Overview: The US dollar's July rally came to an abrupt end last Friday and continues to mostly consolidate as new developments are awaited. In particular, the nomination for Governor Kugler's successor on the Federal Reserve Board may trigger the next act in the drama, though the market now is considerably more comfortable with the idea that the Fed's easing cycle will likely resume next month. Also, Friday is the deadline for the US demand of Russia's ceasefire in Ukraine. Meanwhile, US sectoral tariffs on pharma and chips are anticipated to be announced in the coming days. The US dollar is trading narrowly mixed. The Antipodeans and Scandis lead the G10 higher, while sterling, the yen, and Swiss franc are nursing minor losses. Emerging market currencies are mostly firmer, but the South Korean won, Taiwanese dollar, and Chinese yuan are laggards.
Equities are firm today. In the Asia Pacific region, mainland China shares that trade in Hong Kong, Taiwan's Taiex, and India are notable exceptions. Europe's Stoxx 600 is slightly firmer, and US index futures are trading ~0.2%-0.4% better. Benchmark 10-year yields are 1-2 bp firmer in Europe and the yield on the 10-year US Treasury is up a little more. The yield is almost 4.24% ahead of the $42 bln 10-year auction, with practically no concession built in, and $65 bln in four-month bills. Gold recovered from last week's low near $3268 to $3390 yesterday. It has stalled and is threatening to snap a four-day advance. On the other hand, September WTI is poised to snap a four-day advance amid speculation that Moscow will make some last-minute concessions to avoid or minimize US secondary tariff threat.
USD: After selling off sharply at the end of last week (jobs, ISM, and firing of BLS director), the Dollar Index has not traded over last Friday's settlement (~99.15) so far this week. In fact, yesterday's low was a few ticks below last Friday's low. It is confined to a tight range so far today: ~98.65-98.85. If July counter-trend rally is over, as we think, the Dollar Index will fall through the 98.30 area and test 97.85 in the coming days. More important than the high-frequency data and Treasury coupon auctions today, the market participants anxiously await the nomination of Governor Kugler's successor. This could be the only governor slot that is open in President Trump's second term. And the weaker the candidate is perceived to be the less likely Trump will get another chance. When Powell's term as chair expires next year, he can stay on as governor until that term ends in January 2028. Treasury Secretary Bessent, who is part of a most untraditional administration, insists that tradition requires Powell to step down. There is, in fact, precedent for Powell to remain as governor: Marriner Eccles. The appointment of the new head of the BLS is also awaited. As unusual and untraditional the dismissal of BLS director is, there is also a notable precedent: Herbert Hoover forced the retirement of the head of the BLS in 1932.
EURO: The euro rallied from a brief dip below $1.14 last Friday to almost $1.16. It consolidated on Monday and Tuesday, and this continues today. It recovered from yesterday's low slightly below $1.1530 to almost $1.1590 in North America. The consolidation looks constructive. Above $1.1600, the immediate hurdle is the band of resistance $1.1610-30. It corresponds to the (50%) retracement of the July pullback and the 20-day moving average. Germany's June factory orders unexpectedly fell. The 1% decline contrasts with the 1.1% gain projected by the median forecast in Bloomberg's survey. Domestic orders rose 2.2% after the sharp 7.5% decline in May. Foreign orders fell 3% after May's 3.8% increase. German's industrial production figures will be reported tomorrow. The median forecast is for a 0.5% decline after the 1.2% increase in May. Separately, EMU retail sales recovered in June, rising by 0.3% after a revised 0.3% decline in May (initially 0.7% decline). Retail sales rose a cumulative 0.7% in Q1 and 0.3% in Q2. With Q2 GDP already reported, today's data had little impact. The initial estimate showed a 0.1% expansion in Q2, and the early forecasts do not look better for Q3.
CNY: The dollar matched the early June high at the end of last week near CNH7.2240 before reversing It settled below the previous session's low (~CNH7.1960) to leave a key reversal technical pattern in its wake. Follow-through selling on Monday pushed the greenback to about CNH7.1765. Yesterday, it consolidated within Monday's range yesterday. It is trading with a slightly firmer bias today, reaching CNH7.1955. There may be initial scope toward CNH7.20. If the PBOC is turning cautious about the yuan's appreciation, one would expect some signal in the setting of the daily reference rate. The PBOC set the dollar fix sharply lower on Monday (CNY7.1395, -0.14% from Friday) and yesterday's fix (CNY7.1366) was a new low since last November. Today's reference rate was set at CNY7.1409.
JPY: After posting a key downside reversal against the yen before the weekend, when it settled near its JPY147.30 low, follow-through selling saw the greenback approach JPY146.60 yesterday. It overshot the (50%) retracement objective of the July bounce near JPY146.80 but recovered smartly, with only mild support from the US 10-year yield, which edged up by a little more than a basis point, and reached the session high a whisker below JPY147.85 in the North American morning and a smidgeon more today. This is also around where the 20-day moving average was found (~JPY147.90). The greenback needs to resurface above JPY148.25 to signal another notable from a technical perspective. Japanese labor earnings rose 2.5% year-over-year in June after a 1.4% increase in May (initially 1.0%). Base salaries rose by 2.1%. Last June, cash earnings rose 4.5%. However, when adjusted for inflation, real cash earnings fell by 1.3% year-over-year in June (-2.6% in May). In June 2024, real cash earnings had risen 1.1% year-over-year. Over the past several weeks, the swaps market has discounted 10-21 bp of tightening at the end of year. Now the swaps are pricing an increase of 16 bp.
GBP: Sterling posted a key upside reversal before the weekend. It reached $1.3310 after hitting almost $1.3140, its lowest level, its lowest level since mid-May. Follow-through buying on Monday saw $1.3330 and it consolidated yesterday inside Monday's range. It is trading quietly in about a $1.3280-$1.3315 range so far today. The price action is still constructive, and near-term potential may extend into the $1.3365-90 area initially. Above there, a band of resistance may be encountered between $1.3430 and $1.3465. The UK's July construction PMI snapped a four-month uptrend, falling to 44.3 from 48.8. Although it finished last year at 53.3, it fell sharply in January (48.1) and February (44.6) before recovering but it has not been above the 50 boom/bust this year. The Bank of England meets tomorrow, and the market remains confident that a quarter-point cut will be delivered, and another one is discounted for Q4.
CAD: The US dollar reversed lower against the Canadian dollar after the US employment data at the end of last week. The greenback had reached almost CAD1.3880, its highest level since May 22 before being sold slightly through CAD1.3765, which corresponds to the (38.2%) retracement of the US dollar gains from the July 23 low (~CAD1.3575). Follow-through selling has been minimal during the past two sessions, and during the consolidation, the US dollar was capped near CAD1.3810 yesterday. It is pinned in a narrow range near its recent lows. The next retracement target is around CAD1.3725 and the 20-day moving average is seen a little below there. Canada sees its July services and composite PMI. The composite PMI average of 50.4 in Q4 24 was the first above the 50 boom/bust level since Q2 23. It averaged 46.1 in Q1 25 and 43.8 in Q2 25. The market nor policymakers seem particularly sensitive to the time series. The Bank of Canada meets on September 17, and the swap market has almost a 33% chance of a cut discounting, rising to ~57% at the following meeting in late October.
AUD: The Australian dollar recorded a low near $0.6420 before the US employment data ahead of last weekend. It was the lowest level since June 23. It recovered to almost $0.6495 and has been in a roughly $0.6445-$0.6490 range so far this week. It is fraying the upper end of the week's range, and nearby resistance is seen in the $0.6500-20 area. Australia reports June trade figures first thing tomorrow. Australia trade surplus through May is running more than a third lower year-over-year. Exports have been weak, except for the 5.9% surge in March. They have fallen by an average of 0.3% in the first five months. Australian exports averaged a 0.9% decline in the Jan-May 2024. Imports have risen by an average of 0.7% a month through May this year after averaging a 1.1% increase in the first five months last year. The Reserve Bank of Australia meets next week (August 12) and the market is confident that a quarter-point cut will be delivered.
MXN: The US dollar approached MXN19.00 before the weekend and reached its best level since June 25. It settled in near the middle of the range before the weekend and posted an inside day on Monday. The US weakened yesterday and fell to a four-day low and frayed the 20-day moving average near MXN18.72. A break of MXN18.69 leaves little on the charts to deter a retest on the year's low (~MXN18.51). The July CPI is due shortly. Given the base effect, the headline year-over-year rate is expected to fall to around 3.5%, which would be a new low since the end of 2020. In July 2024, Mexico's CPI surged by 1.05%. This will drop out of the 12-month comparison and be replaced by something closer to 0.25%-0.30%. The core rate will prove stickier and is expected to stabilize after the year-over-year rate rose every month in Q2 (4.24% vs. 3.65% at the end of 2024). Mexico's central bank meets tomorrow. The swaps market appears priced for a quarter-point cut (to 7.75%), while all but one of the 23 economists surveyed by Bloomberg also expect a 25 bp cut.
Reviewed by Marc Chandler
on
August 06, 2025
Rating:
