. Perhaps, one of the most interesting developments today has been the PBOC’s sharply lower dollar fix. Last week, the PBOC had cautioned against one-way moves in the yuan. The dollar’s fix was lowered by the most since April. Ironically, it does not appear that the currency was discussed by Trump and Xi, but the yen was reportedly discussed during Trump-Takaichi talks. Trump and Xi will meet two more times this year (November APEC ins Shenzhen and December G20 at Trump’s golf club in Florida). The US and China agreed to reduce tariffs on $60 bln of goods imported from each other.

Prices

G10

• We suspect the euro is trying to bottom with oversold momentum indicators after it approached the low from late July, it is consolidating quietly within the pre-weekend range and has been confined to about a third-of-a cent above $1.1365. Last week’s low was about $1.1360, and the July low was slightly below $1.1355. Options for about 1.75 bln euros at $1.1350 expire today. Large options remain struck at $1.14 that expire today and tomorrow.

• After the yen declined for five consecutive sessions, Japanese officials returned to the intervention escalation ladder ahead of the weekend to play up the ongoing coordination with the US Treasury. This coupled with the pullback in US rates sent the yen nearly 1% higher, its largest gain in nearly three weeks. As the dollar recovered today toward JPY158, Japan’s finance official Mimura, who is responsible for fx policy, underscoring that US and Japanese officials have sent a “vey clear message” about the yen’s depreciation. The verbal intervention sent the dollar to JPY156.50 in early European activity, a six-day low. It has steadied and returned to around JPY157.15. Options for $1.2 bln at JPY156.75 expire today.

• After testing $1.34 last Monday, sterling fell to nearly $1.32 last week before it steadied ahead of the weekend. Sterling is a little firmer today. It reached a four-day high in early European turnover, near $1.3275. $1.3280-$1.3300 must be overcome to lift the tone. Options for GBP840 mln at $1.33 expire today. The euro reached above GBP0.8630, its best level since late June, but has subsequently reversed sharply lows and a reached a four-day low near GBP0.8570, setting up a potential key reversal. Initial support is seen near GBP0.8550.

• The US dollar reached CAD1.4155 before the weekend and CAD1.4165 today. It is the highest it has been against the Canadian dollar since mid-July. Options for nearly $530 mln at CAD1.4180 expire today. The US two-year premium over Canada crept up to almost 154 bp before the weekend, a new high since February 2025. A narrowing of the premium would seem needed to fuel a recovery in the Canadian dollar. Initial US dollar support is seen near CAD1.41.

• The market is convinced that the Reserve Bank of Australia will hike rates early on September 29. It will be the fourth hike this year. Another hike is fully discounted by the end of February 2027. The Aussie remains pinned near $0.7000, which it has not traded below since early August. On the other hand, it has been capped in recent sessions in front of $0.7050.

• Last week, the Mexican peso fell by almost 3%. It was the largest decline in six months. Latam currencies accounted for the three weakest emerging market currencies last week. The unwinding of dollar-funded carry trades seemed like the main culprit. The greenback approached MXN17.78 before the weekend, its strongest level since April. It has been bid to almost MXN17.82 today. The momentum indicators are stretched by the dramatic peso liquidation but the firmer US rates and drop in equities maintain the pressure on the peso.

• China’s markets were closed before the weekend for the mid-Autumn holiday. The market reopened today but starting Thursday and running through next Wednesday, another holiday will shut the mainland markets. The dollar rose to nearly CNH6.7265 against the offshore yuan today, marginally taking out the pre-weekend high, before reversing lower and falling to about CNH6.7125. The PBOC appeared to have signaled the desire for some consolidation in the exchange rate. The dollar fix continues to be an important way the PBOC signals its desires. The PBOC set the dollar’s reference rate lower for ten consecutive sessions through last Tuesday. Yet, today, the PBOC set the dollar’s fix sharply lower. It was set at CNY6.7399 today, a new cyclical low (CNY6.7489 last Thursday). It is the biggest decline in the dollar’s fix since April.

• Rising oil prices and the broadly stronger greenback was no match for the Indian rupee today. The dollar rose to a seven-day high (INR95.99). This month’s high was recorded on September 17 near INR96.10.

Other Markets

• The combination of lower US rates and oil prices seemed to help US equity indices extend last week’s gains ahead of the weekend. However, stocks are mixed today. Most of the large bourses in the Asia Pacific region fell but Hong Kong, Australia, and Singapore. South Korea’s Kospi was the weakest with a 2.7% drop. Europe’s Stoxx 600 is marginally higher, while US index futures are off 0.4% (Dow Industrials) to -1.0% (Nasdaq Composite).

• Benchmark 10-year yields rose sharply last week with the JGB yield rising almost 10 bp, Germany near 15 bp, and the US a little more than 22 bp. Higher oil prices have sent yields higher today. The JGB yield edged up a little more than one basis point, while European yields are 4-7 bp higher. The 10-year US Treasury yields are up nearly seven basis points to 5.23%.

• For a little more than two weeks, gold has chopped in $4200-$4400 range. It has been sold to almost $4140 today, its lowest level since August 5. Nearby support may be around $4120. Recall that silver was turned back from $70 in late August and has been confined to roughly $62.30-$68.30 this month. It was sold slightly through $61 today. Initial support now may be near $60.

• November WTI pulled back from the first time in three days ahead of the weekend, though the market remains tight. A record premium was paid late last week to secure prompt barrels at the main crude storage hub in Cushing, Oklahoma. The US rejected Iran’s cease-fire proposal and is moving more forces into the region. Nov WTI is near session highs before the US open, around $96. Last week’s high was a little above $97.20.

Data

• The week that features the August US PCE deflator and September jobs report begins slowly. On tap today is the Dallas Fed’s September manufacturing survey, which typically does not spur much of a market reaction. Tomorrow sees house prices, the Conference Board’s measure of consumer confidence, the JOLTS report, and the Dallas Fed’s service activity survey.

• Mexico reports August trade figures today. Its trade surplus has widened to $9.25 bln through July this year compared with $1.18 bln in the first seven months of 2025. US-Mexican trade talks continue, and both sides have expressed optimism, though details have not been revealed. At the start of the week, President Sheinbaum revealed that the US has expanded the list of concerns it wants Mexico to address from an initial 54 items to almost 90. The only one she revealed was the US wanted to lower its bilateral deficit, and Sheinbaum say that Mexico would look to buy more goods from the US and less from other countries.

• Japan reported that August producer services prices accelerated to a new two-year high of 3.7% year-over-year (from 3.6%). Producer service prices have not risen faster since H1 1990.

• China reported August industrial profits rose 4.2% year-over-year from 11.2% in July. Last August, Beijing reported that industrial profits rose 20.4% year-over-year. For the first eight months of the year, profits rose 15.7%. The electronics sector appears to have contributed about 2/3 of the overall profit growth so far this year.

Disclaimer

Week Ahead: Dollar Bulls may be Challenged

noreply@blogger.com (Marc Chandler) — Sat, 26 Sep 2026 06:58:26 -0400

Our assessment of the dollar's technical condition and the upcoming economic data appear to be aligning in a way that warns of the downside risks. The greenback has climbed on the sharp rise in interest rates. With the market discounting nearly 100 bp of tightening over the next 12 months, including a nearly 2/3 chance of a hike late next month, a few days ahead of the midterm election, we suspect the pendulum is unlikely to swing much further.

Our suspicion is partly a based on the methodological changes in the PCE deflator that may dampen, on the margins, price pressures, and US job and auto sales look to have slowed in September. The dollar's recent surge has left momentum indicators stretched, and the greenback approached some important technical levels. Below, we offer some levels that if taken out would boost confidence that a dollar high is in place.

Drivers: The Dollar Index recorded a low this month on September 9, nearly 95.60. It reached almost 101.40 on September 24, its highest level since late July. Since September 9, the US two-year yield rose almost 40 bp. The Fed funds futures are pricing in almost four more Fed hikes over the next 12 months. This is more aggressive than any Fed official, according to the latest Summary of Economic Projections. The pendulum of market expectations has swung dramatically, and there may be little more room based on the current and anticipated information set. The Fed funds futures market is pricing in nearly a 65% chance of a rate hike late next month. That seems unusually high given the little precedent for a change in policy a few days ahead of the midterm election.

Data: The labor market is front and center with the JOLTS report and ADP private sectors jobs estimate, culminating with the September employment report on October 2. The early estimates suggest hiring slowed to a little less than 110k from 162k in August. Through August, nonfarm payrolls have rinse by 80k a month compared with 20k average in the first eight months of 2025. The median forecast in Bloomberg's survey anticipates the unemployment rate to tick up to 4.2% from 4.1%, and small decline in the average work week. US economic growth in Q3 if the Atlanta Fed's GDP Tracker is accurate with exceed China's. Part of the reason is the continued resilience of the consumer despite weak consumer confidence. This will likely be evident in the August personal consumption expenditures, which are expected to have around twice as much as income (0.8% vs. 0.4%). The PCE deflator, which the Fed targets, can be largely extrapolated from the CPI and PPI. However, a methodological change (involving: 1. portfolio management and investment advice services; 2. computer software and accessories; 3. legal services) could shave the measure by an estimated 0.1%-0.3%. The revisions go back five years and will impact the estimates of other macroeconomic data, including GDP.

Prices: The momentum indicators for the Dollar Index are stretched. The Dollar Index met the measuring objective of the double bottom forged in August and September. It projected toward around 101.20. DXY stalled in front of the late July highs near 101.50. In June and July, it traded above 101.50 several times but managed to settle above it twice. It may take a break of the 100.50 area to suggest a top is in place.

EMU

Drivers: The euro continues to be sensitive to changes in US short-term interest rates. That is intuitive. Less intuitive is the inverse correlation of the changes in the euro and German two-year yields, which is to say that rising short-term German rates is correlated with a weaker euro. The inverse correlation is around -0.55 and -0.20, respectively, with changes in US and German two-year rates, respectively. In addition, for the first time since early February, the 30-day correlation of changes in the euro and the Stoxx 600 has become inverted this month.

Data: The final manufacturing PMI on October 1 is not going to capture the market's attention for long. Nor does the unemployment report draw much attention, though for the record, it has been 6.3%-6.4% since the start of last year. The most important data point is the preliminary September CPI on October 2. Headline CPI stood at 3.2% in August, and the core rate 2.4%. The ECB staff's latest forecast is for CPI to be at 3.0% at the end of the year and 2.5% next year. The swaps market has a little less than 50% chance of another hike at the October 29 ECB meeting. Nearly 70 bp of tightening is priced in through the end of Q1 27.

Prices: The nearly 3.75-cent euro loss in the past two weeks has stretched the momentum indicators as the euro approached its lowest level in two months around $1.1360. We anticipate a bottom and are looking for some kind of technical signal that a low is in place. A move above the $1.1450 area would be encouraging.

PRC

Drivers: The PBOC had set the dollar's reference rate lower for 10 consecutive sessions through Tuesday last week. Some suspect it was a cosmetic ahead of the summit. Beijing's willingness to accept a gradual appreciation of the yuan seemed to have increased recently, but the broad move is months long. Consider that on a weekly basis, the dollar's fix rose once in Q1 26, three times in Q2 and only twice so far here in Q3. This seemed to fuel expectations in some quarters of further yuan appreciation, but the PBOC seemed to check such expectations by warning that it would "prevent the 'herd effect' and self-reinforcement of irrational expectations."

Data: Industrial profits and the September PMI are the main features. However, high-frequency Chinese data does not explain the yuan's appreciation this year. The economic data has generally disappointed expectations, except for the trade surplus. The appreciation of the yuan does not sound impressive relative to its cost-of-production advantages and trade surplus. However, it has risen by about 4.5% this year, which is roughly twice the implied one-month volatility and one-year historic volatility of a little more than 2%.

Prices: The dollar made a new high for the month against the offshore yuan ahead of the weekend (~CNH6.7250), while the mainland markets were closed for the autumn holiday. Given the signal from the PBOC, and the five-day moving average poised to cross above the 20-day moving average for the first time since mid-July, the greenback may have potential toward CNH6.7500.

Japan

Drivers: The rolling 30-day dollar-yen correlation with US rates bottomed in early August near zero. However, link has been re-established. However, now the correlation of changes in the exchange rate and US rates is higher for the US two-year yield (~0.55) than changes in the 10-year yield (~0.45). The exchange rate is slightly inversely correlated with changes in Japan's two-year yield. The correlation with Japan's 10-year yield is around 0.30, the upper end of where it has been in four months, which is to say the dollar tends to rise against the yen as Japanese bond yields rise.

Data: The data early in the week, like retail sales, industrial production, and housing starts, will help economists tune their Q3 GDP forecasts. Economic growth is seen slower for the second consecutive quarter (1.9% in Q1 26, 1.4% in Q2 26, and 1.0% in Q3, annualized pace). The BOJ's Tankan Survey is expected to show a small improvement in sentiment and capex plans. Tokyo's September CPI, though, at the end of the week may be the most impactful. The swaps market has less than a 1-in-5 chance of a BOJ rate hike at its next meeting in late October and slightly more than a 50% chance of a hike before the end of the year, which seems low.

Prices: With the help of a particular type of verbal intervention, the yen snapped a five-day decline ahead of the weekend. The press reported that President Trump and Prime Minister Takaichi discussed the exchange rate and Finance Minister Katayama spoke of continued coordination with the US Treasury. The dollar fell by around 0.75%, its largest single day loss in nearly three weeks. The greenback finished the week below the trend line connecting the late July and early September highs, which had been violated on a closing basis on September 24.

Drivers: The broad direction of the dollar, and especially against the euro, may be the best explanatory factor in sterling's movement. The inverse 30-day correlation between changes in sterling and the Dollar Index is near -0.82. The correlation with the euro is around 0.88. The correlation is much greater than with US or UK rates, or the differentials.

Data: The UK reports consumer credit and mortgage lending figures on September 29 and the final reading of Q2 GDP the following day. The final manufacturing PMI (October 1) typically does not elicit much of a market reaction. The swaps market is confident that the Bank of England will hike the base rate at its next meeting in early November (~85%) The market is pricing in nearly 100 bp of tightening between now and the end of H1 27.

Prices: Sterling began September near $1.3550 and was sold to almost $1.32 on September 24, its lowest level since late June. The momentum indicators are oversold. We are looking for some sign of a bottom. A move above $1.3280-$1.3300 may be persuasive.

Canada

Drivers: The 30-day correlation between changes in the US dollar against the Canadian dollar and the two-year rate differential is steady around 0.72. There was an inverse correlation as recently as mid-June. The US premium reached almost 155 bp from a low last month near 117 bp. Last year's peak was near 160 bp, the most since May 1997.

Data: July GDP will be reported on September 29. After expanding by 0.3% in May and June (0.6% in April), the risk is for a slight moderation in activity. The August manufacturing PMI is due October 1. Recall that Canada's manufacturing PMI was below the 50 boom/bust level last year starting in February. However, this year it held above 50 and averaged 53.1 in Q2 and about 53.2 July and August. The swaps market has about a 60% chance of a Bank of Canada rate hike at the next meeting on October 28.

Prices: The greenback reached CAD1.4155 ahead of the weekend, a marginal new high for the move, which could mark a top. The momentum indicators are stretched after rallying for the past three weeks. A push back below the CAD1.4085 area would likely confirm a corrective phase has begun.

Australia

Drivers: As one would expect, the changes in the Australian dollar are correlated with changes in two-year Australian interest rates. However, the 30-day correlation was inverse from early March through mid-May. The correlation now is a little below 0.25. What is striking is that the inverse correlation of changes in the exchange rate and changes in the US two-year yield is more than twice as large (~-0.63).

Data: The futures market is confident (~90%) that the Reserve Bank of Australia will deliver its fourth hike of the year on September 29. Another hike in Q1 27 is fully discounted, as well. The rate hike will steal the thunder from the August CPI due the following day. The July CPI was 3.5%, and the trimmed mean was at 3.6%. The August private sector credit is due at the same time. It rose a robust 8.4% year-over-year in July. Australia sees the final September manufacturing PMI and August trade figures on October 1. Australia's trade balance has deteriorated this year. In the first seven months of the year, the good trade surplus averaged A$1.27 bln a month. In Jan-July 2025, the average monthly goods surplus was A$4.52 bln. Despite reduction in the trade surplus, the Australian dollar is the second strongest G10 currency this year, up around 6.5% (trailing the Norwegian krone's 7.2% gain), On the face of it, the aggressively tighter monetary policy offers a better explanation than goods trade in lifting the Aussie this year.

Prices: The Australian dollar made a marginal new low ahead of the weekend but held above $0.7200. The nearly 3.25% decline since peaking on September 9 left the momentum indicators over-extended. It may take a move above $0.7055 to suggest a low is in place.

Mexico

Drivers: The peso was a beneficiary of carry trades. There are other currencies that offer higher yields, of course, but Mexico offers lower volatility and greater liquidity. The surge in US rates and firmer US dollar appeared to force an unwinding of such positions in a way that intervention-inspired short squeeze of the yen, did not. The dollar-peso remains a good proxy for the JP Morgan Emerging Market Currency Index, with a 30-day inverse correlation about -0.85.

Data: Mexico's data in the coming days are unlikely to have much impact on expectations for the central bank after last week's hike. While the domestic economy is fragile, the external account is solid. The August trade report is due September 28. In the first seven months, the average monthly trade surplus averaged $1.32 bln a month compared with $168 mln a month in Jan-July 2025. Worker remittances averaged about $5.17 bln a month through July this year, slightly more than the average in the first seven months of last year (~$4.97 bln). The August report is out on October 1. The IMEF surveys, also reported on October 1, are similar to PMI, though the market impact is often negligible.

Prices: The dollar surged nearly 3% against the Mexican peso last week. It was the largest gain since early March. The greenback reached almost MXN17.77 on September 24. The dollar consolidated ahead of the weekend, but the tone remained constructive though the momentum indicators are overbought and it remained above its upper Bollinger Band. Near-term risk may extend toward MXN17.85. Here, a break of MXN17.50-MXN17.53 area is needed to suggest a top is in place.

Disclaimer

Softer US Interest Rates Help the Greenback Steady and Talk of US-Japan Coordination Snaps the Yen's Five-Day Slide

noreply@blogger.com (Marc Chandler) — Fri, 25 Sep 2026 06:50:52 -0400

Oil and US rates are softer today and these developments have helped steady the US dollar after this week’s surge. Even with a firmer tone today, four of the G10 currencies are off more than 1% this week. The yen would have been among them, but comments earlier today from Japan’s Finance Minister Katayama played up the ongoing coordination with the US and has seen the yen rise for the first time in six sessions.

The market is pricing in a “normal” Fed tightening cycle, in contrast to the Summary of Economic Projections, where the median dot implied a mini-cycle. We suspect the pendulum of sentiment has swung nearly as far as it might, especially given the prospect of a relatively tame PCE deflator (helped by methodological changes), softer September auto sales and slower jobs growth that will likely be reported next week. We are looking for some sign of a reversal in the price action in the foreign exchange market.

Prices

G10

• The euro dipped briefly below $1.1360 in the North American morning and recovered slightly above $1.1390 near midday in NY amid a wave of optimism over a potential interim agreement of phased de-escalation in the Middle East war. It drifted lower and slipped below $1.1370 in quiet afternoon dealings. However, it is steadied today and is mostly trading within yesterday’s range. It has frayed the $1.14 level, where nearly 1.8 bln euros of options expire today and another 3.1 bln euros expire there on Monday and 2.4 bln euros on Tuesday.

• Our argument has been that higher US rates are driving the dollar higher broadly, including against the Japanese yen. The US 10-year yield has risen by about 20 bp since Monday and the dollar rose about three yen since last Thursday, the last day the greenback declined. The dollar poked above JPY159 yesterday for the first time since September 2. The risk/reward for short-term participants changes as the JPY160 level draws near. The media reports that Japanese Prime Minister Takaichi and President Trump spoke about weakness of the yen yesterday and Finance Minister Katayama indicated she would continue to coordinate with US Treasury Secretary Bessent. This saw the dollar retreat to almost JPY157.65, slightly below yesterday’s low (~JPY157.80). The dollar rose for the past five consecutive sessions.

• Sterling is having a tough week. It could be the worst week since mid-June, with more than a 1.1% loss. It reached about $1.3205 yesterday, its lowest level since late June. It was unable to re-enter the Bollinger Band yesterday, but it is back inside it today (lower band is ~$1.3220 today). Sterling, like the yen, has fallen in eight of the past ten sessions. Yesterday’s high was about $1.3255. Today’s high is near $1.3250.

• The Canadian dollar has trended lower. It has fallen each session this week coming into today and has fallen for the 11 of the past 12 sessions. It finished above the upper Bollinger Band (~CAD1.4160 today) each day this week. The US interest rate premium over Canada continues to widen. The US dollar settled firmly and above the late July high (~CAD1.4130) for the first time. It has extended the gains today to CAD1.4155. The CAD1.4175-CAD1.4200 is the next target.

• The futures market remains confident that the Reserve Bank of Australia will hike rates next week. Yet, it was insufficient to prevent the Aussie from falling for the fourth consecutive session yesterday, the longest losing streak in three months and settling below the 200-day moving average since last November. It settled for the second consecutive session below its lower Bollinger Band (~$0.7020 today). It drew slightly closer to $0.7000, but it held and the Aussie recovered to around $0.7030. Yesterday’s high was near $0.7050, where options for about A$565 mln expire today.

• The Mexican peso’s drubbing continued yesterday. It is off nearly 2.6% this week with today’s 0.3% bounce. Without further recovery in North American, it will be the peso’s worst week in six months. The unwinding of dollar-funded carry trades seems to be the most significant driver. This also seems to account for the Colombian peso’s poor performance as well. It was taken for about 5.3% this week after surrendering a little more than 3% last week.

• The dollar bottomed this week on September 21 against the offshore yuan (~CNH6.6912) and reached CNH6.7200 yesterday and CNH6.7250 today. The PBOC seems to have signaled a period of consolidation for the yuan. In a statement following its quarterly meeting yesterday, it said it would “prevent the ‘herd effect’ and self-reinforcement of irrational expectations”. The mainland markets are closed today for the national holiday.

• The Indian rupee traded with a firmer bias. Net-net the rupee was essentially flat this week. The dollar settled below yesterday’s low (~INR95.83). Recall that the dollar settled near INR95.3850 at the end of August.

Other Markets

• China, Taiwan, and South Korean markets were closed today. Many of the other equity markets, including Japan and India rose. The Hang Seng’s 1% loss was among the largest in the region. Europe’s Stoxx 600 is snapping a two-day slide and is up about 0.65% in late morning turnover. US index futures are up ~0.25%-0.50%.

• Benchmark 10-year yields extended their gains yesterday. Another tailed-coupon sale in the US adds to angst as the 10-year Treasury yield rose above 5.15% yesterday. Yields are narrowly mixed today. The 10-year JGB slipped about a basis point to 3.05%. It is up almost 10- bp this week. European yields are mixed, with the 10-year Gilt off a couple basis points but is still up nearly 15 bp this week. The French 10-year yield is flat but up nearly 22 bp this week. The 10-year Treasury yield is off around 2.5 bp to near 5.17%, leaving it up 22 bp on the week.

• Gold continues to struggle in this rising interest rate environment. It is in the lower end of a two-month trading range. It enjoys a firmer today and is poking above $4300 late in the European morning. It settled near $4379 last week. Silver also has approached the lower end of its recent range (~$62.30). It also enjoys a firmer today and has neared $65 in Europe. Last week, it settled near $66.25.

• November WTI met the (61.8%) retracement target of its recent decline at its high yesterday, a little below $96.80 and approached the week’s high, recorded on Monday (~$97.20). It pulled back amid reports of US-Iran talks. Still, it finished with around a 2.65% gain. It is trading lower today but within yesterday’s range, when the low was near $91.25. It is off nearly 3.4% this week, its first weekly decline in four weeks.

Data

• The US reports August durable goods orders today, and the first decline since May is anticipated. The headline may be dragged down by a decline in Boeing orders (15 vs. 38 in July). However, excluding aircraft and defense, the median forecast in Bloomberg’s survey is for a 0.5% increase after a flat July report. Shipments of capital goods (excluding aircraft and defense are projected to rise by 0.7%, which, if accurate, would match the strongest three-month performance since August 2020. The Atlanta Fed’s GDP Now tracker will be updated after the data. The last estimate stood at 5.1%. The final September University of Michigan consumer confidence reading may be revised lower, but American consumers “reveal preferences” showed shopping continued through August, when retail sales jumped 1.2%, the most since March.

• As expected, Mexico’s central bank stood pat yesterday, leaving the overnight rate at 6.5%, where it has been since the 25 bp rate cut in May. Mexico will report August unemployment today. It has been creeping up this year after finishing last year near 2.4%. It stood at 2.9% in June and July, and may have risen to 3.0% in August, which would be the highest in three years.

• The eurozone’s M3 money supply growth rose to 3.5% from 3.4% in July. Even as the ECB hiked rates this year, M3 has accelerated from 2.8% in the last four months of 2025. At 3.5% the year-over-year pace is the fasted since May 2025. Lending to households rose 3.1% year-over-year, the same pace as in July. Lending to non-financial businesses slows to 4.2% year-over-year from 4.4%.

• The Bank of Japan released its measure of CPI that excludes the effect of subsidies and “special factors”. It rose 2.6% year-over-year. Special factors included changes in the consumption tax, education (free-of-charge policies, like free lunches, which started in April 2026), other relief measures for gasoline, gas, and electricity, and the 2021 reduction in cellphone fees. The swaps market is pricing in around a 30% chance of a hike next month and a nearly 90% chance of a hike in December.

Disclaimer

No Kings but King Dollar

noreply@blogger.com (Marc Chandler) — Thu, 24 Sep 2026 06:44:48 -0400

The surge in US rates continues to underpin the greenback. The market anticipates a more aggressive tightening cycle than the Federal Reserve’s recent Summary of Economic Projections suggested. The Atlanta Fed’s GDP tracker points to 5.1% growth this quarter, which would surely surpass China’s. Treasury Secretary Bessent announced a two-month tariff truce extension with China, which is a little shorter than had been floated. Hopes of a settlement in the Middle East were dashed by Iranian comments threatening new escalation if the US or Israel strike again. Speculation that the US will impose a ban on diesel exports continues to unsettle the market.

Three G10 central banks met today. Norway’s Norges Bank increased the deposit rate by 25 bp to 4.5% and kept the door open to additional moves. The swaps market is pricing in another hike late this year or early next year. Sweden’s Riksbank kept its policy rate at 1.75% but indicated a hike this year was likely. The swaps market has around a 90% chance discounted for the next meeting in early November. The Swiss National Bank maintained its zero-policy rate, dropped the language in its statement that threatened “increased willingness” to intervene to sell the franc, and tweaked up its inflation forecasts.

Prices

G10

• US rates jumped after the stronger than expected preliminary September PMI and that succeeded in pushing the euro to $1.1370, a new low since July 28. The losses were extended to almost $1.1360 in Europe. It consolidates below $1.14, where options for 1.2 bln euros expires today. Indeed, the last session that the euro did not trade above $1.14 was on June 25, the day after it recorded the low for the year (~$1.1325). The July low was set slightly below $1.1355.

• Japanese markets opened for the first time this week and were greeted with the strongest dollar against the yen since September 3. The greenback reached JPY158.80, slightly above the 200-day moving average (~JPY158.45) in Europe today after mostly consolidated in the Asia Pacific session.

• Sterling was driven through the late July low (~$1.3275) and dropped to $1.3225 in the NY afternoon. It recorded a marginal new low today (~$1.3215) and still does not appear to have exhausted the selling pressure. Sterling settled well below the lower Bollinger Band (found near $1.3255 today) and has been capped there today. The next notable chart area is around $1.3200, where options for almost GBP660 mln of options expire today, though the low for the year was recorded on June 24, around $1.3140.

• The Canadian dollar fell by about 0.25% yesterday. It was the 10th decline in the past 11 sessions. The greenback traded above CAD1.4100 for the first time since late July. For the fifth time in the past six sessions, the US dollar settled above the upper Bollinger Band (found ~CAD1.4120 today). Options for almost $1.7 bln at CAD1.4100 expire today. The US dollar has held above CAD1.4095 today. The next chart point is around CAD1.4125-30.

• The Australian dollar fell by more than 1%, the most among the G10 currencies yesterday. Despite the disappointing flash PMI, the futures market marginally increased the likelihood of an RBA hike next week. It was sold through the $0.7040-50 area, which held various technical retracement targets. The Australian dollar settled well below the lower Bollinger Band (~$0.7040 today). Follow-through selling today scratched the 200-day moving average, which the Aussie had not traded below this year (~$0.7022 today). The $0.7000 area holds the (61.8%) retracement of the rally the late June low (~$0.6865) and options for about A$440 mln struck there, roll off today.

• The Mexican peso lurched lower yesterday. It dropped about 1.15%, the largest single day drop since January. The greenback reached MXN17.6055 and took out the highs from the second half of July. The US dollar settled above the upper Bollinger Band (~MXN17.49 today). The highs from late June/early July were around MXN17.6450-MXN17.6765. For the part of the past two weeks, the dollar has mostly been rangebound against the Brazilian real (~BRL5.10-BRL5.18). It approached the upper end of the range yesterday and the 200-day moving average (~BRL5.1760). Maybe the proximity of the tight presidential election is dampening the movement. Still, near-term risk may extend to the BRL5.20-BRL5.22 area. On the other hand, the greenback has jumped to its highest level against the Colombian peso since July 23. The dollar reached almost COP3309 yesterday. The next important chart area is around COP3325-COP3330.

• The dollar moved above its 20-day moving average (~CNH6.7110) against the offshore yuan yesterday for the first time since July 9. The greenback briefly traded above CNH6.7140, stalling slightly in front of last week’s high (~CNH6.7160). Follow-through buying today, lifted the dollar to CNH6.72. The month’s high is about CNH6.7265. The PBOC set the dollar’s reference rate higher for the second consecutive session (CNY6.7489 vs. CNY6.7468 yesterday).

• The dollar gapped higher against the Indian rupee today, and despite reports of onshore intervention, the dollar settled near its highs. It reached INR95.9660, its best level in five sessions. Higher oil prices and the greenback’s broad gains weighed on the rupee. This month’s high is near INR96.0965.

Other Markets

• Yesterday’s decline in US equity indices lent a sour tone to today’s activity. The Nikkei 225 gained, but the other Japanese equity indices fell as the markets re-opened. Outside the South Korea and New Zealand, most of the bourses in the region fell. India and China fell by more than 1.5%. Europe’s Stoxx 600 is off a little less than 0.5%, the same as yesterday. US index futures are heavy and underscore the risk of gap lower openings.

• Benchmark 10-year yields jumped 9-15 bp in Europe and North America yesterday, mostly after the stronger than expected preliminary US PMI. Asia Pacific markets played catch up today, with the 10-year JGB surging almost 11 bp as domestic markets re-opened from the extended holiday weekend. European yields are mostly 2-4 bp higher. The 10-year US Treasury yield is up around 2.5 bp to 5.14%. The US will buy up to $6 bln of longer-dated US Treasuries today. In the previous operation, when it also said it would buy up to $6 bln of 10-to-20-year bonds, it ended up accepting the offers for $5.2 bln. Yesterday’s $70 bln five-year note sale was poorly received, and it produced a large tail (higher auction yields than in the when-issued market). The bid-to-cover was weaker though the yield was around 64 bp higher than the last five-year sale. The US sells $44 bln of seven-year notes today.

• The rise in yields and the dollar did the precious metals no favor. Gold, which had approached resistance around $4400 before the weekend, was sold to almost $4275 yesterday and $4250 today, a five-day low. Silver’s ostensibly bullish outside up day on Tuesday went for nought yesterday. Silver was sold through Tuesday’s low and recorded the session low near $64.25 in the NY afternoon. It has been sold slightly below $63.50 today. Last week’s low was around $62.30.

• November WTI snapped a five-day decline yesterday and rose by about 2.4% and peaked slightly north of $93. It extended the gains to almost $94.70 today as bellicose rhetoric from Iran suggests a deal is not at hand. The $95.20 area is around the halfway mark of the sell-off since the September 15 high (~$101.70). President Trump reportedly indicated he was pushing for a 90-day ban on diesel exports saw prices for the fuel surge. US diesel exports reached a record near 2 million barrels a day in August.

Data

• US weekly jobless claims are likely to have bounced back last week after dipping below 200k during the Labor Day holiday week. August new home sales are expected to have edged up after dropping 10.5% in July. August building permits, initially estimated to have fallen by 2.7%, are subject to revision. The Q2 current account deficit will also be reported. It is expected to have widened from almost $227 bln in Q1 to around $257 bln. In the first quarter, the TIC data showed foreign investors bought about $275.5 bln of US financial assets. In Q2, the TIC data showed foreign investors accumulated another $344 bln of US stocks and bonds. Several Fed officials speak as well but we have already heard from Williams and Barkin. Hammock and Paulson are new, post-FOMC rate hike decision, and Summary of Economic Projections.

• Canada reports the establishment employment survey for July today. It follows a 4.8k increase in June. The markets tend to respond more to the household survey, but even that is often overshadowed by the US report. More importantly, July retail sales are due, and the median forecast in Bloomberg’s survey is for a 0.8% decline. It would be the first decline of the year and the largest since last September. Excluding autos, retail sales may have fallen by 0.5%, which would also be the first decline this year.

• Mexico reports its IGAE activity report for July, which functions like a monthly GDP. It fell in May and June, the first back-to-back monthly decline since March-April 2025. Separately, the CPI for the first half of September is due, and both the headline and core measures are likely to slip marginally. The session highlight is the central bank meeting. The overnight target rate is expected to be held steady at 6.50%.

• Australia grew 39.5 jobs in August. It lost almost 16k jobs in July. However, it lost full-time positions (6.3k) for the first time since April. The unemployment rate rose to 4.6% from 4.5%. It is the third consecutive monthly increase, and it is the highest since late 2021. The participation rate rose to 67.1 from 66.9%. It is the first reading above 67% since April 2025. The futures market is undeterred and is discounting around a 90% chance of a hike next week.

• Japanese markets re-opened for first time since last week. Japan’s preliminary September PMI, which typically does not spur much of a market reaction, was reported. For the record, the manufacturing PMI stands at 54.1 from 54.9, and the services PMI fell to 51.6 from 52.5. The composite PMI eased to 52.5 from 53.5.

Disclaimer

Greenback is Bid

noreply@blogger.com (Marc Chandler) — Wed, 23 Sep 2026 06:46:46 -0400

The US dollar is stronger against all the G10 currencies and most emerging market currencies today. The euro has approached $1.14, despite firmer than expected preliminary September PMI. Japan’s markets re-open tomorrow for the first time this week, and the market has taken the dollar to almost JPY158, around where it peaked before last weekend. Optimism about supply and talks has kept November WTI mostly consolidating today below $90 a barrel. Yet, interest rates are little changed.

The Trump-Xi summit is drawing much attention, but expectations seem relatively low. At most a short extension of the tariff truce may be seen but the current agreement doesn’t end until early November, so there is ostensibly no urgency. The central banks of Switzerland, Norway, and Sweden meet tomorrow. There has been a shift in recent days toward a Norges Bank hike tomorrow. A week ago, the swaps market had a little less than a 50% chance of a hike discounted, and now it is a little more than a 50% chance.

Prices

G10

• The euro’s losses were extended to $1.1430 yesterday and to slightly above $1.1405 today, a new low since late July. Options for 1.8 bln euros struck at $1.14 expire today. The $1.1400 area also holds the trend line drawn off the late June and late July lows. A break could signal a test on the $1.1350 area next.

• The dollar traded in about a yen range yesterday below JPY157.80. The high last Friday before claims that the BOJ checked rates circulated and spooked the market, the greenback briefly traded slightly above JPY158. The dollar has edged a little higher today to approach JPY158. Above there, resistance is seen in the JPY158.20 area and the 200-day moving average is near JPY158.45.

• Sterling was sold to almost $1.3320 yesterday and took another step down today and has slipped through $1.3280. which, like the euro, is the lowest since July 29. Options for almost GBP500 mln at $1.3315 expire today and may have contributed to some of the selling pressure. The sell-off does not appear exhausted, and the $1.3265-75 area is the next technical target.

• The Canadian dollar’s slump continues. It is at its lowest level since late July. The greenback rose slightly above the early August high (~CAD1.4080) yesterday and reached slightly above CAD1.4090 today. The US two-year premium over Canada rose by nearly four basis points approach 150 bp, the widest since March 2025, which itself was the most mid-1997. The next chart area of note is in the CAD1.4100-30 area.

• The Australian dollar traded below $0.7100 in local markets yesterday, and again in Europe, and then in North America. The dip was bought each time, but the Aussie recorded lower highs in each rebound. Today, the Australian dollar has fallen to $0.7080. Last week’s low was about $0.7075. A convincing break targets the $0.7045 area. Options for A$715 mln at $0.7050 expire today. The futures market has a little more than an 85% chance of an RBA hike next week and a 50% chance of another one before the end of the year. That seems a bit rich and the market may be forced to re-consider on any disappointment with tomorrow’s employment report.

• Long Mexican peso positions continue to get squeezed out. The greenback reached MXN17.3165 yesterday. Follow-through dollar buying today has seen the greenback rise to almost MXN17.40, its best level since late July. The US dollar has not traded above the 200-day moving average since April 2025. It is found near MXN17.42 today. The momentum indicators are getting stretched but they do not preclude a a move toward MXN17.55 on a break above MXN17.42.

• The dollar rose for the first time in four sessions against the offshore yuan yesterday. It was the first time in five sessions that the greenback did not trade below the previous session’s low. It reached a four-day high in Europe, near CNH6.7090. The 20-day moving average is a little above CNH6.71. The dollar has not settled above it since July 9. The PBOC fixed the dollar higher today for the first time in 11 sessions (CNY6.7468 vs. CNY6.7459 yesterday).

• The Indian rupee fell for the first time in six sessions today. The dollar opened lower (~INR95.5675) but recovered as the session progressed and settled near its highs. S&P and Fitch lifted FY27 growth to 7.0% and 6.9%, respectively, and anticipate at least one hike in the current fiscal year. The Asian Development Bank also lift its growth forecast (7% vs. 6.6% projection in July).

Other Markets

• Equities are mixed today. In the Asia Pacific regions, China, Hong Kong, and Singapore fell, while Taiwan, South Korea, Australia, and India rose, though the bourses finished well off their highs. Europe’s Stoxx 600 is off by around 0.2%, in what could be the first loss of the week. US index futures are narrowly mixed.

• Benchmark 10-year yields are narrowly mixed in Europe. The 10-year Gilt yield is off a little more than a basis point. The 10-year US Treasury yield is nearly flat, slightly below 4.96%.

• Gold recovered from a three-day low, a little below $4295 yesterday and returned to the $4360 area in the North American afternoon. It is trading inside yesterday’s range with a heavier bias today. Silver similarly was sold to a three-day low (slightly below $64.60) and recovered to settle above Monday’s high (~$67.05). The outside up day has seen no follow through buying, and silver is languishing in the lower end of yesterday’s range.

• November WTI fell for the fifth consecutive session yesterday. It settled at $100.75 on September 15 and closed near $90.50 yesterday. It settled below the 20-day moving average (~$90.55) for the first time since August 7. It is trading quietly unable to trade much above yesterday’s close but also holding above yesterday’s low (~$88.65).

Data

• US preliminary PMI may soften a little. The manufacturing PMI has been steady at 53.9 for the past three months. The services PMI rose for the past three months—from 50.7 in May to 56.5 in August. The composite also has increased for three months through August. It stands at 56.0 compared with 52.7 at the end of last year.

• The eurozone flash September PMI was firmer than expected. The manufacturing PMI was steady at 52.7. It has not declined since June. The services PMI rose to 53.0 from 51.6. It is a new high since last November. The services PMI finished last year at 52.4. The composite PMI reached 53.1 from 52.0, where it was in July and August. It ended last year at 51.5.

• The UK’s preliminary PMI was mixed. The manufacturing rose to 52.0 from 51.7. The services PMI slipped to 51.7 from 52.5, as did the composite PMI. The composite was at 51.4 at the end of last year.

• Australia’s PMI disappointed. The manufacturing PMI fell to 49.3 from 52.0. It was the first sub-50 reading since March. The services PMI eased for the second consecutive month. It stands at 51.4, down from 53.2 in August and 53.6 in July. The composite also slipped for the second consecutive month. It is at 50.8, down from 52.7 in August and 53.2 in July. It was at 51.0 at the end of 2025.

Disclaimer

Plaza Agreement, R.I.P.

noreply@blogger.com (Marc Chandler) — Tue, 22 Sep 2026 09:18:15 -0400

The Plaza Agreement turns 41 today. The anniversary is worth remembering not simply because it was one of the great episodes of coordinated foreign-exchange policy, but because it is increasingly being invoked as a template for a new agreement to force the Chinese yuan higher.

That analogy is appealing. It is also misleading.

The Plaza Agreement was struck by the US, Japan, West Germany, France and the United Kingdom at New York's Plaza Hotel on September 22, 1985. The goal was clear. The dollar had become too strong, and a more orderly alignment of currencies was desirable to arrest the protectionist push in the US.

The Reagan-Volcker policy mix was a powerful part of the explanation of the extreme dollar over-valuation at the time. Expansionary fiscal policy combined with tight monetary policy produced high US interest rates and attracted foreign capital into dollar assets. The federal deficit approached 6% of GDP while the federal funds rate had been around 20% in 1981.

There is an important wrinkle to the popular version of the story. The dollar had already begun to decline before the agreement. Indeed, central banks had been intervening against it for months. The dollar fell sharply immediately after Plaza, but the agreement reinforced a trend that was already underway.

That history matters today.

The case for a new Plaza rests on a superficial similarity. China has a huge trade surplus, the yuan is widely viewed as undervalued, and the United States and Europe would like China to rely less on exports and more on domestic demand. Some have proposed coordinated pressure to force the yuan higher.

But Japan in 1985 and China in 2026 are not remotely in comparable bargaining positions.

Tomomitsu Oba, Japan's vice finance minister for international affairs and one of the principal Japanese negotiators, later offered an unusually candid explanation of why Tokyo yielded. Japan's economic rise had occurred under the protection of the U.S.-Japan security alliance. Oba understood that strategic dependence constrained Japan's freedom of action. In his later recollection, Japan felt it had to accommodate Washington.

China has no comparable dependency.

Quite the opposite. Beijing has acquired leverage over supply chains that Washington and Europe cannot easily replicate. Consider rare earths. China accounted for about 60% of global mined magnet rare earths in 2024, roughly 91% of refining and an extraordinary 94% of sintered permanent-magnet production. These are not commodities sitting at the beginning of a supply chain. They are embedded in the technologies of automobiles, wind turbines, industrial machinery, data centers and defense systems.

Rare earths are only the most obvious example. China occupies important positions across a broad range of manufacturing supply chains, from low-value-added goods to increasingly sophisticated machinery, electronics, batteries and clean-energy equipment. Its leverage is therefore not merely financial. It is industrial.

That makes the threat of coordinated pressure very different from 1985. Push too hard on the yuan and Beijing can push back somewhere else. The blowback would not necessarily be a stronger yuan and a smaller trade imbalance. It could be higher input prices, disrupted production and weaker growth in the United States and Europe.

There is another problem. The G7 does not command the global economy the way the G5 did in 1985. Developing countries have their own interests. Many have benefited from access to inexpensive Chinese manufactured goods and Chinese capital. They are unlikely to automatically join a Western campaign designed to constrain China's competitiveness.

If the US and its allies cannot force China to appreciate the yuan is there nothing that can be done? The political realist solution is to find a way to make appreciation serve China's interests.

There is a historical precedent. In the 1950s and 1960s, the US gradually shifted from an export-oriented economy toward one in which American companies increasingly invested in points of production capacity abroad. Japan eventually followed a similar path. As the yen appreciated and trade friction intensified, Japanese companies increasingly moved production offshore. Foreign direct investment became an alternative to exporting from Japan.

Today Japan runs a trade deficit.

That is the more interesting lesson from Plaza. Currency appreciation was not, by itself, the solution. The deeper adjustment came from changing where production occurred and how national companies served foreign markets.

China should be allowed to pursue the same course. Encourage Chinese companies to invest abroad. Allow excess industrial capacity to become foreign direct investment rather than ever-larger export volumes. Give Chinese capital a path from exports to ownership.

That would also begin to align Beijing's interests with a stronger yuan. A Chinese company building a factory in Mexico, Europe or the US has a different relationship with the exchange rate than a Chinese exporter shipping another container from Shenzhen.

A new Plaza based on compulsion is likely to produce resistance. A quid pro quo based on an accommodation that produces more jobs and economic activity in the US and Europe has a better chance of success. The objective should not be to make China surrender. It should be to make a stronger yuan compatible with China's own economic evolution.

(with the assistance of Adam Farhat, a graduate student at Sussex)

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Lower Oil Prices Could Help Snap the Nearly Two-Week Rise in the US Two-Year Rate

noreply@blogger.com (Marc Chandler) — Tue, 22 Sep 2026 06:46:52 -0400

Ahead of the North American session, the US dollar is mostly a little softer. It has initially extended its gains in the Asia Pacific session, where Japan is still on holiday, but has retreated in the European morning. Optimism about the amount of oil making its way through the Strait of Hormuz and pipelines has seen November WTI extend the pullback that began last week after the foray above $100. It approached $89.25 today, its lowest level in two weeks. It is weighing on yields, and the US two-year note yield is threatening to fall for the first time since September 3.

Neither of the US two new initiatives have impacted the broader markets. First, the deal struck with Denmark/Greenland do not appear to give the US anything it did not have under the earlier agreement. That foreign countries cannot have bases there seems to affirm what is already taking place on the ground. Second, the idea that the US-China have a framework for an AI dialogue seemed to have been agreed upon in May. Both sides seem to be slow walking it. Notifying each other about AI incidents that threaten national security seems to be a minimal step.

Prices

G10

• The euro approached $1.15 in early North American turnover but was quickly beaten back. There are almost 4.4 bln euros in options that expire at $1.15 between today and Thursday. New session lows were recorded midafternoon in NY, near $1.1460 and follow-through selling today took out last week’s low, recorded before the weekend, was slightly above $1.1450. It fell to about $1.1435 in early European turnover before it bounced back to almost $1.1470. .

• Japanese markets are closed today and tomorrow for national holidays. The dollar firmed to almost JPY157.55 yesterday and reached the session high in the North American session. The greenback reached almost JPY157.80 before being sold in the European morning to the session low near JPY156.85. Options for about $925 mln at JPY157 expire today. Yesterday’s low was slightly below JPY156.60. A move below that would weaken the dollar’s technical tone.

• Sterling sellers lurked around $1.34 yesterday and turned sterling back in early North American activity. It was squeezed to around $1.3365. It took it out today and fell to almost $1.3325 before catching a bid in early European turnover that lifted sterling back to around $1.3370. Options for about GBP325 mln struck at $1.3380 expire today.

• The Canadian dollar weakened by about 0.25% against the US dollar yesterday and fell to its lowest level since August 6. The greenback reached nearly CAD1.4040 and edged up to CAD1.4050 today, the (61.8%) retracement of the US dollar’s losses since the test on CAD1.4250 in late June and early July. The US two-year premium over Canada rose to a new high since May 2025 (~146 bp). A move above CAD1.4050 targets the CAD1.4080-CAD1.4100 area next.

• The Australian dollar traded sideways yesterday. The session high was recorded in early North American turnover, near $0.7140. It pulled back and found support around $0.7120. It traded below $0.7100 today for the first time in three days and approached $0.7090. Options for almost A$500 mln at $0.7100 expire today. The Aussie recovered in the European morning to around $0.7120.

• The dollar traded in a narrow range against the Mexican peso. It was confined to about MXN17.1850 to almost MXN17.24. It rose above last week’s high (~MXN17.2750) today and reached MXN17.2915 before steadying. Options for about $600 mln at MXN17.30 expire today. The next chart area of note is around MXN17.40. None of the 17 economists surveyed by Bloomberg expect the central bank to change its 6.5% overnight rate target at Thursday’s meeting.

• The dollar was sold to a new low since mid-July 2022 yesterday, near CNH6.6910. It has held slightly above there today and recovered to about CNH6.7035. The offshore yuan has risen in only two weeks here in Q3. It rose in five weeks in Q2. The signal from the PBOC is clear: Beijing is accepting a mild appreciation of the yuan. The PBOC set the dollar’s reference rate lower for 10th consecutive session today (CNY6.7459 vs. CNY6.7487 yesterday). The IMF estimates that the yuan is around 16-21% undervalued. Some economists estimate it is 20-30% undervalued. Over the past 12 months, the yuan has appreciated nearly 6.25%.

• The decline in oil prices appeared to help strengthen the Indian rupee today. It reached a six-day high. The dollar has drifted lower for the fifth consecutive session today. It settled below INR95.60 for the first time since September 11. Nearby support is seen in the INR95.34-INR95.37 area.

Other Markets

• The US major equity indices traded firmly yesterday and settled above opening levels. The Nasdaq Composite (~2.3%) and the S&P 500 (~1.5%) rose by the most since early August. Asia Pacific equities were narrowly mixed, while Europe’s Stoxx 600 is about 0.35% better and a higher close today would be the fourth in five sessions. US index futures are slightly firmer.

• Benchmark 10-year yields tumbled in the Europe and North America yesterday, but Asian bonds were narrowly mixed today. European 10-year rates are mostly 2-3 bp lower but the 10-year Gilt is off three basis points, and the French benchmark is flat. With the effective Fed funds rate (weighted average) of 3.88% and expectations priced into the Fed funds futures of three more hikes in the cycle, a 4.70% two-year Treasury yield does not seem particularly high.

• Gold was unable to find much traction yesterday, despite the pullback in rates. At the low, it had retreated by about $55. It managed to pare its losses in late turnover but was sold today below $4300 in early European turnover before it bounced back to almost $4340. It needs to reestablish a foothold above $4400 to improve the technical tone. Silver stalled slightly above $67 and a little below the last week’s high recorded before the weekend (~$67.35). It was sold slightly through $64.60 today before steadying. It reached the $65.50 area near midday in Europe.

• Optimism dragged November WTI down to around $91.20 yesterday, its lowest level since September 9. Follow-through selling pushed the contract to $89.30 today and below the 20-day moving average (~$90.50) for the first time in nearly a month. If, technically, the rally from the late August low is being retraced, the $90.10 area was the halfway mark, and $87.40 is the (61.8%) retracement objective.

Data

• In a fairly light data week ahead of next week’s US employment report, the Philadelphia Fed’s non-manufacturing survey and the Richmond Fed’s survey are unlikely to capture the market’s imagination today. The Fed reports are unlikely to have a material impact on expectations for next month’s Fed meeting. Several Fed officials speak today (Williams, Jefferson, and Barkin). The futures market has slightly more than a 50% chance of another quarter point hike. The Atlanta Fed’s GDP tracker sees 5.1% growth this quarter, which would likely exceed China’s. It will be updated at the end of the week.

• Mexico reports July retail sales today. While we have noted the strength of Mexico’s external account, the domestic economy continues to struggle sustaining forward momentum. Retail sales have been flat in H1 26 after they increased by about 1.8% in H1 25. They fell by 0.6% in May and slipped another 0.2% in June. The median forecast in Bloomberg’s survey for July anticipates a flat report.

• The UK reported August government finances. The UK borrowed more than anticipated in the first five months of the fiscal year. The GBP77.3 bln shortfall is a little more than GBP8 bln more than projected by the Office for Budget Responsibility in March. The deterioration was the result of the increase in the cost of goods and services, as revenue was solid. The next important development is the fall budget at the end of next month. Ahead of the budget, sterling has tended to weaken in September. Sterling has declined in five of the past six Septembers and is off a little more than 1.3% so far this month. The 10-year Gilt yield has risen by about 12 bp this month.

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