Marc to Market

Bond and Equity Sell-Off Continues, Greenback Extends Gains

noreply@blogger.com (Marc Chandler) — Wed, 2 Sep 2026 06:46:51 -0400

The risk averse market conditions persist. Yields are higher and stocks are lower. October WTI set a new contract high as hostilities in the Middle East continue. The S&P 500 and Nasdaq composite could gap lower when the cash session begins, though ADP private sector jobs estimate will be released before the opening.

The US dollar is firmer against almost all the G10 currencies. The yen is faring best and is the exception among the major currencies with a small gain. BOJ Governor Ueda seemed to confirm a rate hike, while a hawkish board member held out the possibility for a larger move. The weakest currency among the G10 is the New Zealand dollar. It is off around 1.4% and is a cautionary note to those who expect the yen to rally on a well-signaled BOJ hike late this month.

Prices

G10

• The euro nearly met the (38.2%) retracement of its losses since the recent highs near $1.1710 before turning lower yesterday. The euro approached lows from Friday and Monday, slightly below $1.1580, and the losses were extended to almost $1.1565 today. It has not been lower since August 17. The five- and 20-day moving averages are set to cross tomorrow. The next downside target is in the $1.1520-30 area.

• It is difficult to hold down dollar-yen now in the rising interest rate environment, at least partly influenced by the renewed rise in oil prices and increased hostilities in the Middle East, not to mention the appreciation in key food prices, and the familiar supply issues. The US Treasury may have it backwards, the weak yen is not driving US yields higher, but higher US yields may be a drag on the yen. The dollar initially rose to almost JPY160.40 before hawkish BOJ comments pushed the greenback below yesterday’s low (~JPY159.65) but it quickly rebounded to almost JPY159.90. Options for more than $1 bln each at JPY159.60 and JPY160 expire today.

• Sterling had a rough time yesterday. Fiscal issues seemed to help account for the sharp sell-off in Gilts. The 10-year rose eight basis points, more than double any major European country. Sterling was sold through last Friday’s low (~$1.3525). Sterling met the (38.2%) retracement of its four-cent rally since late July. It approached the (50%) retracement today (~$1.3475). The five-day moving average crossed below the 20-day moving average for the first time in a month. A break of $1.3475 could target the $!.3430-45 area next.

• The Canadian dollar has traded in a wide range for the past three sessions, and it is breaking lower today. After trading between roughly between CAD1.3845 and about CAD1.3910, the US dollar rose to almost CAD1.3940 today. The next technical target is near CAD1.40. The five-day moving average has crossed above the 20-day moving average for the first time since mid-July.

• Yesterday, the Australian dollar posted its second outside down day in the past three sessions. A firm GDP reading today (0.4% quarter-over-quarter) failed arrest the downside correction. The Aussie took another leg lower today; to nearly $0.7120 so far, where options for almost A$750 mln expire today. The next target is around $0.7100 and then $0.7065. The hike by the Reserve Bank of New Zealand, which was widely expected, has not protected the New Zealand dollar. Its1.5% loss today leads the G10 currencies lower against the greenback (yet somehow, we are to believe that the well-telegraphed BOJ hike would support the yen).

• The Mexican peso set a marginal new three day high before reversing lower. The US dollar fell to almost MXN16.94 in the North American morning to extend the decline that had begun in the European morning. The greenback settled little changed, slightly below MXN17.00. The dollar has come back bid and is pushing above MXN17.02 late in the European morning. Last Friday’s high was near MXN17.0650. Latam currencies were the three best performing emerging market currencies yesterday (Colombian peso, almost 2%, the Brazilian real, around 0.85%, and the Peruvian sol about 0.25%).

• The dollar continues to drift in narrow ranges against the offshore yuan in the trough it is forged for nearly two weeks now (~CNH6.7130-CNH6.7330). It continues to trade on a CNH6.72 handle. The onshore yuan settled at a three-year high on Monday. The fix has been between CNY6.7808 and CNY6.7920 since late July. The firmer dollar tone pointed to a higher fix today. It was set at CNY6.7828 (CNY6.7809 yesterday).

• The dollar traded quietly against the Indian rupee today. Intervention in the offshore and onshore markets was reported. The greenback traded between INR94.8425 and INR94.9775, inside yesterday’s range and settled near session highs.

Other Markets

• Higher oil prices and rising yields are weighing on what were seen as richly valued equity markets and nervous investors. Despite better-than-expected Dell earnings late yesterday, rising yields proved too much for Asia Pacific equities. The Nikkei fell by nearly 3%, South Korea’s Kospi was tagged for almost 4%. China’s CSI 300 fell by about 1.4% and Taiwan’s Taiex was off nearly 1.7%. Europe’s Stoxx 600 is off more than 0.5% for the third consecutive session. US Nasdaq and S&P 500 futures warn of the possibility of a gap lower open in the cash market.

• The 10-year US Treasury yield has risen by almost 14 bp in the past five sessions. The 10-year Bund yield rose about 11 bp and the 10-year Gilt yield increased by 23 bp. The 10-year JGB yield rose by about 10 bp. Today, European yields are 5-7 bp higher. The 10-year JGB yield was practically flat, and the US 10-year yield is up almost two basis points to nearly 4.82%.

• Rising yields dulled the yellow metal. No safe haven here. Gold fell to almost $4326 yesterday, and a little below $4283 today. its lowest level since August 17. It settled below the 20-day moving average for the first time in nearly a month. The next retracement objective is near $4265. The five-day moving average has crossed below the 20-day moving average for both gold and silver. Silve has been sold to about $63.30 today. A break of $63 could signal another $2 decline.

• October WTI jumped 5.2% yesterday and traded above $90 for the first time since May. A new contract high was set today near $92.30 before steadying. The upper Bollinger band is near $90.50 and that is where the contract is hovering in late European morning activity.

Data

• ADP provides its estimate of August’s change in private sector employment. Through July, it’s estimated that the US private sector created an average of 72k jobs a month. The BLS estimate is identical. The median forecast in Bloomberg’s survey is for a 47k increase after 44k in July. Factory orders are expected to rise 0.7% in July after a 0.3% contraction in June. The preliminary estimate is that durable goods order rose 1.1% in July, the most since April. Excluding aircraft orders and defense, they rose 0.2% after a 1.7% jump in June (initially 1.2%).

• There is little chance of a change in Bank of Canada’s monetary setting today. Its overnight target rate is 2.5%. The swaps market has about a 65% chance of a hike before year-end, which seems subjectively high to us. Past the central bank meeting and the data highlight is the August employment report on Friday. Through July, Canada created almost 10k jobs on average a month (recall the economy is about 1/12 the size of the US) and an almost 12k average in the first seven month of 2025.

• Mexico reports August domestic auto sales. They tend not to move the market. Auto sales have risen up about 6.2% in the first seven months of the year. For the record, auto exports are running around twice as much as domestic sales.

• Australia’s GDP slowed from 0.9% in Q4 25 to 0.3% in Q1 26. It grew 0.4% in Q2, slightly better than many expected. Consumption rose by 0.4%, the same as in Q1. Trade and government spending improved but capex fell. The central bank does not meet until late this month, and the futures market is discounting a nearly 80% chance of a hike, up from a little more than 50% yesterday. It was about a 10% probability a week ago. Stronger than expected, July CPI and another strong monthly gain in household spending lifted expectations. The Reserve Bank of New Zealand delivered the expected quarter-point hike earlier today. The new cash rate target is 2.75%. The swaps market is discounting another hike fully before the end of the year.

Disclaimer

The Dollar Bounces Back but US Efforts on Rates and the Yen are Being Challenged as Iran Presses Hard

noreply@blogger.com (Marc Chandler) — Tue, 1 Sep 2026 06:48:31 -0400

After consolidating softer yesterday, the US dollar has come back bid today. It often does better when US rates are rising unlike many of the other major currencies. However, the dollar’s strength does not reflect is successes on the various fronts the Trump administration has made a stance.

The war in the Middle East has escalated and a few ships have been attacked today in the Strait of Hormuz. October WTI is traded at its highest level since May earlier today. The long-end US yields are at new multiyear highs despite the Treasury’s plan to boost buybacks starting this week. The effort to support the yen are being rebuffed as the dollar trades above JPY160, despite high conviction that the Bank of Japan raises rates late this month. While some reports claimed Treasury Secretary Bessent told Japan’s Ministry of Finance and the central bank that its next move should be to raise rates, Japanese officials seemed to play it down, and the Minister of Finance herself cited the BOJ Act, protecting its independence. The swaps market shows high confidence in a BOJ rate hike. It is higher than the US, which has stronger growth and higher inflation.

Prices

G10

• The euro consolidated within the pre-weekend range and reached about $1.1620 in North America yesterday. After reaching $1.1625 in Asia Pacific turnover, the euro was sold slightly below $1.1590 in early European turnover. Options for 1.8 bln euros at $1.1600 expire today. A break of the $1.1575 area may target the $1.1530 area.

• The dollar climbed on rising US Treasury yields before the weekend to test JPY160.20, the highest level against the yen since intervention. Treasury Secretary Bessent told a CNBC audience that “disorderly” yen moves can destabilize global markets. While that is certainly possible, that is not the case now. Recall that before the intervention in late July, benchmark three-month implied volatility was below 7%, the lower end of where it has been since early 2022. The intervention saw implied vol surge to around 8.8%, its highest level since the first part of April. It is now back to about 7.5%. Before the intervention, the swaps market was pricing in almost six basis points of a September hike and now in a little more than 23 bp. Leaving aside theory, we note that the rolling 30-day correlation of changes in dollar-yen and changes in the two-year US yield is about 0.25. The correlation of changes in the exchange rate and Japan’s two-year yield is not even 0.05. The dollar is trading inside yesterday’s range, which was inside last Friday’s range. The consolidation looks constructive for the US dollar.

• Sterling recovered about half of its pre-weekend, Warsh-inspired losses. It reached $1.3565 in North America yesterday. It is also recording in an inside day today, trading between about $1.3530 and $1.3560. It remains within the pre-weekend range (~$1.3525-$1.3600). The intraday momentum indicators are stretched, however, which inclines us to look for downside pressure in North America. Options for al most GBP575 mln at $1.3550 expire today.

• The US dollar briefly traded at two-week high against the Canadian dollar yesterday, slightly above CAD1.3910. It surrendered its gains and recorded a session low near CAD1.3855 in North America. It tested the pre-weekend low, seen before Warsh and the firm Q2 GDP, near CAD1.3845 today. The US dollar recovered and reached the session high in Europe slightly above CAD1.3875. Resistance is seen near the highs from the last two sessions around CAD1.3910.

• After reversing lower before the weekend, the Australian dollar traded quietly yesterday in less than 1/5 of a cent range, mostly between $0.7155 and $0.7170. The Aussie is recording a bearish outside day. It reached slightly above $0.7080 before being sold to about $0.7140. The daily momentum indicators look set to turn lower from over-bought territory. The next chart area to note is near $0.7100, which seems a little far today, given the intraday momentum indicators. The $0.7100-level holds nearly A$665 mln in options expire today and more before the end of the week.

• The Mexican peso consolidated its pre-weekend losses and traded quietly in a narrow range yesterday. The greenback traded between almost MXN16.99 and a little above MXN17.05. It is straddling the MXN17.00 level tightly today. The consolidation looks constructive for the dollar and a close above the MXN17.0350 area lends credence to our near-term favorable dollar outlook. The dollar reached its best level against the Colombian peso since August 4 yesterday. It was the sixth consecutive decline in the Colombian peso. Last week, the new government unveiled a preliminary fiscal deficit for next year of 9.4% of GDP, relying on more borrowing from abroad. Its estimate of borrowing this year is $11 bln higher than anticipated and almost a quarter is expected to be borrowed from abroad. President de la Espriella’s withdrawal of negotiations with some of the rebel groups that began under the former president. Last week the government bombed a position and ordered alleged drug traffickers to be extradited to the US. Separately, Colombia reported that urban unemployment jumped to 8.5% in July from 8.0% in June. A break of the COP3244 area could signal a move toward COP3300.

• The offshore yuan was largely confined to the pre-weekend range and settled firmly yesterday. The US dollar traded between about CNH6.7175 and CNH6.7320. The G20 finance ministers’ meeting yesterday did not appear to give a formal endorsement to US Treasury’s call to review the terms of trade with China. Moreover, the Trump-Xi meeting later this month is seen to lay the groundwork for an extension of the tariff truce that expire in September. At the same time, the Shanghai Cooperation Organization meeting ended today, and it appears many members, including Pakistan and India, do not appear obliged to support the US-touted “Economic D-Day” against Iran. The PBOC shaved the dollar’s fix today to CNY6.7809 (from CNY6.7828 yesterday).

• Despite higher oil prices, the Indian rupee rose to its highest level since July 1 today. The central bank reportedly continued to intervene in the offshore and onshore markets. The dollar gapped lower today and briefly fell below INR94.80. It settled at INR94.50, its lowest close since late June.

Other Markets

• Equities are beginning the month heavily. The S&P 500 and Nasdaq composite gapped lower yesterday, and while the Nasdaq’s gap was closed, the S&P’s was not. In the futures market, both are trading broadly lower. Asia Pacific equities are mostly lower. Japan’s Topix, South Korea’s Kospi, and Taiwan’s Taiex are notable exceptions. Europe’s Stoxx 600 is off nearly 0.8%, and if it is sustained, it would be the largest drop since late July.

• Higher oil prices weighed on bond prices yesterday. Benchmark 10-year yields in Europe and the US rose 3-5 bp yesterday. New high yield levels were reached. Asia Pacific bonds played catch-up today. The generic 10-year JGB traded and settled above 3% yield. Benchmark yields in the region were up 5-8 bp. European yields are up mostly another 3-4 bp today. The 10-year US Treasury yield is up 3-4 bp and is nearing 4.80%. The 30-year benchmark yield is up more than three basis points to slightly above 5.27%.

• Gold extended its pre-weekend loss yesterday and fell about $4397 in the Asia Pacific session. It recovered to around $4464 in Europe before it consolidated in North America, mostly below $4450. Gold recorded its first back-to-back loss in over a month and is off to a poor start in September. It frayed our initial target today near $4365 and looks headed lower. Silver fell to a seven-day low and frayed the 20-day moving average (~$65.90 today) for the first time since early August. It has been sold slightly below $64.50 today and also is poised to fall further.

• The new hostilities in the Middle East saw the October WTI contract gap higher yesterday. It reached almost $86.80 before stalling. Morre ships have been attacked in the Strait of Hormuz today and oil prices are higher. October WTI reached a little more $88 to test July’s high. The August high was about $87.70.

Data

• The preliminary US August manufacturing PMI slipped to 53.2 from 53.9. It implies the slowest growth since March. It is subject to revision today. The August manufacturing ISM is expected to have eased from the 55.6 reading in July, which was its strongest reading since May 2022. Yet the sectors that received the most tariff protection are not the source of the strength in the US manufacturing sector, which is AI and tech related. The July JOLT report will draw some attention. Job openings are projected to decline for the third consecutive month but are expected to remain well above year-ago levels (7.089 in July 2025). Construction spending slipped by 0.1% in June and looks flat in July. Auto sales will trickle in over the course of the session and are projected to slow slightly from the 16.33 mln annual pace in July. If so, it would be the first back-to-back decline since May-June 2025.

• Canada sees its August manufacturing PMI. It rose to a marginal new high of 53.5 in July. It is a busy week for Canada. The Bank of Canada meets tomorrow and there is little doubt but that rates are on hold at 2.25%. July trade figures are due Wednesday and the August jobs report on Friday. Separately, Canada’s Liberal Party won all three elections yesterday and this increased its parliamentary majority to 173-166. It will be seen by many as endorsing Prime Minister Carney’s stance vis a vis the US.

• Mexico’s favorable external balances are bolstered by worker remittance. They are expected to have risen to $5.53 bln in July from $5.47 bln in June. Mexico’s August manufacturing PMI is due (51.3 in July), but the IMEF surveys are weaker. The manufacturing and non-manufacturing readings are expected to have remained below the 50 boom/bust levels.

• The eurozone’s August aggregate manufacturing PMI was slipped to 52.7 in the final reading from the preliminary estimate 52.8, its strongest reading since in a little more than four years. The preliminary August CPI rose 0.4% and lifted the year-over-year rate to 3.3% (from 2.9%). It has not been highest since September 2023. The core rate ticked down to 2.4% from 2.5%. The July unemployment rate was unchanged at 6.4% because the June’s 6.3% was revised to 6.4%.

• The UK’s final manufacturing PMI stands at 51.5, up from the preliminary 51.5. However, new consumer credit data was made available today. July consumer credit expansion accelerated slightly but net mortgage lending and approvals slipped. Prime Minister Burnham will speak to parliament today for the first time as PM as the summer recess ends. Tomorrow is the question session.

• Australia’s final August manufacturing PMI was confirmed at 52.0. The Q2 current account deficit widened to A$27.2 bln from A$25.4 bln in Q1 26. Australia’s current account deficit was 2.7% of GDP in 2025. The IMF expects it to narrow to 2.3% this year, while the OECD projects it to widen to 2.8%. The A$57 bln c/a deficit in H1 26 compares with a A$26 bln deficit in H1 25. Tomorrow, Australia reports Q2 GDP. A 0.3% quarterly expansion would show the year-over-year rate to 1.9% from 2.5%. Separately, the Reserve Bank of New Zealand is widely expected to hike its overnight cash target rate at the second consecutive meeting tomorrow to 2.75%. The swaps market is fully discounting another hike in Q4 26. The market is pricing in another 50 bp of hikes in H1 27.

• Japan reported strong corporate profits (24.6% year-over-year in Q2) but stronger than expected capex, which rose 1.6% year-over-year (after a flat Q1). Excluding software, capex rose 3.6% year-over-year after contracting by 1.4% in Q1. The final August manufacturing PMI slipped to 54.9 from the initial estimate of 55.1.

• Yesterday, India reported solid 7.8% year-over-year growth in Q2 (8.6% in Q1). The economy is expected to slow in H2. Earlier today, the August manufacturing PMI was reported at 52.8, after a preliminary estimate of 52.9. It is the third consecutive monthly decline and the weakest reading it at least three years.

• The “official” Chinese PMI showed a slowed contraction in China’s manufacturing sector, but today’s RatingDog iteration ticked up to 51.5 from 50.9. The RatingDog methodology reportedly gives more weight than the “official” measure to small and medium-sized businesses.

Disclaimer

The Dollar Consolidates Warsh-Inspired Gains

noreply@blogger.com (Marc Chandler) — Mon, 31 Aug 2026 06:46:48 -0400

The US dollar is consolidating its pre-weekend surge spurred by the hawkish commentary that Fed Chair Warsh delivered at Jackson Hole. The last time the US two-year and the Dollar Index rose as much as in response to the hawkish hold delivered in the first FOMC meeting Warsh chaired in the middle of June. With the August nonfarm payroll report at the end of this week and the end of next week, we are not yet persuaded a FOMC hike at the conclusion of the next meeting on September 16 is a done deal by any stretch of the imagination. Meanwhile, the first Spanish, French and German CPI underscore expectations for an ECB hike. At the same time, the joint intervention and firm data, including today’s retail sales and industrial production point to a BOJ hike on September 18.

New hostilities in the Middle East have lifted oil prices by around $3 a barrel today. Meanwhile, the US Defense Department’s Office of Strategic Capital reported plans to structure an investment through penny warrants, which will allow the US government to take an equity stake (~35% passive stake in Alejandro Betancourt’s North American Blue Energy Partners) without a significant capital investment that gives is rights to buy 20% of the companies oil production in Venezuela at cost (reported reserves of 65 mln barrels). The significance of this is a major talking point today.

Prices

G10

• The euro finished last week with a seven-day low. It was its first weekly loss in five weeks. The daily momentum indicators have turned down. It returned to around where it was before US Treasury Secretary Bessent’s “at least doubling of US Treasury purchases”. The euro held above Friday’s low today and poked a little above $1.1605. The $1.1610 area corresponds to a (38.2%) of last Friday’s losses. There are options for almost 2.2 bln euros at $1.1600 that expire today. The consolidation does not change our bearish outlook. The next technical target looks to be around $1.1530,

• Firmer Japanese rates failed to lend the yen much support. The yen fell every session last week--something that has not happened in three months. The rise in US rates and broad gains carried the greenback back above JPY160 for the first time since the intervention in late July. The pre-weekend high of JPY160.20 held today and the dollar was pushed to slightly below JPY159.50. Options for about $780 mln at JPY159.65 expire today. It appears that cautiousness about the risk of intervention offset the negative yen impact of the jump in oil prices. The JPY160.60 area corresponds with the (61.8%) of the dollar’s intervention-inspired losses and the July 31 high was almost JPY160.90.

• Sterling fell last week for the first time in five weeks. It settled at an eight-day low. The momentum indicators are turning down from overbought territory. It is stabilized today and is in about a $1.3530-$1.3555 range. Our bearish outlook warns of near-term potential toward the $1.3440-70 area.

• The Canadian dollar also looks vulnerable. The greenback rose to CAD1.3910 and traded on both sides of the previous day’s range. It settled above that range, forming an ostensibly bullish US dollar pattern. Follow-through US dollar buying was limited to a couple of ticks today. Support was found near CAD1.3890. The trade conflict with the US may escalate, and the USMCA framework itself is thrown into doubt. A move above CAD1.3930 could spur a move back toward CAD1.4000.

• The Australian dollar traded above $0.7200 ahead of the weekend for the first time since the end of May. However, with the greenback turned better bid on Warsh, and the Aussie reversed and was pushed below the previous day’s low (~$0.7165). The momentum indicators are poised to turn lower. It is consolidating quietly in between about $0.7155 and $0.7170 so far today. We look for $0.7100 in the coming days and possibly $0.7065, and maybe $0.7000 in the slightly longer term.

• The dollar’s surge in response to Fed Chair Warsh saw it rise to MXN17.0645, its best level against the Mexican peso in seven sessions. It stopped near the 20-day moving average (~MXN17.0660). It frayed the 20-day moving average today, which for the first time this month. Yet, it, too, is consolidating today and the greenback has held above MXN17.00. We suspect there is scope for additional dollar gains. It could rise toward MXN17.13-MXN17.15.

• The dollar rose to a new high for the week against the offshore yuan in response to Fed Chair Warsh’s comments and the hawkish market interpretation. The dollar edged a little higher today and reached CNH6.7320, its best level since August 19 before settling back into the pre-weekend range. Following the greenback’s broad gains, it is hardly surprising that the PBOC lifted the dollar’s fix to CNY6.7828 (CNY6.7811 previously).

• The dollar fell to INR95.1140 today, its lowest level in a little more than three weeks against the Indian rupee. The central bank reportedly sold dollars in the offshore and onshore markets. The dollar settled slightly below INR95.18 compared with INR95.2925 at the end of July.

Other Markets

• US equities fared better than one might have expected ahead of the weekend in the face of a jump in US yields. Still, the main indices settled below opening levels and the futures are off around 0.15% ahead of the North American session. Asia Pacific equities are mixed today, and Europe’s Stoxx 600 is nursing a small loss.

• Benchmark 10-year yields are mostly 2-3 bp higher in Europe today, though UK Gilts are nearly flat. The 10-year JGB was unchanged, and the 10-year US Treasury yield is slightly softer, near 4.71%. Yields rose 2-4 basis points in Europe and nearly five basis points in the US before the weekend. The 10-year Treasury yield settled a little above 4.70% for the first time last week. The high earlier this month was about 4.75%. The 30-year yield has a built a floor near 5.15% and finished last week near 5.21%. It is slightly firmer today. The high earlier this month was a little below 5.35%.

• Gold peaked early last week, a little shy of $4700 and finished the week with a sharp drop to about $4445. With the daily momentum indicators turning down, a deeper correction should be anticipated. It was sold a little below $4400 today but has recovered to about $4450. The $4300 seems reasonable. Silver rose above $70 ahead of the weekend for the first time since mid-June and sellers emerged and drove it to a new low for the week, a little below $66.40. A key downside reversal was formed. It was sold slightly below $65.60 today before recovering in the European morning back above $67. Technical risk may extend toward $62.

• October WTI was largely sidelined ahead of the weekend. It traded in about a $1.25 range, the smallest in a little more than a week. It settled a little below the middle of the two-week range. (~$$79.60-$87.70). The increased hostilities saw the contract gap higher today and it has trended higher through the European morning to reach almost $86.65.

Data

• German states reported their August CPI, and the national figures will be out shortly. The EU-harmonized measure appears poised to push above 3% for the first time since January 2024. Recall that Spain reported its preliminary estimate at the end of last week. It rose by 0.8% on the month for a 4.6% year-over-year increase, the largest rise since February 2023. France reported its EU harmonized measure of CPI rose to 2.7% from 2.4%. Even before the Spanish and French data, the swaps market had an ECB hike next month nearly fully discounted and a nearly 70% chance of another hike in Q4.

• The firmness of Australian inflation expectations and the resilience of private sector credit growth pushed the market in the direction it was already moving. The Melbourne Institute’s inflation gauge rose to 4.8% from 4.0% and private sector credit rose by 0.6% last month. The market has become more confident that the central bank will hike rates again before the end of the year. Before last week’s CPI and household spending, the futures market had about a 10% chance of a quarter point hike discounted for next month. It is now nearly 50%. The market had almost 15 bp higher rates before year-end priced in and now almost 27 bp.

• Japan reported stronger July retail sales but weaker industrial output. Although Japanese household spending tumbled 3.3% year-over-year in June, retail sales rose 0.6%. On a month-over-month basis, Japanese retail sales tumbled 3.9% in June, the most since the pandemic-induced slump. They rose 2.4% in July. Industrial output surged 1.9% in June, the largest increase since January and edged up 0.1% in July. The median forecast in Bloomberg’s survey was for a 0.7% decline in July. The swaps market is discounting about a 90% chance of a hike next month.

• China’s August PMI readings remained below the 50 boom/bust threshold. The manufacturing PMI edged up to 49.8 (from 49.2), and the non-manufacturing PMI was flat at 49.0. The composite PMI stands at 49.5 (from 49.3).

Disclaimer

September 2026 Monthly

noreply@blogger.com (Marc Chandler) — Sat, 29 Aug 2026 07:00:21 -0400

September brings a cluster of events that will shape the macro narrative into year-end. A Xi-Trump meeting, German state elections, a Federal Reserve decision with a new Summary of Economic Projections, and an ECB meeting that is not finished hiking. Each carries its own logic, but together they sketch the contours of the fourth quarter.

In our more frequent analysis, we noted that while the dollar had been dragged down by disappointing economic data and pushing of a Fed rate hike further out, we were cautious as the momentum indicators were over-extended. The tension has been resolved. The market took a hawkish message away from Fed Chair Warsh at his Jackson Hole speech, increasing the odds of not just a September hike but another one before year end. And the momentum indicators for the dollar turned higher. Even if the market has overreacted to Warsh's comments, the upside dollar correction has only just begun, it would appear.

Xi-Trump: Trade, Not FX

President Xi is coming to the US a couple of days after the UN General Assembly starts the new session on September 22. He is set to meet with President Trump in Washington on September 24. The headline meeting will focus on trade, not currency. Although the yuan is terribly undervalued, the Trump administration does not seem to have prioritized it in bilateral talks. Trade, China's shipment of rare earths, and alleged assistance to Iran and Russia appear more saliant, and that is where the political capital will be spent. Washington has still not renewed arms sales to Taiwan, which has been held in abeyance for the last several months.

Beijing will understand that as a signal regardless of how it is explained by the US domestically and to its allies. At the same time, the US is scaling back its role in joint military exercises with South Korea. Neither move is really about currency, but both tell Beijing something about the trajectory of US commitment in the region, and that context will hang over the trade conversation even when it is not named.

European Politics

German state elections this month carry real risk that the AfD wins outright in at least one Land. That would be a marker, not just a headline. Chancellor Merz has leaned on a familiar political device, blaming Chinese competition for the erosion of German industrial market share. The data only partially cooperates. The IFW estimates that roughly a third of Germany's lost market share traces to Chinese competition. The other two-thirds are homemade, the product of energy costs, underinvestment, and a manufacturing model built for a world that no longer exists. Blaming Beijing is politically convenient. It is not the whole story, and voters drifting to the AfD are responding to the homemade two-thirds as much as the imported third.

France's Macron is a lame duck, and Le Pen leads the polls. The question hanging over Paris and Frankfurt alike is whether Christine Lagarde takes a page from Mario Draghi's playbook and steps back into French domestic politics to challenge Le Pen directly. Draghi left the ECB and became prime minister of Italy at a moment of national emergency. Lagarde has the stature, the technocratic credibility, and, unlike most of her potential rivals, a claim to standing above the fray. Whether she wants the job is a separate question from whether she could win it.

If Lagarde departs, the succession fight at the ECB becomes immediate. Germany has a case to make. It is the largest economy in the currency union and has gone a full cycle without the top job. But the bid is complicated by the fact that Germany already holds significant positions in Brussels, including at the head of European Commission, and a German ECB president risks tipping the informal balance of institutional power that keeps the EU's largest members in rough equilibrium with one another.

That opens space for another idea now circulating in EU corridors, an Eastern European vice president. The eurozone has never had one. The question is not merit. It is whether the bloc's political culture is actually ready to place a citizen of a 2004 or 2007 accession country in the ECB's second chair, and what that would signal about how the union sees itself two decades on.

The Federal Reserve, European Central Bank, and the Bank of Japan

July's US jobs report was soft. Inflation gauges cooled. Retail sales declined. That combination made is seem unlikely the three hawkish dissenters from the prior meeting will have persuaded their colleagues to join them in supporting a hike. However, Fed Chair Warsh's speech at Jackson Hole saw the market swing the other way and has almost 15 bp of a possible 25 bp hike priced in for the mid-September FOMC meeting. The market may think again about the outlook if job growth is week and if the year-over-year pace of headline and core CPI falls for the third consecutive month.

The ECB sits in a different place entirely. New staff forecasts are likely to accompany a hike, and the door will stay open to another one before year-end. The market leans toward pricing a final move in December. The divergence is the story. The Fed has been reluctant to hike despite what appears to be full employment and a resilient economy, while the ECB keeps tightening, and that gap, not any single headline from Beijing, Berlin, or Paris, is what will drive the exchange rate through the fourth quarter.

The Bank of Japan meets against a backdrop of disappointing Q2 growth. Consumption contracted by 0.1% despite real wage gains, and capex shrank for the third quarter in the past four. Neither is the profile of an economy ready for sustained tightening. Policy still targets 2% core inflation, and Japan has not printed above target all year, a persistent undershoot that argues against urgency at the BOJ even as the yen has demanded attention elsewhere. Nevertheless, a rate hike in September and another before year-end seems to be the most likely scenario.

The yen's loss this year before the late-July intervention was modest, just north of 4%, which makes the scale of the response notable. The April-May and July interventions together may have amounted to something in the neighborhood of $150 billion. The US Treasury's involvement was the real surprise. Washington intervened through the Exchange Stabilization Fund for the first time in more than a quarter century, and it sold euros rather than dollars, a choice that breaks from the historical pattern where BOJ intervention has not reliably tracked moves in 10-year US rates.

The mismatch between the yen's actual depreciation and the size of the response suggests the intervention was as much about signaling and precedent as it was about the exchange rate itself. Japanese investors took advantage of the initial intervention-inspired bounce to acquire more foreign stocks and bonds, even speculative yen shorts in the CME futures market were reduced.

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 edged up by 0.3% in August after a 0.65% gain in July. BWCI is up about 1.0% this year after a 3.7% advance last year, which was the first increase since 2020.

Turning to the components of the index, the greenback itself was unchanged, of course. It accounts for about a third of the index and dampens the volatility of the BWCI. Among the other G10 currencies, the yen was the only one that did not appreciate, despite the intervention in late July and the threat of more. It fell by about 1.7%. The Australian dollar was the best. It appreciated by about 2.0%. The trade war between the US and Canada, saw the Canadian dollar pare its in late August turnover. Still, it managed to rise by about 0.8% and bested the euro (almost 0.50%) and sterling (0.40%).

That dubious honor of the weakest component in the BWCI falls to the Russian ruble, which dropped by about 7.5% after it declined by nearly 1.2% in July. It was the underperformer in the index for the second consecutive month. The Indian rupee rupee was virtually flat. The Brazilian real fell by by about 2.4%, which reversed more than its July gain. It looks vulnerable ahead of the October presidential election. While the Brazilian real was the weakest in the Latam in August, the Mexican peso was among the strongest, and its 1.8% gain was the second best among the emerging market currencies in the BWCI. The Korean won rose by about 4.4% in August. It was the strongest member of BWCI. The central bank followed July's hike with another in late August.

Since around "Liberation Day" in April 2025, BWCI has been in a clear range between about 90.00 and about 92.00. It frayed the upper end reached almost 92.45 in May, matching its highest level since April 2024. It is trading slightly above 92.00 as August winds down. It dovetails with our general assessment that while the dollar's underlying fundamental support has weakened, the technical momentum indicators are over-extended. Just as the BWCI turned down in late August, we think the risk/reward favors a dollar bounce after broadly trending lower over the past couple of months.

U.S. Dollar: The combination of a net loss of jobs in July, softer inflation readings, and the US Treasury's efforts to suppress bond yields weighed on the dollar broadly in August. The Dollar Index fell for the second consecutive month for the first time this year. While the Fed funds futures market remains confident of a Fed rate hike before the end of the year, the risk of a second hike has been cut to less than 10% from about 50% at the end of July. The Atlanta Fed's GDP tracking model puts US Q3 growth at 4.6%, while the median forecast in Bloomberg's survey is 2.4%. Trade and inventory adjustments have weighed on GDP measures. Economic growth in the past three quarters has averaged slightly less than 1.40%, the slowest nine months since the first three quarters of 2022, which followed the recovery boom. However, excluding trade, inventories, and government, what is called final sales to private domestic parties, arguably gives a clearer signal of the state of the economy. In the past three quarters, it grew a little more than a percentage point higher to 2.45%. The 4.1% unemployment rate is the lower end of the Federal Reserve's estimated range of full employment. The manufacturing sector appears to be strengthening and the 30k jobs it added in H1 is the most in a six-month period since Q1 23. The administration continues to play its tariff card and there is speculation that it will soon levy another 7.5% tariff on China due to the distortions from its excess capacity. The 50% tariffs on Canada currently cover a small part of Canada's exports to the US ($20 bln of almost $410 bln goods exports in 2025 and $290 bln non-energy exports). Canada retaliated, with a range of 15%, 25% and 50% levies on around 700 US products, worth about $20 bln. Given the relative size, with the US economy 12x larger than Canada, the US would seem to dominate the escalation ladder. Yet it will disrupt regional economies, especially in US Northeast and upper Midwest, which in turn could impact the midterm elections in early November.

Euro: The euro rose by about 0.5% in the month through late August, which pared the year's loss to about 1.40%. Technical and fundamental considerations underscore the downside risks. First, the euro's more than 3.5-cent rally since late July stretched the momentum indicators. The correction that began in late August may extend into an outright technical correction that could see a return to the $1.15 area or a little lower after probe about $1.17 was turned back. Second, constructive fundamentals appear to have been discounted, but the political risks remain palpable. The swaps market has a rate hike at the September 10 central bank meeting almost fully discounted and nearly 75% chance of a hike in Q4. The staff updates their economic forecasts, and the risk seems to be for higher inflation next year. In June, the forecast was for CPI to fall to 2.3% from 3.0% this year. There are three state elections in Germany in September. The market seems ill-prepared for the possibility that the Afd breaks through the containment imposed by the other parties and secure a majority of seats in the September 6 contest for Saxony-Anhalt's unicameral legislature. However, if the Afd does not secure a majority, the CDU is even in more complicated pickle. It would need to cobble a coalition together that would likely have to include the far-left Die Linke, which could split the CDU and send reverberations through the national party. Chancellor Merz, who nipped at Merkel's heels for years, has seen his personal support and for the coalition government heads fall to near-record lows. Polls find that a majority of Germans do not expect Merz to complete his term (2029). The Afd challenges in the state elections could provide an extra push.

(As of August 28, indicative closing prices, previous in parentheses)

Spot: $1.1585 ($1.1384) Median Bloomberg One-month forecast: $1.1599 ($1.1493) One-month forward: $1.1600 ($1.1398) One-month implied vol: 5.4 (5.6%)

Japanese Yen: Japanese and Americans intervened to buy yen at the end of July. Their joint intervention failed to push the dollar below the low that the Bank of Japan achieved on its own its April/May intervention of JPY155. That area is now invested with greater technical significance. While the intervention succeeded in forcing speculation in the CME futures to cover about a third of its short yen position in the first two weeks after the intervention, Japanese investors took advantage of the yen's bounce to buy the most foreign stocks and bonds in two years in the subsequent two weeks. Many argue that the yen's weakness stems from the Bank of Japan being behind the curve in tightening monetary policy. Yet, the national core CPI has not been above the target this year. The economy expanded by 0.5% in Q1 26, which after contracting in H2 25 recouped the lost activity. While the efforts by the Japanese government have succeeded in encouraging businesses to give employees pay increases on top of inflation, it has not fueled an increase in household spending, which fell 3.3% year-over-year in June. Also, the BOJ's balance sheet has by almost 7.5 percentage points of GDP in the first half of the year, which is more than the combined reduction of the Federal Reserve, European Central Bank, and the Bank of England's balance sheets. Japan's two-year yield rose nearly 20 bp last month as the market become more confident of BOJ hikes. The swap market now has almost an 85% chance of a September hike discounted, double what it was at the end of July. The probability of a hike in Q4 has risen to a little above 50% from about 15% at the end of July. Nevertheless, arguably encouraged by firm US yields, the dollar is finishing August higher on the month. The dollar rose to JPY160.20, its highest level since the intervention in part of the broad dollar advance after Fed Chair Warsh's speech at Jackson Hole. As the market continues to probe for the official paint threshold, the next area maybe around JPY160.80.

Spot: JPY160.09 (JPY157.40) Median Bloomberg One-month forecast: JPY159.07 (JPY158.81) One-month forward: JPY159.72 (JPY157.04). One-month implied vol: 7.0% (9.1%)

British Pound: Sterling rose for the first time in back-to-back months this year in August. It rose by about 0.4% and reached $1.3675, its highest in six months. Sterling's gains were not facilitated by a change in expectations for the Bank of England. If anything, the chances of more than one hike in the remainder of the year were trimmed. The swaps market prices in little chance of a move at the September 17 meeting. The economy appears to be finding better traction. The preliminary composite August PMI rose it its best level in four months, and GfK's August measure of consumer confidence was the strongest in two years. Drama was limited in Prime Minister Starmer's first month at 10 Downing Street and the Labour Party is doing a little better in the polls. Still, the big challenge awaits: The run-up to the late October Autumn budget statement. In recent years, sterling struggled in September and fell in five of the past six years. In four of those years, the September loss was greater than 2%.

Spot: $1.3538 ($1.3483) Median Bloomberg One-month forecast: $1.3408 ($1.3378) One-month forward: $1.3540 ($1.3485) One-month implied vol: 5.6% (5.6%)

Canadian Dollar: The Canadian dollar weakened in May and June by almost 5.2%. It recovered in July and most of August and retraced around 75% of those losses. It had a four-week rally in tow when the trade negotiations with the US ended acrimoniously. Canada's economy is about a 1/12 of the United States, making it more vulnerable to the trade dispute. However, some northeast and northern Midwest states in the US may be negatively impacted, potentially impacting the US midterm elections. Canada's economy recovered in Q2, growing 3.3% at an annualized rate. The Q1 contraction (-0.1%) was revised away and the new estimate was for 0.3% growth. The trade shock poses a new economic risk. The swaps market downgraded the chances of a rate hike before the end of the year to a nearly 65% from about 85% before the trade conflict erupted, which we suspect is still too high. Canada is the only other country besides China that has retaliated against the US tariffs. The latest tariffs were implemented under Section 338 of the 1930 Trade Act. Many observers expected the legality of these tariffs to be challenged on the grounds that subsequent trade legislation has superseded that 1930 measure, which has never been used like this before. Canada did not only respond "dollar for dollar" with tariffs but also quickly cobbled together a fiscal package (worth about $5.4 bln) to help support Canadian business that would be hurt.

Spot: CAD1.3905 (CAD 1.4021) Median Bloomberg One-month forecast: CAD1.3994 (CAD1.4010) One-month forward: CAD1.3888 (CAD1.4005) One-month implied vol: 4.3% (4.0%)

Australian Dollar: The Australian dollar is one of the strongest currencies in the world this year. Through late August, it has appreciated by almost 7.3% against the US dollar, helped by three rate hikes in the first half, and the prospect of another before year-end. At 4.35%, its policy rate is the highest among the G10 countries. It is also one of four G10 countries with above 3% CPI. Inflation expectations are even higher, and household spending, capex, and private sector credit growth are robust. Moreover, the budget deficit is expected to widen to about 3.5% of GDP this year from 2.7% in 2025, while the economic growth is around 2%, leaving it will little spare capacity. The Reserve Bank of Australia threatens additional rate moves and after a higher-than-expected July CPI (3.5%) and strong household spending, the futures market moved to fully discount a rate hike before the end of the year. The odds of a hike in late September have risen to almost 50% from slightly more than 10% at the end of July. The Australian dollar's 3.5% rally here in Q3 has stretched the momentum indicators. We anticipate a pullback may extend back toward $0.7000.

Spot: $0.7164 ($0.7019) Median Bloomberg One-month forecast: $0.7104 ($0.7009) One-month forward: $0.7160 ($0.7015) One-month implied vol: 7.0% (7.3%)

Mexican Peso: The peso's rose by about 2.25% against the dollar in August and reached its best level since the run-up to the 2024 presidential election. The currencies that offer higher interest rates (greater carry) have significantly higher volatility. Brazil's Selic rate is at 14%, and Colombia's policy rate is at 12% compared with Mexico's 6.5% rate. The implied three-month volatility is over 15% for the Brazilian real and over 13% for the Colombian peso for example. At less than 1% of GDP, Mexico's current account is considerably smaller than Brazil and Colombia's, which are near 2.5%. Moreover, in the first half of the year, Mexico's exports of AI-related hardware (primarily computer servers and data processing equipment) surged to by around 170% to almost $83 bln and surpassed the traditional automotive and auto-parts sectors, with nearly $75 bln of exports. Worker remittances have sent another $30.6 bln of hard currency into Mexico in H1 (about $1 bln more than in H1 25). The biggest risk to Mexico comes from the pressure from Washington on tariffs and trade. President Sheinbaum's approval rating is off the 80% highs seen previously but it is hovering the 65%-70% area, which gives her space. Reports suggest she may support measures that reduce the use of cash in an attempt to curb tax evasion and corruption. As has been the case this year, the market has tended to be more pessimistic towards the peso than we feel warranted. The median forecast in Bloomberg's survey for year-end is MXN17.50. We expect the correction that began in recent days to lift the greenback toward. MAN17.15-MN17.20

Spot: MXN17.0360 (MXN17.3426) Median Bloomberg One-month forecast: MXN17.2680 (MXN17.39) One-month forward: MXN17.0765 (MXN17.4470) One-month implied vol: 6.3 (7.6%)

Chinese Yuan: While the US 10-year premium over China widened to more than 300 bp in August, which is nearly a record, and economic activity has disappointed, Beijing has facilitated the continued gradual appreciation of the yuan. The yuan has appreciated by nearly 4% this year against the dollar and all but a handful of the world's currencies so far this year. Given the production cost differentials, China's near monopoly on range of production, and China's low inflation, the yuan's appreciation is not sufficient address the domestic imbalances or stem the criticism especially from the US and Europe over the undervaluation of the yuan. China’s Ministry of Finance unveiled new measures in late August, aimed at boosting spending on big-ticket items such as vehicles and home renovations, with more action pledged for later in the year. Officials also raised the maximum interest-subsidy payout for qualifying consumer loans, lifting the per-individual cap from 3,000 yuan to 5,000 yuan (US$743). It also broadened the coverage of the loan interest-subsidy policy for micro, small and medium-sized enterprises to include working capital loans. Given the magnitude of the challenge, these measures, like the yuan's appreciation, seem too modest to have significant impact. On balance, we expect the yuan's gradual appreciation, which seems to be in place since April 2025 will continue, though ahead of the Xi-Trump meeting in late September, it may consolidate. Still, we suspect that the median forecast in Bloomberg's survey for the dollar to finish the year at CNY6.70 may be too modest.

Spot: CNY6.7290 (CNY6.7515) Median Bloomberg One-month forecast: CNY6.7494 (CNY6.7525) One-month forward: CNY6.7650 (CNY6.7525) One-month implied vol: 2.4% (2.3%)

Disclaimer

All Eyes on Warsh

noreply@blogger.com (Marc Chandler) — Fri, 28 Aug 2026 06:46:03 -0400

The G10 currencies have been in a relatively narrow range this week and this persists ahead of the new Fed chair’s speech at Jackson Hole today. Warsh is an awkward position. First, the main thrust of his brief tenure that the evolution of central banking in the past couple of decades has been misguided, and that the emphasis on forward guidance and transparency has distorted the signal from the millions of market participants. Second, he has to contend now with the Treasury Secretary seemingly pushing in the other direction. Bessent is doubling down the bill issuance and bond buybacks that he was critical of Yellen and Biden for previously. He claims to know better than the market where long-term yields ought to trade.

The escalating trade war between the US and Canada weighed on the Canadian dollar this week. It is off about 0.65%, the heaviest of the G10 currencies this week. The Australian dollar is the strongest, up about 0.40% encouraged by the swing in sentiment toward another rate hike this year. Despite Japanese data that has seen the odds of a BOJ hike rise for next month and in Q4, the yen has been unable to find traction. It is off a little almost 0.5% this week, ahead of the North American session and is approaching its worst level since the intervention.

Prices

G10

• The euro has slowly bled lower this week. It has taken out the previous session’s low in the first four sessions of the week after stalling near $1.1710 following the US Treasury’s bond buyback announcement last week. The euro is trading marginally heavier today, but yesterday’s low remains intact (slightly below $1.1640). The euro held the 200-day moving average (~$1.1635) and steep trendline off the late July lows. Still, it looks vulnerable as the daily momentum indicators are only turning down.

• The dollar traded gingerly against the yen yesterday. Buying interest dried up after pushing above JPY159.50. It held above JPY159.25 in the NY afternoon. The greenback recovered, despite the firm Tokyo CPI, unexpected decline in the unemployment rate, and slightly higher odds in the swaps market for a hike next month. The US dollar rose to JPY159.70 in Europe. The post-intervention high was recorded last week near JPY159.80.

• Sterling recovered from a six-day low near $1.3570 as North American markets were beginning to open to reach a new session high slightly above $1.36 before European markets closed. It settled back within Wednesday’s range. It is trading uninspiringly in about a 20-tick range below $1.3600 today. It, too, looks vulnerable, as we head into next week, with the daily momentum indicators turning down in overbought territory.

• Despite the reported absence of talks between the US and Canada, and the US escalation threat (not just to tariff but to ban some Canadian goods), the Canadian dollar enjoyed a slightly firmer tone. The greenback held slightly below Wednesday’s high and settled near CAD1.3860. It is in a particularly narrow trading range today of a little more than 10-ticks. The US dollar slipped briefly below CAD1.3850 late in the Asia Pacific session but caught a better bid in Europe and recovered back to CAD1.3860. Options for a little more than $400 mln at CAD1.3875 expire today. Recall, the greenback settled around CAD1.3760 last Friday and opened in Asia Pacific on Monday near CAD1.3785.

• As the market sees a greater likelihood of another rate hike by the Reserve Bank of Australia, as early as next month, the Australian dollar’s uptrend since the end of June (~$0.6865) extend to slightly above $0.7200 today and traded at its best level since mid-May. The roughly four-year high was recorded in early May slightly shy of $0.7280. The Australian dollar is the only G10 currency that has risen against the US dollar this week. It has appreciated by about 0.35%. It is the fifth consecutive weekly gain and the 8th in the past nine weeks.

• The dollar traded firmly but quietly against the Mexican peso yesterday. It reached a six-day high near MXN16.9965, holding just below the MXN17.00 level. The greenback has edged higher each session this week after falling for the past five consecutive weeks. It is consolidating within yesterday’s range so far today. It is trading quietly between about MXN16.9590 and MXN16.9825.

• The dollar continues to grind in a narrow range against the Chinese yuan. This week it traded between about CNH6.7130 and CNH6.7265. The dollar settled near CNH7.7210 last week. Recall, it traded a narrow range around CNH6.75 for most of the first half of August. The PBOC set the dollar’s fix at its lowest level of the week today (CNY6.7811 vs. CNY6.7829 yesterday and CNY6.7817 last Friday).

• The dollar traded on both sides of yesterday’s range against the Indian rupee today and posted its lowest settlement in two weeks, near INR95.3850. It is the first advancing week for the rupee in three weeks and is slightly higher here in August, headed into the last session of the month on Monday.

Other Markets

• Equities traded higher in the Asia Pacific region today, perhaps encouraged by the Nasdaq composite, which gapped higher yesterday after Nvidia’s earnings and solid close. It entered but did not close the gap created with the sharply lower opening on August 18. That gap extends to ~26626. The S&P 500 has a similar gap and the top of it is almost 7745. The S&P and Nasdaq futures are trading with a heavier bias. China and South Korea were notable exceptions among the large bourses in the Asia Pacific region and failed to participate in today’s advance. Europe’s Stoxx 600 is up a little more than 0.5%, which if sustained would be the largest gain this week.

• Benchmark 10-year yields mostly edged higher in Europe yesterday and the US Treasury yield rose 3 bp. Yields are higher today. The firm Tokyo CPI and lackluster two-year bond auction today saw the 10-year yield rise a little more than four basis points. It was practically flat on the week coming into today. European yields are 1-3 bp higher on the day and week. The 10-year US Treasury is slightly firmer but is down a little more than a basis point on the week.

• Gold recovered from a four-day low, slightly below $4566 yesterday. It bounced by about $50 before stalling. It consolidated in the NY afternoon above $4600. It is trading inside yesterday’s range. Gold settled near $4603 last week, and a higher close this week would be the fourth consecutive weekly advance. It would match the longest streak of the year. Silver is pushing above $70. It reached almost $71, its best level since June 17. It settled near $69 last week, and barring a reversal, is extending its recovery for the fourth consecutive week, as well.

• October WTI spent yesterday inside Wednesday’s range. It recorded the session high, near $83.25 in late NY turnover. It is consolidating quietly today, between about $82.55 and $83.80. It settled slightly above $87 at the end of last week.

Data

• As Fed Chair Warsh begins speaking at Jackson Hole today (10:00 am ET), preliminary benchmark revisions of the level of jobs in March 2026 will be announced and the University of Michigan’s final August consumer confidence will be reported. It seems unreasonable to expect the Warsh to be any more forthcoming about the outlook for Fed policy than he was at his first two press conferences. He is not waiting for the taskforces to complete their work before shifting gears. Warsh, however, is in an unenviable position of likely explaining to his colleagues and central bankers from all over the world that they have been moving in the wrong direction for the better part of the last couple of decades. The evolution has been toward greater transparency and visibility. Note, also the seeming contradiction between Warsh and Bessent. The Fed chair argues that the market’s signal, if it were focused on economic forces instead of the central banks’ reaction function, it would generate a more useful signal. The Treasury Secretary says he knows better than the market the “right” level of long-term interest rates and oil.

• Canada is expected to report a strong rebound in growth in Q2 after contracting in the previous two quarters. The median forecast in Bloomberg’s survey is for 3.4% growth at an annualized pace. The economy contracted by about 1% in Q4 25 and by a little more than 0.1% in Q1 26. If it is reported as expected, it will be the strongest growth since Q1 23. However, the escalating trade war can be a serious headwind, even with stepped up government support for the targeted sectors. The swap market has slashed the odds of a Bank of Canada rate hike this year from almost 85% at the end of last week to slightly less than 50% now.

• Japan machine tool orders continue to surge. The surge began last September and no month this year has seen less than 24% increase year-over-year. The final July reading was confirmed at 50.4%. Domestic and foreign orders rose by a little more than 50%. However, both slipped last month. After jumping 28% in June, domestic orders pulled back 8.2% in July. Foreign orders rose 10.4% in June and slipped 3.8% in July. Japan also reported that the unemployment rate unexpected slipped to 2.4% in July from 2.5%. However, with an eye toward next month’s Bank of Japan meeting, Tokyo’s August CPI was the most important data point today. August CPI ticked up but needs to be placed in the context of the previously announced downward revisions to the July series. The headline pace stands at 1.9%. June’s 2.0% rate was revised to 1.8%. The core rate is at 1.8% after June’s 1.7% (revised from 1.9%). The swaps market is discounting about an 85% chance of a hike next month, up a little on the week and more than double the chances since the end of last month. About 16 bp of a Q4 hike is discounted, which is also up slightly on the week, and compares with almost 4 bp at the end of last month.

Disclaimer

Greenback Edges Higher

noreply@blogger.com (Marc Chandler) — Thu, 27 Aug 2026 06:47:08 -0400

In the relatively quiet conditions that have prevailed this week, the US dollar is trading with a mostly firmer bias. Rising US rates amid the technically oversold short-term market are lending the greenback support. The dollar remains firm against the yen, even though the Deputy Governor of the BOJ seemed to support speculation of a rate hike next month. US rates seem to fit better with changes in the exchange rate than Japanese rates.

It appears, unsurprisingly, that Russia and China have formally rejected adhering to the US economic chokehold on Iran. Without their participation in “Operation Economic Outcast”, the US policy seems to be a way to disengage with making such a declaration. If it is retreating from the war in Iran, it is threatening to escalate the trade war with Canada. Trade Representative Greer has threatened banning some Canadian imports to the US. Given the asymmetries, the Canadian dollar has held its own so far this week. It is off about 0.25%, a middling performer in the G10.

Prices

G10

• The euro was sold to a five-day low yesterday near $1.1640. That is about the midpoint of the euro’s rally since the US Treasury announced it would double the bond buyback. It has not traded above $1.1660 today and it has slipped through yesterday’s low in the European morning by a few hundredths of a cent. The 200-day moving average is around $1.1635 and the (61.8%) retracement is near $1.1625.

• The dollar held below Tuesday’s high (~JPY159.50) against the yen yesterday but still posted its highest settlement in six sessions (~JPY159.30). It is has taken out yesterday's high marginally today in Europe. The five-day moving average crossed above the 20-day moving average for the first time since the last July intervention. We continue to suspect the market wants to challenge the Bank of Japan and the US Treasury despite the increased recognition that the BOJ may hike rates twice before the end of the year. Higher oil prices an and higher US yields could provide macro cover. The high since the intervention was on August 18 slightly below JPY159.80.

• Sterling fell by about 0.4% yesterday, one of its biggest losses in a month. It reached a five-day low slightly below $1.3585. That nearly met the (61.8%) retracement of the gains since the US Treasury’s announcement about bond buybacks. The losses are being extended today to almost $1.3570. The next technical area of support may be $1.3335-60. Options for GBP840 mln at $1.3550 expire today.

• The Canadian dollar remains under pressure since the dramatic escalation in trade tensions with the US. Consistent with our correlation work, the weakening of the Canadian dollar has taken place as Canada’s discount to US two-year rates widened to 128 bp yesterday, the most in nearly three weeks. The US dollar traded to almost CAD1.3895. It has held below there today, but there is no top in place. We have noted initial resistance near last week’s highs (~CAD1.3910). Above there, we are looking at the 20-day moving average (~CAD1.3920) and then the CAD1.3950-60 area. US Trade Representative Greer is threatening to ban some Canadian goods as part of the trade conflict.

• The Australian dollar reached nearly $0.7190 yesterday, its best level since June 1. It stalled, and what appeared intraday profit-taking sent it back to $0.7165. The five-day moving average is there, as well, and the Aussie has not closed below it for two weeks. It is firm as the yesterday’s CPI data and today’s reported household spending boosts expectations of another rate hike.

• The dollar traded on both sides of Tuesday’s range against the Mexican peso yesterday. Although it settled within the range, the risk still seemed to be on the upside. The momentum indicators are oversold after falling for the past five consecutive weeks. It is difficult to quantify, but given the US-Canada blow-up, the odds that USMCA does not survive would have had to increate. The dollar has edged up a little above MXN16.99 today. A move above MXN17.00 runs into last week’s high slightly below MXN17.08. The 20-day moving average is closer to MXN17.10 and the MXN17.1365 area is the (38.2%) retracement of the greenback’s losses since the late July high (~17.54).

• After it settled below CNH6.72 on Tuesday for the first time in 3 ½ years, the dollar recovered and settled firmer against the offshore yuan, near CNH6.7225 yesterday. It is consolidating quietly today, straddling CNH6.72. The firmer dollar seemed to incline the PBOC to raise the fix today and it did (CNY6.7840 vs CNY6.7829 yesterday).

• The Indian rupee slipped as the market re-opened from yesterday’s holiday. Higher oil prices and a broadly firmer US dollar weighed on the rupee. The rupee’s gain on Tuesday (~0.35%) was the largest in nearly a month. The dollar reached almost INR95.39 on Tuesday and rebounded to INR95.56 today. Last week’s high was a little over INR95.76.

Other Markets

• Higher rates and oil seemed to deter US equity investors ahead of Nvidia’s earnings. But its earnings seem to help some tech stocks in a mixed Asia Pacific performance today. South Korea’s Kospi 1.5% gain was notable. It was among the strongest in the region despite the back-to-back rate hikes by the central bank (the base rate is now at 3%). The won barely rose. Europe’s Stoxx 600, light on technology, is off 0.4% in the European morning, which if sustained would be the largest loss in a week. Nasdaq futures are up around 1%, while the S&P 500 futures are up a little less than half as much.

• Benchmark 10-year yields rose and settled mostly 3-5 bp higher in the US and Europe yesterday. Rates are mostly firmer today. In Europe, the increase is 1-2 bp, while the 10-year US Treasury yield is up 2 bp and to nearly 6.67%.

• Gold’s five-day rally ended with a bang yesterday, and the yellow metal gave back a little more than the past two days of gains. It fell by 1.3%. It is trading with a heavier bias today and has fallen to a four-day low, slightly below $4579. If the leg up in gold, like we saw in the currencies began with the US Treasury’s buyback announcement, the first corrective target may be near $4555. It looks like silver hit a brick wall near $70. It recorded an inside day yesterday but looks vulnerable, though it remains within Tuesday’s range (~$67.45-$69.95).

• October WTI recovered a dip below $80, its first since August 14 to record session a session high near $83.30 around midday in NY. It has held above $80 today and is hovering near $82 ahead of the North American open. Last week’s high was almost $87.70.

Data

• The US reports the advanced goods trade deficit today, retail and wholesale inventories, weekly jobless claims, and the Kansas City Fed’s August manufacturing survey. Because of the front-running of US tariffs last year, the improvement in the US trade balance is distorted. Still, in H1 26 the overall US trade deficit was about $534.8 bln compared with $716.6 bln in H1 25 and $558 bln in H1 24. Price changes also impact these nominal figures. The inventory data tend not to elicit much of a market reaction, but they are inputs into GDP forecasts as is the real trade balance. Recall that in Q2, net exports subtracted about 1% from GDP and inventories were a 0.7% drag. Weekly initial jobs claims show the continued resilience of the labor market. The four-week moving average fell five weeks in a row through the end of last month and has risen slightly to stand at 204k in mid-August. It likely rose again as the dip below 200k in mid-July drops from four-week period.

• Canada reports the results of its June establishment employment survey. The market seems more responsive to the household survey that is reported in a timelier fashion. StatCan will provide an estimate of the Q2 current account balance ahead of tomorrow’s first estimate of Q2 GDP. Canada’s quarterly current account has been in deficit since Q2 22 and looks likely to have swung into surplus in Q2 26. The economy contracted in Q4 25 (1.0% annualized) and Q1 25 (0.1% annualized). The economy is expected to have recouped the lost ground in Q2. The median forecast in Bloomberg’s monthly survey is for 3.2% growth, and the weekly survey produced a median forecast of 3.4%. Still, the escalating trade war with the US will most likely have a negative impact in Q4.

• Mexico reports its July trade balance today. Mexico’s trade balance is a notable bright spot for the economy. The trade surplus in H1 26 was about $9.86 bln compared with a surplus of $1.43 bln in H1 25. Exports have risen by a 10.7% in H1 26 and imports have risen by 7.7%. Yesterday, the central bank increased this year’s GDP forecast to 1.5% from 1.1% and shaved next year’s CPI projection to 2% from 2.1%.

• The eurozone reported M3 money supply rose by 3.4% year-over-year in July from 3.3% in June. It is the fastest growth since June 2025. Lending to households rose 3.1% year-over-year, up from 3% in June. Lending to non-financial firms accelerated to 4.4% year-over-year from 4.0%.

• Yesterday’s firmer than expected Australia’s CPI has been followed by news today that higher rates have not deterred Australian household spending. It rose 1.1% in July (vs. the median forecast in Bloomberg’s survey for a 0.3% increase, and the June series was revised to 1.0% from 0.8%). Even though private capex unexpectedly fell in Q2 (-3.6% vs. the median forecast in Bloomberg’s survey for a 0.8% rise), the Q1 increase was revised to 6.9% from 6.5%. rose 0.8% in Q2 after surging 6.5% in Q1. The takeaway is that the futures market is now discounting about almost a 50% chance of a hike next month compared with slightly more than 10% at the end of last week. A hike before year-end is fully discounted now. At the end of last week, pricing was consistent with almost a 60% chance.

• For the first time in three weeks, Japanese investors sold foreign bonds last week. The JPY1.98 trillion sales were the largest weekly liquidation since early April and the start of the new fiscal year. Japanese investors also sold foreign stocks for the first time in three weeks. The nearly JPY870 bln sales were the most since early June.

• China reported July industrial profit growth slowed to 11.2% year-over-year in July from 15.1% in June. It was the third consecutive month of slowing on a year-over-year basis. The aggregate figures conceal the divergence between the strong performance of the high-tech sector, which accounts for more than half of this year-to-date growth.

Disclaimer

Consolidation Persists in the FX Market

noreply@blogger.com (Marc Chandler) — Wed, 26 Aug 2026 06:46:47 -0400

The US dollar is enjoying a slightly firmer tone against most of the G10 currencies. However, for the most part, ranges tend to be narrow, and the consolidative one seen this week persists. Oil prices have extended their pullback amid reports that Iran and Oman are discussing an “interim framework” to re-open the Strait of Hormuz. The US is reportedly preparing for its diplomats to return to embassies in the region, which is seen as a sign that the administration does not anticipate renewed full-scale hostilities.

The US has threatened more retaliation against Canada as the trade war broke out when trade talks failed has pushed the Canadian dollar to a new low for the week. The US dollar is trading near CAD1.3870 after it settled last week near CAD1.3760. More broadly speaking, backed by firmer US rates, we see scope for additional dollar gains in North America.

Prices

G10

• The euro traded in about a 30-pip range above $1.1650 yesterday. It reached the four-day low early and settled near session highs recorded in the NY afternoon. The euro is trading with a heavier bias today. It held below $1.1680 and so far, has not traded below $1.1660. Options for about 1 bln euros at $1.1675 expire today.

• US interest rates softened yesterday, and Japanese rates rose on Tuesday, but the yen remained weak. The dollar spent yesterday above the 20-day moving average (~JPY158.75 today) for the first time since before last month’s intervention. Last week’s post-intervention high was about JPY159.80. The greenback is trading a little heavier today and is hovering in a narrow range around JPY159 where options for around $985 mln expire today.

• Sterling remained firm yesterday and consolidated within Monday’s ~$1.3620-55 trading range, which is taking place within the range set last Friday (~$1.3620-$1.3675). It is heavier today and has frayed $1.3620. A convincing break could see $1.3580-$1.3600. Options for ~GBP525 mln at $1.3625 roll off today.

• The Canadian dollar steadied yesterday. Its trade-war-inspired losses on Monday were initially extended, but the Canadian recovered in North America. However, the Canadian dollar is again on the defensive, and the greenback is trading a new high for the week as it pushes CAD1.3870 in the European morning. Nearby resistance is seen around last week’s highs, slightly above CAD1.39, and the 20-day moving average is near CAD1.3920. Recall that at the end of last week, when a trade deal, we were told was in hand, the US dollar settled around CAD1.3760 and began this week after the talks collapsed near CAD1.3785.

• The Australian dollar continued to consolidate in the upper half of last Friday’s range (~$0.7110-$0.7180). Yesterday, it recovered from a brief dip below $0.7140 to set new session highs in North American turnover around $0.7165. Follow-through buying, inspired arguably by the firmer July CPI, has lifted the Aussie to ~$0.7185. It has not traded above $0.7200 since the end of May.

• The dollar consolidated in a narrow range against the Mexican peso yesterday. Its roughly MXN16.9250-MXN16.9660 range was in the upper end of Monday’s range. It is trading quietly today, mostly in yesterday’s range, though the low has frayed a little. Monday’s low near MXN16.8875 was a new low since the run-up to the mid-2024 presidential election. The Mexican peso has appreciated by about 2.4% this month, putting it atop the other regional currencies.

• The dollar rose to the upper end of -day range against the offshore yuan before reversing lower and settled below CNH6.72 for the first time since February 2023. The dollar is in about a CNH6.7150-CNH6.7210 range today. The softer greenback seemed to give the PBOC little choice but to weaken the dollar’s fix and it lowered it for the first time in four sessions (CNY6.7829 vs. CNY6.7852)

• A national holiday in India today has shut the banks and foreign exchange market, but the equity market was open and slipped lower. The rupee had its best day in a month yesterday when it gained about 0.35% against the US dollar. The pullback in oil prices, ongoing central bank intervention, and the approaching end of the special facility for overseas deposits (August 31).

Other Markets

• The decline in interest in Europe and the US, the continued pullback in oil prices may be helping lift equities today. The large bourses in the Asia Pacific region but Australia, India, and Singapore rose. Europe’s Stoxx 600 is edging higher today extending the recovery from a seven-day slide for the fourth consecutive session today. The major US indices settled higher on the day but slightly below opening levels. They are narrowly mixed now. Nvidia will report earnings later today, and that is drawing much attention.

• Benchmark 10-year yields in the Asia Pacific region played catch-up today after the strong bond rally in Europe and the US yesterday. The 10-year JGB yield slipped a single basis point, but South Korea and New Zealand yields fell by a little more than four basis points. European yields fell mostly between five and seven basis points yesterday and are up less than one today. bp higher today. The 10-year US yield finished near 4.63% yesterday and is near 4.65% now.

• Gold appears to have forged a near-term base near $4600. Although it did not sustain the upside momentum that carried it to almost $4700, a three-month high, in the upper end of Monday’s range. It is trading heavier today. A break of $.4600 would see $4555 next. Silver, too, recovered. It bounced off a three-day low (~$67.45) and traded above $69. It continues to knock the recent high near $70. It is consolidating today inside yesterday’s range.

• October WTI butted against the $87.70 area at the end of last week and with today’s decline to about $79.60, it has fallen $8. It has retraced a little more than half of the run-up from the month’s low on August 5 (~$73.10). The next retracement target is near $79.65.

Data

• The US economic diary is busy today and it all takes place at 8:30 ET. Personal consumption expenditures may have eked out a 0.1% gain, which would be the smallest increase since the outright decline (-0.3%) in January 2025. When adjusted for inflation, consumption looks flat. Income growth may be stable at 0.2%. Savings may have ticked up. The release of the US CPI and PPI removes much of the guess work from the PCE deflators. The headline is expected to rise by 0.1%, which given the base effect, may allow the year-over-year rate to slow to 3.6% from 3.7%. The expected 0.2% rise in the core rate will keep the year-over-year rate steady at 3.3%. Q2 GDP may be subject to revision from 1.5% July durable goods orders look steady at 0.5%.

• Mexico’s central bank releases its inflation report late in the North American session today. It has used this quarterly report to update its macroeconomic forecasts.

• Australia reported July’s CPI rose by 1.0%, the first increase since April. Still, the year-over-year rate slowed to 3.5% (from 3.8%), the slowest pace since last November. The trimmed mean was flat at 3.6% year-over-year. Expectations for next month’s central bank meeting were unchanged in the futures market at slightly less than 10%. After falling in the previous three months gasoline and diesel prices jumped (~7.5%). The partial unwinding of the fuel excise discounts helped lift prices.

• Japan’s leading economic indicators elicit little market reaction, which is also the case for department store sales that were reported today. The July PPI service prices rose 3.6%, up from a revised 3.4% rise in June (initially 3.2%). The swaps market continues to discount about an 85% chance of a Bank of Japan rate hike next month. The BOJ hiked twice last year and once so far this year. Japan’s two-year yield has risen by about 18 bp this month. It is not clear that a 25 bp hike in September will help strengthen the yen. The short-dated (30-day) and longer-date (100-day) correlations between changes in the exchange rate and Japan’s two-year yield are low. Consider that the 100-day correlation reached a four-year high near 0.15 in late July and is now below 0.05. The 30-day correlation is slightly inverse.

Disclaimer

Oh, Canada

noreply@blogger.com (Marc Chandler) — Tue, 25 Aug 2026 09:35:58 -0400

The breakdown in U.S.-Canada trade talks weighed on the Canadian dollar and drove Canadian interest rates lower. That is hardly surprising. A trade war with an economy roughly 12 times larger is a more significant threat to Canada than to the United States. The asymmetry is economic, even if Ottawa believes it has some political leverage.

In the middle of last week, President Trump gave Canada a three-day grace period before imposing a threatened 50% tariff on roughly $20 billion of Canadian goods. Trump suggested that an agreement was close at hand. Prime Minister Mark Carney was less willing to declare victory. Several issues remained unresolved, he indicated, and the subsequent breakdown suggests that the differences were more than cosmetic.

Carney, however, appears to have a strong domestic hand. His approach has broad support at home, including from some of his political rivals. That matters. Retaliation is easier to threaten than to sustain, especially when the other side is so much larger. Yet Canada seems prepared to push back.

Carney has threatened to retaliate “dollar for dollar.” Ottawa has identified U.S. steel, dairy products, appliances, agricultural equipment, electronics, pulp, and paper as potential targets. The September 8 deadline leaves a small window for a last-minute compromise. Washington, meanwhile, has warned that Canadian retaliation could trigger further escalation. Yesterday, Trump threatened 50% tariffs on Canada's autos and unspecified products as of January 1.

This is important beyond the bilateral dispute. One reason international trade has held up better than many expected in the face of the Trump administration's tariffs is that most countries have not retaliated. The two notable exceptions are China and Canada. If Canada succeeds in extracting concessions by pushing back, it could embolden others to follow. That would change the character of the trade conflict. Tariffs are one thing. A broader cycle of retaliation is something else.

For Canada, however, escalation comes at an awkward time. The economy contracted in both Q4 2025 and Q1 2026. Q2 GDP will be reported at the end of this week, and the median forecast in Bloomberg's survey is for 3.4% annualized growth. If realized, it would be the strongest quarterly expansion since Q1 2023. A new trade shock could weaken the outlook just as the economy appears to be regaining its footing.

The market reaction has been instructive. The Canadian dollar remains especially sensitive to changes in the two-year interest-rate differential. The rolling 30-day correlation between the exchange rate and the two-year spread is near 0.72, among the strongest readings since 2017. The 60-day correlation is near 0.67, the highest since early 2018.

Yesterday, Canada's two-year yield fell nine basis points. The U.S. two-year yield slipped by less than a single basis point. The U.S. two-year premium over Canada rose by eight basis points to a little above 128 bp, the widest in roughly two and a half weeks. It is edging closer to 130 bp today. The message from the bond market is straightforward: a trade war is a more immediate economic problem for Canada.

That shift in the rate differential helped fuel the greenback's recovery against the Canadian dollar. Recall that the U.S. dollar bottomed near CAD1.3480 in late January, its lowest level since October 2024. It recovered toward CAD1.40 in early Q2 before slipping back to around CAD1.3550 in early May. From there, it trended higher through May and most of June, reaching this year's high near CAD1.4250 in late June—the strongest level since April 2025.

The greenback then fell for four consecutive weeks and in six of the past seven. By the time the trade talks broke down, momentum indicators were already signaling an oversold dollar.

Our initial assessment warned of upside risk toward the CAD1.3850-CAD1.3900 area. The lower end of that range was reached in Europe and North America yesterday. Last week's high was a little above CAD1.3900. The CAD1.3930 area is technically important: It marks a congestion zone from earlier this month, corresponds roughly to the 38.2% retracement of the dollar's decline from the late-June retest of CAD1.4250, and houses the 20-day moving average. A move above CAD1.3930 could encourage a test of the next retracement objective, slightly below CAD1.40.

The trade dispute is not the only factor driving the Canadian dollar. It rarely is. But the breakdown in negotiations has altered the near-term calculus. Canada's economy was only beginning to show signs of renewed momentum, and the prospect of a deeper trade conflict threatens to undermine it. The bond market has responded by widening the U.S.-Canada rate differential, and the foreign-exchange market has followed.

For now, the technicals and the macro story point in the same direction: the failed trade talks have given the U.S. dollar another reason to recover against the Canadian dollar.

Disclaimer

Dollar Mostly Little Changed, Oil Extends Pullback, and China Rejects US Unilateral Sanctions on Iran

noreply@blogger.com (Marc Chandler) — Tue, 25 Aug 2026 06:49:54 -0400

The US dollar is mixed against the G10 currencies. If it weren’t the nearly 0.3% decline in the Norwegian krone, fueled by the second consecutive of more than 2% in the price of Brent oil, the G10 currencies would be mostly +/-0.1% change today as narrow ranges prevail. The prospect of an extended trade war with the US continues to weigh on the Canadian dollar. Despite falling US yields, and a small rise in long-end Japanese government bonds, the market lifted the greenback to a four-day high against the Japanese yen near JPY159.50.

China has formally rejected the unilateral and secondary sanctions the US announced against Iran and anyone that trades with it. After the UAE cut off economic ties with Iran earlier this month, China is Tehran’s largest trading partner. US Treasury Secretary Bessent has hinted that a major financial institution may be sanctioned in the coming days. There is some speculation that it could be either one of the two large Chinese banks that reportedly received a formal warning letter from the US Treasury back in April. Such a move would ahead of next month’s Trump-Xi meeting could be especially disruptive.

Prices

G10

• The euro slipped to a new session low near $1.1655 yesterday, a three-day low. It made a marginal new low near $1.1650 in late Asia Pacific turnover and caught a bid in early European activity that lifted it to the session high near $1.1675. Yesterday’s high was slightly above $1.1685. Recall that twice last week, Europe bid the euro to around $1.1710 and North American participants sold it.

• Despite the nearly five basis point decline in the US 10-year yield yesterday, the greenback remained firm against the Japanese yen. Today, US yields are softer while the 10-year JGB yields rose, and the dollar reached a four-day high near JPY159.50. For two weeks, it has chopped between about JPY158 and JPY159.60-80. Many, if not most, observers are skeptical of the effectiveness of the recent intervention, but swaps market boosted the likelihood a hike BOJ hike next month to around 80% from less than 30% before the central bank action. The odds of another hike before the end of the year have risen to about 60% from less than 10% on eve of the intervention.

• Sterling recorded an inside day yesterday as it spent the session within the pre-weekend range (~$1.3620-$1.3675). It remains in that range today. The daily momentum indicators are overextended, but there may be scope for a marginal new high. A break of the $1.3590-$1.3600 area may be the first signal confirming a consolidative or corrective phase.

• The Canadian dollar was weakest among the G10 currencies yesterday. Its roughly 0.6% loss was the largest since the hawkish hold was delivered by the Federal Reserve at Warsh’s first meeting as Chair. The US dollar reached CAD1.3860 yesterday and slightly above CAD1.3865 today. The next technical target is in the CAD1.3900-10 area. The channel of transmission was thew two-year interest rate differential. The US premium widened by nearly 10 bp to almost 130 bp.

• After reaching $0.7180 before the weekend, the Australian dollar pulled back yesterday to about $0.7140. It made a marginal new low today before recovering to almost $0.7160. Although momentum indicators are stretched, there is potential to re-challenge last week’s high.

• The risk-off mood and a disappointing monthly IGAE measure, couple with a slight downward revision in Q2 GDP (1.4% vs. 1.5% quarter-over-quarter) weighed on the Mexican peso. The dollar rose to about MXN16.9735. With stronger risk appetites, it held today, and the dollar eased back to almost MXN16.93. Last week’s high was MXN17.07-MXN17.08. The Mexican peso fell by about 0.3% yesterday, its biggest loss in a month, and the high-flying Colombian peso dropped about 0.8%. The Brazilian real slipped by ~0.25%.

• After falling to a new marginal low since February 2023 yesterday against the offshore yuan (~CNH6.7130), the greenback recovered to CNH6.7255, the pre-weekend high, and marginally higher today. From a technical and fundamental perspective, we continue to see risks of some consolidation. The PBOC fixed the dollar slightly higher today, for the third consecutive session (CNY6.7852 vs. CNY6.7841 yesterday). Separately, but not totally unrelated, reports suggest that the US is considering an additional 7.5% tariff on Chinese goods over concerns about excess manufacturing capacity ahead of next month’s Xi-Trump meeting, and China rejects the unilateral sanctions on Iran.

• Apparently helped by intervention, the Indian rupee rose to a seven-day high today. The dollar fell to almost INR95.39 today. The 0.35% gain was the rupee’s biggest advance of the month. The dollar settled near INR95.4150, the first settlement below the 20-day moving average (~INR95.48) since last Monday.

Other Markets

• Equities are mostly firmer today. Most of the large bourses in the Asia Pacific region advanced but Hong Kong and the China’s CSI 300, but the regional MSCI index recovery from yesterday’s 1.2% fall was marginal. Europe’s Stoxx 600 was flat yesterday and is up nearly 0.5% today. US index futures are firmer today. The S&P 500 futures are about 0.55% higher after slipping almost 0.3% yesterday. The Nasdaq fell by about 0.75% yesterday and the futures contract is 1% higher today.

• Benchmark 10-year yields softened yesterday, ostensibly helped by the decline in oil prices. News wires cited a couple of Treasury officials suggesting the US bond buying effort could tap the Treasury’s General Account, which would create reserves in the banking system. Treasury Secretary Bessent has been critical of the “ample reserve regime” and it would complicate Warsh’s goal of reducing the Fed’s balance sheet. Heavier oil prices today have helped European yields fall around 2-4 bp today and the 10-year US Treasury yield is near 4.67%. It settled slightly below 4.70% yesterday.

• Gold’s four-day surge stalled near $4681 yesterday, its highest level in a little more than three months. Still, it settled above the pre-weekend high (~$4632). It reached slightly above $4696 today before it was sold a little below $4619. It is nursing small losses in the European morning. A break of $4600 could see $4540 initially. Silver has been capped near $70 for the past two sessions. It tried again today and failed. The disappointment led to some liquidation, and silver fell to a three-day low, slightly below $67.60.

• October WTI spent the last two sessions inside the range set August 20 (~$84.25-$87.70). It broke to the downside today and fell to almost $82, a six-day low. This met the (38.2%) retracement of this month’s rally (from ~$73 on August 5). The 20-day moving average is near $81.25 and the next retracement target is around $80.40.

Data

• Today’s US data includes house price, new home sales, building permits, a few regional Fed surveys and the Conference Board’s August consumer confidence survey. However, given the larger context, tougher economic sanctions on Iran, and threats to enforce other countries to comply, reports suggesting that the US Treasury could use its TGA (Treasury’s General Account) to buyback more government bonds, and Fed Chair Warsh’s speech tomorrow at Jackson Hole, there may be little more that headline risk with today’s reports.

• Mexico reports Q2 current account figures today. Despite Mexico’s trade surplus, it runs a small current account deficit. It was about 0.5% of GDP last year, and the IMF projects to be nearly the same size this year. The markets tend not to reaction much to the quarterly figure.

• Germany revised Q2 GDP to 0.3% from 0.2% and provided more details. Private consumption rose a meager 0.1% but it fell by 0.6% in Q1. Capex disappointed. It fell by 0.2% after a 1.3% contraction in Q1. Government spending edged up 0.1% after rising 0.9% in Q1. Separately, the IFO survey showed sentiment improved and the overall assessment of the business climate increased for the fourth consecutive month. At 88.8, it is at a new high since last August.

• The minutes from this month’s Reserve Bank of Australia meeting confirmed the hawkish hold message the market understood at the time. Several board members think that another interest rate hike may be needed, and inflation risks were to the upside. The market recognizes the central bank is in no hurry to hike rates again after three moves earlier this year. Still, the futures market has a little more than a 60% chance of another hike before the end of the year, up from slightly less than 60% at the end of last week. A softer July CPI reading tomorrow may not be sufficient to change views significantly. While headline CPI may slow to 3.3% (from 3.8%) the underlying trimmed mean may be stickier at 3.5% (from 3.6%).

Disclaimer

US -Canada Trade War Escalates, while US Seek to Choke the Iranian Economy

noreply@blogger.com (Marc Chandler) — Mon, 24 Aug 2026 06:44:52 -0400

The US dollar is trading higher against nearly all the currencies. Equity markets are mixed and bond yields are lower alongside oil prices. There are two major developments. First, the US and Canada trade talks broke down, and the risk is further escalation. Last week, President Trump has granted Canada a three-day grace period from the 50% tariffs on $20 bln of Canadian goods, even those that were protected by the USMCA saying a deal was struck. Canadian Prime Minister Carney was less sanguine and acknowledged that while progress was made, there were many unresolved issues.

The second development is that US economic sanctions on Iran are intensifying. Treasury Secretary Bessent has an editorial in today’s Financial Times and will hold a press conference later today to explain what the US economic operation will entail. There are not very thinly veiled threats against those who violate the US sanctions. A key question is China’s response, a month before President Xi is to visit Washington and meet with President Trump.

Prices

G10

• Ahead of the weekend, and for the second consecutive session, the North American market took advantage of the euro’s push above $1.1700 in Europe to sell it. While we recognize the US attempt to suppress long-term yields is dollar-negative, we have been cautious due to the over-extended momentum indicators. The euro has been sold to a three-day low near $1.1660 in Europe today. A break of the $1.1650 area lends supports our caution, a break of $1.1620 may be required to signal a technical correction.

• The market appears comfortable jobbing the dollar against the yen between about JPY158 and JPY159.80. There is a sense that the JPY160 level could spur an official response (verbal or material) to support the yen. The greenback rose to a three-day high of almost JPY159.30 today. It has frayed the 20-day moving average (~JPY159.20) for the first time since July 30.

• Sterling reached a six-month high ($1.3675) in Europe ahead of the weekend. North American participants pared sterling’s rise and sent it back to new session lows (~$1.3620). The pre-weekend low has held so far today. Additional support is near $1.36, and a break could spur an initial half-cent loss.

• The acrimonious breakdown in US-Canada trade negotiations and the mutual recriminations dragged the Canadian dollar lower today and it has reached its best level in three months ahead of the weekend. The greenback is rebounding from almost CAD1.3730 at lowest level before the weekend to almost CAD1.3845 and the 200-day moving average. Last week’s high was slightly above CAD1.3900. While the intraday momentum indicators are stretched, the daily indicators have just begun turning. The US has threatened to retaliate, and the risk is for more escalation. Canada is the only other country besides China that has retaliated against the US tariffs. If Canada succeeds, others might be emboldened.

• The Australian dollar reached almost $0.7180 in the North American session ahead of the weekend. It settled above the upper Bollinger Band (~$0.7170 today). The $0.7200 area offers stronger resistance, especially given the stretched momentum indicators. It is trading quietly today in a narrow range of almost 20 ticks in the upper end of last Friday’s range. A break of $0.7135 would suggest the consolidative/corrective phase may be at hand.

• The Mexican peso finished last week at its best level since mid-2024. The dollar hovered near MXN16.91. The dollar made a marginal new low today near MXN16.8875 but is near MXN16.93 in late European morning turnover, and the risk-off mood makes in vulnerable in the North American session. Previous support around MXN17.00, now functions as resistance.

• The offshore Chinese yuan appreciated by about 0.35% against the dollar last week, its biggest weekly advance in two months. The US dollar was sold to a new low today, slightly below CNH6.7130 but has recovered and is now probing near last Friday’s high (~CNH6.7255). We had thought that Beijing might be inclined to signal consolidation as the Trump-Xi meeting draws close, but as ironic as it might sound, the market appears to have forced its hand a bit. Still, the PBOC set the dollar’s reference rate higher for the second consecutive session. Today’s fix was at CNY6.7841 and CNY6.7817 end the end of last week. Last week’s low, on Thursday was CNY7.7808, was the lowest since February 2023.

• The Indian rupee traded softer today but remained with the range seen in the second half of last week. Last week’s dollar high was near INR95.7635 and today it was capped at INR95.75, where it settled.

Other Markets

• Equities are mixed today. but mostly lower. The S&P 500 gapped lower last Thursday and was not able to close it before the weekend. Despite the better performance on Friday, a small upside gap remains, which extends to a little above 7700. The Nasdaq Composite gapped lower last Tuesday and Wednesday attempt to close it failed. Support was found in the last two sessions, near 26000. The gap from earlier this month extends to about 25967. Nasdaq futures are off around 0.5% and the S&P futures are off around 0.15%. Asia Pacific bourses were mostly lower today, with China’s CSI 300, the Hang Seng, and the Taiex fell more than 1% and the Kospi was tagged for a little more than 3%. Australia was a notable exception and rose almost 0.50%. Europe’s Stoxx 600 is hovering around little changed level after the pre-weekend gain of almost 0.6% snapped a seven-day slide.

• Despite Treasury Secretary Bessent’s claims that he knows better than the market and attempts to cap yields, the US 10-year note yield rose to slightly above 4.74% ahead of the weekend, less than a half of basis point from the year’s high. It rose by around 4.5 bp last week. The 30-year bond yield rose almost two basis points to settle near 5.28%. The multiyear high was recorded last Tuesday, slightly above 5.33%. Yields are lower today. European benchmark rates are 1-2 bp lower and the 10-year US yield is off almost three basis points.

• Gold advanced $110 an ounce before the weekend, its second advance last week of more than 2% to settled about 5.7% higher on the week. It reached $4632, its best level in three months. Gold’s gains have been extended to almost $4660 today. The $4769 area corresponds to the halfway mark of decline from the record high in late January (~$5595.50) and is where the market stalled in May. For its part, silver traded above $70 before the weekend, for the first time since mid-June’s FOMC meeting. It is trading quietly in the upper end of last Friday’s range. A move above $70.50 could spur a test on the 200-day moving average (~$72.25), which gold has settled above for the past three sessions.

• October WTI consolidated ahead of the weekend in a roughly $85.80-$87.50 range. The US economic stranglehold that is threatened is bound to trigger a disruptive reaction by Tehran. Toppling the regime may prove to be a different kettle of fish. US Treasury Secretary Bessent ahs an editorial in the Financial Times urging others to join the US sanctions against Iran with a threat of secondary sanctions. He is expected to hold a press conference at 2:00 pm ET today to discuss the economic chokehold on Iran. October WTI has rallied about 12% in the last two weeks and entered today with a six-day rally in tow. It is off about 2.25% today.

Data

• What is a busy week of US economic data begins slowly with only the July Chicago Fed’s National Activity on tap today. It typically does not elicit a response from the market. We note that it contracted on average by -0.17% in Q1 and by -0.05 in Q2. We know that the economy grew by 2.1% in Q1 and 1.5% in Q2 (at annualized rates).

• Mexico has a busy day. It offers another look at Q2 GDP, which was initially estimated at 1.5% quarter-over-quarter. It followed a 0.6% contraction in Q1. The estimate for Q2 GDP is the strongest since end of 2020. With Q2 in hand, it renders the June IGAE Economic Activity report superfluous, which serves as a monthly GDP estimate. Inflation for the first half of August will also be reported. The headline rate has fallen from about 4.6% in mid-March to 3.10% in mid-July. It rose in late July for the first time since mid-March and may have edged up in the first part of August (3.2% median forecast in Bloomberg’s survey). The core rate has been stickier. It had been above the 2-4% target range from late May 2025 until the second half of June 2026. It steadied slightly below 4% in the second half of June.

Disclaimer

Week Ahead: Warsh at Jackson Hole

noreply@blogger.com (Marc Chandler) — Sat, 22 Aug 2026 07:03:12 -0400

Introduced by the Nobel-prize winning economist Paul Samuelson in the late 1930s, "revealed preferences" says to look at what people are actually doing to determine their true preferences rather than what they say. Applying this to the US now suggests the administration is worried about the US Treasury market. Last week's announcement that the Treasury's bond buyback program will at least double starting early next month (to at least $32 bln a quarter) followed other measures to support the bond market. Earlier, the administration adjusted the capital requirement of large banks that will incentivize holding more Treasuries. The Genius Act provided the legal framework for stable coins to invest in US bonds. Reports of last month's intervention, indicating that the Treasury Department intervened to support the yen by selling euros not dollars is thought to be consistent with this too. If Japan did not want to sell US Treasury's, the Federal Reserve already had a facility in place for officials to repo them, and of course, large banks offer similar capabilities. Yet, just as market participants pushed back against the recent intervention yen intervention, the rise in oil prices, the chronic large budget deficits despite solid domestic demand helped lift the US 10-year yield back to the upper end of its recent range, above 4.70%.

As August winds down, the highlight this week is Fed Chair Warsh's speech at the Jackson Hole symposium on Wednesday, though Bessent has put the Treasury in play, too. Even before his taskforces made any recommendation, a new era at the Fed is apparent. And the recently released minutes showed he is seriously considering reducing the number of meetings to six from eight. His speech is likely to be aimed at a very high level and outline his criticism of the evolution of central banking over the last couple of decades. Meanwhile, the US Treasury will sell more than $180 bln of coupons (not including $28 bln two-year floating rate notes) and more than $265 bln of bills. Treasury Secretary Bessent has hinted at a new initiative to support yields, but it does not appear to include reducing the budget deficit, which is expected to be around 6% of GDP this year, let alone a debt-reduction strategy. The failure of US and Canada trade talks is a shock that will most likely weigh on the Canadian dollar, which has rallied for the past four weeks and in six of the past seven.

USA

Drivers: The Treasury's announcement that it was doubling its long-bond buyback injected a new dynamic into the mix and sent the greenback reeling. Ahead of Fed Chair Warsh's speech at Jackson Hole, the Fed funds futures have a hike before the end of year almost fully discounted.

Data: The US reports of slew of data but most are unlikely to pose more than headline risk. The PCE deflator, which the Fed had targeted, draws attention but with the CPI and PPI in hand, the market has a good handle on it. Outside of some rounding, it does not typically surprise. It is too early in the quarterly data cycle to have a firm grasp of Q3 GDP. The Atlanta Fed says it is tracking 4.0%, while median forecast in Bloomberg's survey is nearly half of that. Personal consumption, durable goods, and the advanced July goods trade balance may be useful but not decisive. There are several Fed surveys but often the market looks through them. Bloomberg's growth data surprise model is at its lowest level since early March. There are two highlights. The most important thing from the market’s point of view is Fed Chair Warsh's speech at Jackson Hole on August 26. A possible if not likely scenario is for Warsh to lay out his vision, knowing he is on the world stage. He is going against not only the continuity seen under the Bernanke, Yellen, Powell trilogy, but the evolution of modern central banking. It has moved to greater transparency and sharing of reaction functions and views of the economy. Moreover, the Great Financial Crisis and then again during the pandemic, the vast power of central banks became more evident to more people. Moreover, he is not the first head of a central bank that wants to review first principles. Isn't that what Baily did for the Bank of England and the adoption of scenarios, following Bernanke's recommendation? Isn't that what Powell tried with the average inflation rate? William Grieder's book, Secrets of the Temple, was written in 1987 when the Fed did not hold press conferences. It took the Fed another seven years to announce the results of its policy decision. They had to be ferreted out by "Fed Watchers" who poured over the Fed data to determine what it did. While Warsh may sketch his broad views about central banking, it is unreasonable to expect that he addresses the current monetary policy setting. Also, the BLS offers a preliminary estimate of benchmark revisions to nonfarm payrolls. This year's preliminary benchmark is potentially much more consequential than a routine statistical footnote. The monthly CES survey has been telling us one story about employment growth, while other indicators have increasingly suggested something weaker. The September 2025 preliminary benchmark said -911,000. The final number in February was still -862,000 on a non-seasonally-adjusted basis. In other words, the preliminary estimate was not some statistical curiosity that disappeared in the final data. It was telling us something real about the labor market. Ultimately, what will be generated is the March 2026 level error.

Prices: With a push delivered by the US Treasury's effort to suppress bond yields, the Dollar Index took a step lower in the middle of last week and consolidated weakly in the past two sessions. DXY reached 98.55, its lowest level since mid-May and slightly surpassed the (50%) retracement of the rally from the late January low (~95.55). Momentum indicators remain stretched but there appears to have been a fundamental shift, and participants should be attentive to a reversal pattern. The next retracement level is around 98.00.

EMU

Drivers: Over the past 30-sessions, the euro's correlation with changes in the two-year German yield is inverse slightly, which is to say that higher German two-year yields are correlated to a weaker euro. The more intuitive inverse correlation with changes in US two-year yields has slackened since the multiyear high in mid-June and is now near the least in four-months (~-0.48). The correlation between changes in the exchange rate and the 10-year Treasury yield is now around -0.30, compared with -0.70 mid-June. The rolling 30-day correlation of changes in euro and the Germany's 10-year has been inverse most this year. There was an exception for a few weeks in February, but it did not get above 0.15. It reached almost -0.65 in June before turning positive against from mid-July through early August and peaked near 0.22. It slipped back into inversion but ended the past week with an ever so slight positive correlation.

Data: The eurozone reports July M3 money supply growth and lending figures. The time series no longer captures the imagination of market participants. Nor do the EC's sentiment surveys typically move the market.

Prices: The euro is probing the (50%) retracement of the decline from the year's high in January (~$1.2080) found near $1.17. A sustained break of it targets the next retracement (61.8%) and May's high, around $1.18. The five- and 20-day moving averages are trending higher, but the momentum indicators are stretched, and the euro is fraying its upper Bollinger Band (a little above $1.17). The $1.1650 area may offer initial support.

PRC

Drivers: The closely managed US dollar-Chinese yuan has a higher correlation with the broad movement of the dollar (DXY) than US short-term interest rates (two-year yield). Over the past 30 sessions, the correlation with changes in the former is near 0.65 and about 0.40 with the latter. Changes in the dollar against the yuan and China's two-yield is around -0.25, near the most in five months. The offshore yuan closely tracks the JP Morgan Emerging Market Currency Index. Over the past 30 sessions, the inverse correlation has reached beyond -0.75. It was a little more than -0.80 in May and June, the most since early 2021.

Data: Beijing reports July industrial profits early on August 27. Chinese companies appear to rely on what is called "patient capital," bank-lending and in China's case, the banks are state-owned. In other countries, reliance bank capital rather than market capital allows companies to compete for market share rather than profitability. In June, China's industrial profits rose 15.1% year-over-year. In June 2025, industrial profits fell 4.3%.

Prices: Chinese officials are trying to manage the pace of the yuan's changes, but the direction is clear. It is at its best level against the dollar since February 2023. The dollar saw a low then a little below CNH6.70. Against the onshore yuan, the dollar's low then was closer to CNY6.69. The yuan's appreciation is being recorded even as the US 10-year premium over China is hovering around 300 bp, which has not been much larger since early last year when it reached 315 bp, the most in two decades.

Japan

Drivers: The market has changed. The 30-day correlations of changes in the exchange rate and US rates were the better fit that Japanese rates and this remains the case. However, the correlation with US rates has dramatically diminished. The correlation of dollar-yen and change in the US 10-year yield is near 0.20. It was above 0.60 when at the conclusion of the June FOMC meeting and fell to around zero earlier this month, the lowest since early 2023. The 30-day correlation with the US two-year yield is hovering near 0.25, a little above its low since peaking above 0.65 in May. Meanwhile, the exchange rate's correlation with the Dollar Index has trended higher in recent weeks. The weakest since March 2025 was seen in early July (~0.45). It is now near 0.75.

Data: Tokyo's August CPI on August 28 is the most important data point for Japan in the coming days. The headline has risen from 1.4% in March and May to 2.0% in July, the fastest pace of the year. The core measure, which excludes fresh food, has also risen for the past two months and stood at 1.9% in July, the highest since January. Tokyo's CPI is important because it is often a good guide the national figures, which will not be released for several weeks. A rise, especially in the core rate above the national target of 2%, will reinforce expectations for the BOJ hike. Pricing in the swaps markets is consistent with about an 85% chance of a move when the September 17-18 meeting concludes. At the same time, Japan's July jobless rate (2.5% in June) and job-to-applicant (1.18 in June) will be reported. The market will likely be more sensitive to Tokyo's CPI.

Prices: The US Treasury's stepped-up bond buy-back program helped arrest the market's challenge to the central banks' resolve, as the greenback approached JPY159. The market seems to recognize JPY160 as a likely pain threshold for officials. The announcement drove the dollar back to JPY158. Still, when everything was said and done last week, the US dollar was still straddling the JPY159 area ahead of the weekend. In the first two weeks after the intervention, Japanese investors took advantage of the stronger yen to buy more foreign stocks and bonds.

Drivers: Over the past 30 sessions, the sterling is nearly as correlated with changes in the Dollar Index as it is with changes in the euro. The former is inversely correlated by a little more than 0.80 and the latter is positively correlated by about 0.82. The correlation between changes in sterling and the US two-year yield is a little more than -0.40, roughly half of where it bottomed after the June FOMC meeting. However, sterling remains inversely correlated with changes in UK two-year yields, but half of the correlation with US yields. It was positively correlated, mostly below 0.30, in the first two months of the year.

Data: There are no government reports in the week ahead.

Prices: Sterling reached $1.3675 before the weekend, its best level in six months. It rose by about 0.75% last week, its fourth consecutive weekly advance and the seventh in the past eight weeks. It overshot the (61.8%) retracement of the losses from the year's high in late January (~$1.3870). The next target may be in the $1.3700-10 area. The momentum indicators are stretched, and sterling frayed the upper Bollinger Band in the second half of last week. Initial support is seen in the $1.3570-$1.3600 area.

Canada

Drivers: While a trade deal seemed likely between the US and Canada seemed at hand, talks failed late Friday and the US threat of 50% tariffs on around $20 bln of a wide variety of Canadian goods went into effect early on August 22. Canada has threatened to retaliate "dollar for dollar." This unexpected development will likely drag the Canadian dollar lower on Monday. Meanwhile, the surge in the 30-day correlation with the US two-year rate differential has steadied in around 0.70. In mid-June, the correlation had been briefly inverse. The correlation between changes in the exchange rate and the Dollar Index has been edging higher since it bottomed earlier this month, a little below 0.60, its weakest since mid-June. It is now near 0.70. The correlation of changes in the exchange rate and changes in the US two-year yield (~0.35), and the inverse correlation of USD-CAD and the front-month NYM-NYMEX traded contract (~-0.23).

Data: There are two Canadian data highlights in the coming days. The first is a look at the establishment employment survey. Unlike the US, which reports the establishment and household surveys at the same time, Canada separates them. It reports the household survey first, and then with a two-month lag reports the establishment survey. Like in the US, the two surveys are often difficult to reconcile. Through May, the household survey showed an average loss of 4.9k jobs, while the establishment survey found an average monthly gain of almost 19k. The June household survey estimated that 18.2k jobs were created after 87.8k in May. According to the establishment survey, 24.1k more people were on companies' payrolls. Although market's reaction of Canada's household survey is often overwhelmed by the reaction to the US employment report, Canada's establishment survey tends not to elicit a market response. The second data highlight is the first estimate of Q2 GDP. In Q1 26, the monthly estimate was net flat and the Q1 GDP contracted by 0.1% at an annual pace. The April and May monthly GDP prints show a cumulative 0.9% increase. StatCan estimates that the economy expanded by 0.2% in June for 3.4% annualized growth in Q2. The median forecast in Bloomberg's survey is for a more moderate 2.1% expansion.

Prices: The US dollar has trended lower against the Canadian dollar since it peaked in late June near CAD1.4250. It has fallen for the past four weeks and six of the past seven. It reached nearly CAD1.3730 ahead of the weekend, on the back of the broadly weaker US dollar and a little stronger than expected Canadian retail sales. On this pair, too, the momentum indicators are stretched and the Bollinger Band frayed. Given the technical condition and that unexpected collapse of what had looked like a trade deal, the short-term market has been caught wrongfooted. After settling near CAD1.3760 before the weekend, the greenback is likely to jump Monday. In terms of magnitude, we suspect it can rise into the CAD1.3850-CAD1.3900 area.

Australia

Drivers: The Australian dollar's 30-day correlation with the Dollar Index has been fairly stable in the 0.60-0.70 area in recent weeks. The correlation of the exchange rate with changes in the US two-year yield is a little above 0.50, the middle of the range since mid-June. For the past 30 sessions, changes in the exchange rate are around twice as correlated with changes in gold (~0.55) than changes in Australia's two-year yield (~0.27).

Data: Australia's CPI fell in May (-0.7) and June (-0.1%) and fell at an annual rate of 1.2% in Q2. July's CPI is due, but it is unlikely to spur much a market reaction. With the whiff of deflation and last week's July employment report, showing below average jobs growth, the central bank does not appear to be in a hurry to hike rates again after three hikes earlier this year. However, the central bank continues to keep the door open to additional moves. Inflation expectations remain elevated, and household spending remains firm. July household spending is due on August 27. The May-June increase of 2% was the strongest two-month performance since last October and November, i.e., before this year's rate hikes. The average monthly increase in H1 26 was 0.5% compared with 0.4% in H1 25.

Prices: The Australian dollar rose by about 1.3% last week, its biggest weekly advance since April. It was the fourth consecutive weekly gain and the seventh in the past eight weeks. The Aussie reached almost $0.7180 before the weekend, its best level since early June. Nearby resistance is seen in the $0.7185-$0.7200 area. Momentum indicators are overbought, and the Australian dollar settled above its upper Bollinger Band ahead of the weekend (~$0.7160). Initial support may be in the $0.7120-30 area.

Mexico

Drivers: Changes in the dollar-peso exchange rate have been most correlated with changes in the JP Morgan Emerging Market Currency Index. It is around -0.88. It reached the most extreme since late 2020 in mid-March near -0.90. The correlation with the Dollar Index is near 0.50. It reached a six-month low earlier this month, near 0.40. The correlation with changes in the US two-year yield has slackened from above 0.80 in June to almost 0.45 now. The greenback tends to rise against the Mexican peso as oil prices rise. The 30-day correlation reached slightly 0.75 in mid-July and fell to almost 0.40 earlier this month but is back to almost 0.55 now.

Data: Mexico will take another look at Q2 GDP, when its initial estimate pointed to 1.5% quarter-over-quarter growth and 2.2% year-over-year. Recall that the economy contracted by about 0.6% in the first quarter, when the year-over-year pace was about 0.25%. Trade played an important role. Mexico recorded a $10.9 bln trade surplus in Q2 after a deficit of a little more than $1 bln in Q1. It was the largest quarterly surplus since Q4 2020. As we noted previously, with the help of Taiwan companies’ production in Mexico, the electronics and AI-related exports to the US now exceed auto trade. The July trade balance is due om August 27, a few hours before Mexico's central bank will update its economic forecasts in the inflation report. Officials will likely find comfort in the economic recovery and gradual easing of price pressures. At that start of the week, Mexico's inflation for the first half of August will be released. Mexico's July CPI was 3.12%. It peaked in March at 4.59%. The core rate was at 3.95% in July, the first sub-4% reading since April 2025. It peaked in February at 4.5%. The central bank targets 2-4% and aims for the midpoint. The central bank has reduced its overnight rate target twice this year to 6.5% (from 7.0%). The swaps market is pricing the next move as a hike and sees around a 50% chance before the end of the year.

Prices: The Mexican peso rose for the fifth consecutive week, and the dollar broke below MXN17.00 for the first time since the mid-2024 Mexican elections. The greenback made a new low before the weekend, slightly below MXN16.89. The low in 2024 was nearly MXN16.26. Dollar carry trades are fashionable again. The Colombian peso was the strongest emerging market currency last week, rising almost 3% against the greenback. The Colombian peso reached its best level since 2018. The dollar was sold to almost COP3028 on August 20 before consolidating ahead of the weekend. Colombia's policy rate is at 12.0% compared with 14% in Brazil and 6.5% in Mexico.

Disclaimer

Bessent Doubles Down, Dollar Slumps but Rates Little Changed

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

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

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

Prices

G10

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

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

Other Markets

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

Data

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

Disclaimer

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

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

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

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

Prices

G10

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

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

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

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

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

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

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

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

Other Markets

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

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

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

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

Data

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

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

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

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

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

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

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

Disclaimer

Three-Day Reprieve for Canada from US Tariffs

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

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

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

Prices

G10

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

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

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

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

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

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

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

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

Other Markets

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

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

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

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

Data

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

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

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

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

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

Disclaimer

The Dollar is Mostly Firmer but in Narrow Ranges

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

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

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

Prices

G10

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

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

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

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

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

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

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

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

Other Markets

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

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

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

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

Data

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

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

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

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

Disclaimer

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

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

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

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

Prices

G10

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

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

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

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

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

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

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

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

Other Markets

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

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

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

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

Data

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

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

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

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

Disclaimer

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

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

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

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

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

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

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

EMU

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

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

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

PRC

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

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

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

Japan

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

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

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

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

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

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

Canada

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

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

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

Australia

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

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

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

Mexico

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

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

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

Disclaimer

USD Trades Heavier and Look for North America to Follow Suit

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

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

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

Prices

G10

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

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

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

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

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

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

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

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

Other Markets

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

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

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

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

Data

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

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

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

Disclaimer

Becalmed FX Market

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

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

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

Prices

G10

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

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

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

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

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

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

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

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

Other Markets

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

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

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

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

Data

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

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

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

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

Disclaimer

US Dollar is Mixed Ahead of July CPI

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

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

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

Prices

G10

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

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

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

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

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

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

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

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

Other Markets

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

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

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

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

Data

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

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

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

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

Disclaimer

Parallel Play or Joint Intervention?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Disclaimer

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

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

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

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

Prices

G10

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

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

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

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

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

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

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

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

Other Markets

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

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

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

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

Data

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

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

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

Disclaimer

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

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

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

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

Prices

G10

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

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

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

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

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

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

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

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

Other Markets

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

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

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

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

Data

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

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

Disclaimer

Week Ahead: Soft CPI to Follow Disappointing US Jobs Report

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

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

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

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

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

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

EMU

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

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

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

China

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

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

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

Japan

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

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

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

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

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

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

Canada

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

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

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

Australia

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

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

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

Mexico

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

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

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

Disclaimer

August 2026 Monthly

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

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

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

How We Got Here

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

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

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

Why the Dollar Stayed King

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

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

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

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

Weaponization

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

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

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

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

The Counterweight Nobody Wants to Talk About

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

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

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

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

Where This Leaves Us

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

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

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

Bannockburn World Currency Index

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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