Ahead of the long holiday weekend in North America, the is trading with a slightly firmer bias in narrow trading ranges. The drama around the Fed has intensified with FHFA Director Pulte sending a new criminal referral against Governor Cook regarding a third mortgage, while Governor Waller reiterated his dissent from last month’s meeting.
He supports a in the face of the deterioration of the labor market while advocating looking through the tariff-related price pressures. China again lowered the dollar’s reference rate to a new low for the year, and after the Thai baht, the yuan is the second-strongest emerging market currency this week, rising nearly 0.5% against the dollar.
While most of the large markets in the Asia Pacific region fell, the Hong Kong and mainland indices rose. This week’s CSI 300 gain of 2.7% is among the best performers. Europe’s Stoxx 600 is struggling. It is off for the fourth session this week and is down nearly 2% on the week. US index futures are off 0.3%-0.5%. European bonds are also under pressure.
Yields are 2-3 bp higher, paring this week’s decline. The is up a couple basis points a little above 4.22%, which leave it down about five basis points on the week. Gold reached a new high for the month yesterday, slightly above $3423. It is consolidating lower today but is holding above $3400 (~1% for the week). October WTI is in less than 50-cent range above $64.00. It is up about 0.75% this week.
USD: Rather than trend lower this week after the outside down day was recorded last Friday in response to Fed Chair Powell’s speech at , the bounced around last Friday’s range: ~97.55-98.84.
It is in a tight range today of about 25 ticks above 97.80. The prospect of another soft jobs report next Friday, what are expected to be sharp downward revisions in the annual benchmark adjustment to the establishment survey a few days later, and the threat to the Federal Reserve’s independence are weights on the dollar. We have suggested that investors need a higher premium to hold on greenback.
But the US two-year premium over Germany is near the low for the year recorded in March. The US 10-year yield is at the lower end of a five-month range, and the US 10-year premium over Japan is near a three-year low. Today’s July personal income and consumption estimates will likely point to a solid start to Q3, while the advanced goods trade balance is expected to have deteriorated in July.
The Atlanta Fed’s tracker is looking at 2.2% growth this quarter. Such an outcome would still put growth above what the Fed considers the non-inflationary pace and seems to offer prima facie case against stagflation claims. The deflators will draw attention, but after the and reports, the market tends to have a good handle on it.
The early call for this month’s CPI (Sept 11) is for a rise in the headline (2.9% vs. 2.7%) and a steady (3.1%). Lastly, Governor Waller did not surprise in his comments late yesterday. He endorsed a rate cut next month and resuming the easing cycle to the downside risks from the labor market and arguing to look through tariff- induced inflation.
: The euro recovered from a three-week low on Wednesday near $1.1575 to reach nearly $1.17 yesterday. It pushed above the (61.8%) retracement of this week’s slippage, found near $1.1680. It is little changed today in a roughly $1.1655-$1.1690 range. Last Friday’s high was near $1.1745. It is not just an illusion, the price action has been choppy, with the euro alternating daily between gains and losses since last Tuesday.
France and Spain reported August inflation figures ahead of next Tuesday’s EMU aggregate preliminary August CPI is due. Looking at the harmonized measures, French inflation rose by 0.5% in August for a 0.8% year-over-year increase (0.9% in July) and Spain’s inflation was flat on the month for an unchanged 2.7% year-over-year rate. Recall that in H2 24, eurozone CPI rose at an annualized rate of about 0.8%.
That makes for a tough comparison this year. It rose at 4% annualized rate in H1 24 and 3% annual pace in H1 25. The swaps market has about a 38% chance of another rate cut this year. In early August, the odds were nearly 70%.
: The dollar recorded a two-month high against the offshore yuan on August 1 near CNH7.2240. It set a new low for the year today around CNH7.1160 but has subsequently rebounded to above CNH7.1300. It is difficult to know what Beijing is thinking, but it has signaled a willingness to accept some yuan appreciation, given the continued reduction in setting of the dollar’s reference rate.
The next technical target is in the CNH7.08-CNH7.10 area. Previous support often serves as initial resistance and that may be around CNH7.15. The PBOC set the dollar’s fix at CNY7.1030, a new low for the year (from CNY7.1063 yesterday and CNY7.1321 last Friday).
The absolute value of the changes in the reference rate this week was the largest over the year. For the first time in seven weeks, the implied three-month CNY volatility rose around 3.8%, it is the highest this month. It was nearly 6.4% at the end of last year.
: The dollar held above Monday’s low yesterday but posted its lowest settlement since late July. The low set last week after Fed Chair Powell’s speech was slightly below JPY146.60 and the greenback approached it yesterday. It is trading between about JPY146.75 and JPY147.20 today.
A break could signal a push into the JPY145.85-JPY146.20 band. As was the case with the euro, the dollar has been choppy against the yen, alternating between gains and losses since early last week. Japanese data dump included weaker than expected real sector data. July retail sales tumbled by 1.6%. The median forecast in Bloomberg’s survey was for a 0.2% decline after a 0.9% rise in June. Industrial output slid 1.6% (-1.1% was expected after a 2.1% rise in June). The exception was the unemployment rate, which eased to 2.3% from 2.5%, a new low since 2019.
Meanwhile, Tokyo’s August CPI was as expected. It moderated for the third consecutive month. The headline pace eased to 2.6% from 2.9%. It has not been lower since last November. The core rate, which excludes fresh food, eased to 2.5% from 2.9%, the slowest pace since February. The measure that excludes fresh food and energy eased slightly to 3.0% from 3.1%. The rise in fresh food prices is still filtering into processed food. The swaps market has about 17 bp of tightening discounted before the end of the year. It is little changed on the week and month.
: Sterling has a three-day rally in tow coming into today, but it remains within the range set last Friday (~$1.3390-$1.3545). With that brief exception, the $1.3400-$1.3600 range has dominated for three weeks. It is near $1.3460 in late European morning turnover. A break should be respected. It is trading with a heavier bias today, which some link to a policy think tank suggesting a windfall tax on banks to fill the fiscal hole. Incidentally, Italy is reportedly considering similar measures. The swaps market has settled in recent days with around 40% chance of another cut this year. The base rate sits at 4.0% and the swaps market has a cut fully discounted next year, and about a 50% chance of another.
: A record quarterly current account deficit saw the Canadian dollar weaken initially but it was not sold to a new session low before catching a bid. The US dollar recorded the session low in North American turnover slightly near CAD1.3740. The greenback settled lower for the third consecutive session. Near CAD1.3750, it reached the halfway point of the greenback’s rally from the July 23 low (~CAD1.3575) to last Friday’s high (~CAD1.3925). The five- and 20-day moving average look set to cross for the first time since late July. The US dollar was pushed briefly below CAD1.3740 today but is virtually flat in late European morning turnover. A convincing break targets the CAD1.3700-20 area next. Canada reports for June and Q2 today. The monthly GDP contracted in April and May but cannot be simply tallied to get to the quarterly reading. The Canadian economy expanded by 2.2% at an annualized rate in Q1 and is expected to have contracted in Q2. Economists polled by Bloomberg think the economy bottomed and will slowly recover. The median looks for 0.1% growth in Q3 and 0.8% in Q4.
: The Australian dollar is the best performing G10 currency this week with about a 0.65% gain. It reached a two-week high near $0.6540 yesterday to fray the downtrend line drawn off the July and August highs. The close above $0.6520 yesterday looks constructive and the next immediate target is the $0.6545 area, and it stalled slightly below there in the local session and eased toward $0.6525 in Europe. The daily momentum indicators look favorable, and the five-day moving average crossed back above the 20-day. The market did not seem to pay much attention to July’s private sector credit growth of 0.6%. It was as expected and broadly consistent with this year’s pace. The highlight next week is the first estimate of Q2 GDP. After 0.2% growth in Q1 25, economists project a 0.5%-0.6% quarterly expansion in Q2.
: For a little more than two months, the US dollar has chopped back and forth between about MXN18.51 and MXN18.98. The lower end represents the low for the year, and the greenback has not traded above MXN19.00 since late June. We suspect the range may hold for a bit longer. The US dollar is firm today and is approaching MXN18.72. The big development this week may have been reports suggesting that in the budget to be submitted in early September, the government will include an increase in tariffs on a range of Chinese products (including autos, textiles, and plastics). Mexico already has a 20% tariff on Chinese-made autos (which include some American brands). The key consideration looks to be the appeasement of the US president ahead of USMCA negotiations next year.