Overview: After selling off sharply last Friday, the US dollar consolidated on Monday and Tuesday before taking another leg lower yesterday. It remains under pressure today, though it has stabilized in late European morning turnover, though even a dismal German industrial production report was unable to deter the euro from rising to almost $1.17. It bottomed near $1.14 last week. The greenback is softer against most the G10 and emerging market currencies. The prospect of a Bank of England rate cut shortly has not deterred the market from extending sterling's recovery. Three regional Fed presidents (Daly, Cook, and Kashkari) appear to be favoring a September rate cut. US reciprocal tariffs have been implemented, and while India has been hit with an extra 25% tariff for buying Russian oil, China has not and the August 12 deadline for a deal is approaching.
News that the US tariffs on semiconductors will not be levied on companies that invest in the US saw Taiwan stocks rally nearly 2.4% today and South Korea's Kospi rose almost 1%. Most of the chips the US imports are embedded into products, but some industries, like autos, may be import chips separately. India's stocks bucked the regional trend but posted small losses (less than 0.2%). Europe's Stoxx 600 is up about 0.75%, which if sustained would be the largest gain in a couple of weeks. US index futures are also enjoying a firmer tone. Bond yields are softer. European benchmark 10-year rates are 1-2 bp lower and the 10-year US Treasury yield is off nearly a basis point to 4.23%. After yesterday's poor reception to the 10-year note sale, the US Treasury is back today, selling $25 bln 30-year bonds and $185 bln in bills. Gold is consolidating now after having approached $3400 earlier today, its best level in two weeks. September WTI settled below $65 yesterday for the first time since July 1. It is in about a $1 range today below $65.10.
USD: The Dollar Index was sold to nearly 98.15 yesterday after having been turned back before the weekend, near 100.25. It remains on the defensive today, fraying the 98.00 area. Nearby support is seen around 97.85, which corresponds to the (61.8%) retracement of the DXY rally from the July 1 multi-year low. The line connecting July 1 and July 24 low is near 97.55 today. The five-day moving average may cross below the 20-day moving average in the next day or two. US nonfarm productivity and unit labor costs are not observed directly but are interpolated from the GDP data. That means that productivity recovered from a 1.5% decline in Q1 and unit labor costs cooled after spiking 6.6% in Q1. Wholesale sales and inventories may help economists fine-tune expectations for revisions to Q2 GDP. Perhaps most interesting today are the weekly jobless claims. It is one of the few labor market time series that did not show the weakness of last week's non-farm payroll report. Recall that initial jobless claims fell for six weeks through July 18. The four-week moving average peaked in mid-June (~246k) and in the week through July 25 were 221k, the lowest in three months.
EURO: After consolidating the first two sessions this week, the euro took another leg up yesterday, reaching slightly above $1.1670. It approached $1.1700 today. It settled above the 20-day moving average ($1.1630) for the first time since July 25. The daily momentum indicators are poised to turn higher. It surpassed the (61.8%) retracement of last month's decline (~$1.1660). Above there, the trendline off the two highs in July comes in near $1.1765 today and about $1.1755 at the start of next week. The US two-year premium over Germany is near 180 bp. It reached 207 bp in early July. The low for the year was set in March a little more than 165 bp. Following yesterday's poor factory orders (-1.0%), Germany reported a 1.9% drop in industrial output (-0.5% was the median forecast in Bloomberg's survey). And adding insult to injury, May's 1.2% gain was revised to -0.1%. On a workday adjusted basis, German industrial production has fallen 3.6% over the past year. Separately, Germany reported a smaller than expected June trade surplus (14.9 bln euros) amid soft exports (0.8% month-over-month after a 1.4% decline in May) and a rebound in exports (4.2% vs.-3.9% in May). There is risk that the initial German Q2 GDP (-0.1%) is revised lower.
CNY: The dollar hit a wall in the past three sessions slightly above CNH7.1955. The broader dollar pullback weighed on it, and the greenback was sold to around CNH7.1835, a new session low yesterday in the North American afternoon. It approached the lower end of this week's range extends CNH7.1765-75. The PBOC set the dollar's reference rate at CNY7.1345 (CNY7.1366 yesterday), which is the lowest since last November. China's July trade surplus narrowed more than expected to $98.2 bln from $114.75 bln in June. Exports rose 7.2 year-over-year (5.9% in June), and imports rose 4.1% (1.1% in June). In the first seven months of the year, China recorded a trade surplus of about $684 bln. In the January-July 2024 period, the trade surplus was around $521 bln. China found other sources of demand to replace the US, but, as we have argued, the US is finding it difficult to replace Chinese supply (e.g., rare earths for defensive and EV battery technology). Exports to the US fell 22% year-over-year (-16% in June) The US is saying it is close to a trade deal with China, which appears to be a pre-condition to a Trump-Xi meeting.
JPY: The dollar was turned back from the 20-day moving average yesterday (~JPY147.85) despite the firmer US yields after the 10-year note auction tailed (high yield at the auction was above what was prevailing in the when-issued market). It fell to around JPY147 in the North American afternoon yesterday, and the losses were extended to JPY146.70 today. The five-day moving average has pushed below the 20-day moving average for the first time in about a month. Provided the JPY148 are continues to act as a cap, Tuesday's low slightly above JPY146.60 is the next immediate target, and the JPY145.85 area corresponds with the (61.8%) retracement of last month's rally and the July 24 low. A convincing break of that area could signal a test on the trendline drawn from the April and July low, seen near JPY144 tomorrow. Note that the Japanese government cut this fiscal year's growth forecast to 0.7% from 1.2%, partly reflecting the new US tariff regime.
GBP: Sterling reached a high around $1.3310 last Friday after the poor US jobs report. It reached nearly $1.3370 yesterday, which is where the (50%) retracement is found of sterling's last leg lower from the July 24 high (~$1.3590). It edged up to $1.3380 today. The $1.3390-$1.3420 area contains other retracement objectives and the 20-day moving average. The trendline connecting last month's two highs is found near $1.3465 tomorrow, which is also the (50%) retracement of last month's losses. There is practically no doubt in the market that the Bank of England will cut its base rate by 25 bp today to 4.00%. It will be the third cut this year following two last year. The swaps market is anticipating another cut in Q4. It has slightly less than a 2/3 chance of cut in Q1 26. The terminal rate is seen between 3.25% and 3.50%.
CAD: We often see the Canadian dollar performing relatively better in a firm US dollar environment and weaker in a soft dollar environment. To wit: CAD was the weakest of the G10 currencies in H1, rising by about 5.5% against the US dollar. In July, when the greenback was squeezed higher, the Canadian dollar was the best performing G10 currency (~-1.80%). In yesterday's weaker US dollar environment, the Canadian dollar was a laggard with about a 0.25% gain. Only the Swiss franc, among the G10 currencies performed worse, rising by about 0.15%. The US dollar, which reversed lower from about CAD1.3880 at the end of last week, fell to almost CAD1.3730 yesterday. It made a marginal new low today closer to CAD1.3720. The 20-day moving average and the (50%) retracement of the US dollar gains from the July 23 low (~CAD1.3575) are found in around CAD1.3725. Additional support may be encountered in the CAD1.3690-CAD1.3700 area. Canada sees the July IVEY survey ahead of tomorrow employment report. The IVEY survey tends to run hotter than the PMI. It averaged 51.23 in Q1 and 50.03 in Q2, which was the lowest quarterly average since Q2 20. The composite PMI has not been above 50 this year. It averaged 43.8 in Q2 and 46.1 in Q2.
AUD: The Australian dollar extended its recover begun at the end of last week. It reached near $0.6510 yesterday, a five-day high. It overshot the (38.2%) retracement of its losses from the year's high recorded on July 24 (~$0.6625). Today, it surpassed the (50%) retracement and the 20-day moving average around near $0.6520 to reach $0.6540. The (61.8%) retracement is about $0.6245. Australia's June trade surplus widened to A$5.37 bln after a revised A$1.60 bln (initially A$2.24 bln) in May, the smallest surplus since 2018. Exports jumped 6%, while imports fell by 3.1%. The H1 25 surplus was about A$24.15 bln, around a quarter lower than in H1 24. Exports have fallen by an average of about 0.6% a month in H1 25 and fell by an average of 0.7% in H1 24. Imports rose by an average of 0.1% a month in H1 25, compared with a 1.1% average monthly increase in H1 24.
MXN: The US dollar fell for the second consecutive session against the Mexican peso and the fourth session in the past five. It approached MXN19.00 at the end of last week and yesterday reached nearly MXN18.58. The dollar is pinned in a narrow MXN18.59-MXN18.6170 range today, which is an important day for Mexico. Mexico will see July CPI figures shortly and late today the central bank is expected to cut the overnight rate by 25 bp to 7.75%. The year-over-year headline rate is expected to have fallen for the second consecutive month and ease back into the 3% +/- 1% target range. The median forecast in Bloomberg's survey is for a 3.54% year-over-year rate. It so, it would match the lowest since the end of 2020. The core rate is firmer but is expected to moderate slightly after rising every month in Q2. The swaps market sees the terminal rate Mexico to be 7.50%, with a risk of 7.25%. The central bank may offer cautious forward guidance and barring a surprise, there is little to stop the dollar from testing the low for the year set last month near MXN18.51. We still think a move to MXN18.40 is still a reasonable target.
Reviewed by Marc Chandler
on
August 07, 2025
Rating:
