Overview: With Japanese markets closed for Mountain Day and a quiet summer Monday in Europe, activity in the foreign exchange market is subdued. It may continue in North America today, ahead of tomorrow’s CPI. Most of the G10 currencies are in narrow ranges and +/- 0.2% against the US dollar. Emerging market currencies are mostly in narrow, consolidative ranges.
Equity markets are mixed. The large bourses in the Asia Pacific region were mostly higher. Notable exceptions included the index of mainland companies that trade in Hong Kong, South Korea's Kospi and Singapore's Strait Times. Europe's Stoxx 600 is straddling unchanged levels in late European morning turnover, while US index futures are slightly firmer. Benchmark 10-year yields are a little softer, but the 10-year yield is off four basis points after the rising five basis points before the weekend to cap a four-day, 10 bp advance. The 10-year US Treasury yield is off around 2.5 bp to slightly below 4.26%. It also rose in the last four sessions. The White House is clarifying the confusion at the end of last week, and gold bars from Switzerland will not be subject to the tariff and classified as financial assets rather than goods. In the spot market, gold is off a little more than 1%. It has gained in six of the past seven sessions (~$122) and flirted with $3400 in the second half of last week. It is now a little below $3360. September WTI has steadied after falling to nearly $62.75 at the end of last week, its lowest level since the first part of June. Still, it has not traded above last week's settlement (~$63.90).
USD: Broadly said, the US dollar is trading heavier this month after the July rally and US interest rates are at the lower end of a three-month range. The Dollar Index's downside momentum stalled at the end of last week, slightly below 98.00, but above the (61.8%) retracement of last month's rally (~97.85). The economic diary is light today but tomorrow sees the July CPI. The median forecast in Bloomberg's survey expects the third consecutive monthly increases in the headline and core rates. The pendulum has swung hard, and now the Fed funds futures are discounting two cuts and about a 40% chance of a third in the last three FOMC meetings of the year. While following the intrigue and recognizing that Powell is entitled to complete his term as governor even after his chair role expires, it may not be impactful on central bank actions yet (though it could). Meanwhile, the investors are digesting the implications of a reports that Nvidia and AMD will pay 15% of their chip revenue earned in China to the federal government. It looks like an export tax, which the constitution explicitly forbids. Meanwhile, the three-day bench trial begins today in which California is suing the president over the federalization of the National Guard earlier this year. The use of military forces to enforce domestic laws is very conditional and Governor Newsom is challenging whether those conditions were met.
EURO: The euro rose by about three cents in five sessions through last Thursday when it reached nearly $1.17, surpassing the (61.8%) retracement objective of the July decline, found near $1.1660. Now, only a convincing loss of $1.1610 jeopardizes the constructive technical outlook. It is trading in last Thursday's range (~$1.1610-$1.1700) as it did before the weekend. The poor German industrial production figures at the end of the last week and a small trade surplus did not impact expectations for the ECB. While the pendulum of sentiment has swung toward more US rate cuts, it leans in favor of another ECB rate cut this year. The swaps market has a little more than a 50% chance discounted, down from around 67% that prevailed at the conclusion of the ECB meeting on July 24.
CNY: The dollar consolidated in a CNH7.1665-CNH7.1960 trading range last week. It is trading quietly today, roughly between CNH7.1825-CNH7.1910. The PBOC set the dollar's reference rate at CNY7.1405 (CNY7.1382 last Friday. China reported July CPI and over the weekend. The CPI slipped back into deflationary territory at -0.1% year-over-year from 0.1% in June. Over the past five months it has been mostly stuck at -0.1% in four months. Producer prices fell 3.3% year-over-year. The last time they rose was in September 2022. There are still murmurings of the need of a new broad foreign exchange accord, and there is bound to be more as we remember the end of Bretton Woods on August 15. The Plaza Agreement, that Americans are so proud of, is seen quite differently in Beijing. The US forced its major allies and trading partners to accept a dramatic appreciation of their currencies backed by massive (at the time), coordinated, and repeated intervention. The yuan shadows the dollar, which ensures the US will not gain competitive advantage through the devaluation that some in the Trump administration have advocated.
JPY: The dollar trended in a clearly defined range last week. A shelf was carved around JPY146.60-70. The cap was JPY147.90-JPY148.10. The dollar approached the upper end of the range ahead of the weekend, arguably helped by the rise in the US 10-year yield to almost 4.29%, a new high for the week. Japan's markets were closed for a national holiday today, and the greenback is in a narrow range: ~JPY147.35-JPY147.80. With prospects of a further backing up of US rates, overcoming resistance around JPY148.25 could signal gains toward JPY149.00-30.
GBP: Sterling reached nearly $1.3455 at the end of last week. That area holds the downtrend line drawn off last month's high and the (50%) retracement of last month's leg down (~$1.3465). The dollar made a marginal new high today, slightly above $1.3475. After last week's hawkish cut by the Bank of England, the swaps market year-end rate rose to almost 3.80%, about a 10 bp increase on the week. It is the highest in two months but is slightly softer today (~3.78%). This is a big week for UK data but given that the bar is very high for a cut at the next BOE meeting on September 18, the data, including tomorrow employment report and Thursday's Q2 GDP and June details may have more foreign exchange impact than on interest rates. Recall that the British economy contracted in April (-0.3%) and May (-0.1%).
CAD: The US dollar found support in the last couple of sessions near CAD1.3725. That is where the 20-day moving average and (50%) retracement of the rally from the July 23 low near CAD1.3575. The greenback is trading with a slightly firmer tone to CAD1.3775 today. Near-term risk may extend back to the CAD1.3800-20 area. Although the Canadian dollar finished little changed ahead of the weekend, seemingly unperturbed by the loss of 55k full-time jobs last month, the swaps market boosted the chances of a rate cut next month to almost 40% from 30%. The market has nearly 26 bp of cuts this year discounted compared with slightly more than 20 bp a week ago.
AUD: The Aussie comes into today with a four-day advance tow. It stalled last Thursday slightly ahead of the (61.8%) retracement of the decline from the July 24 high for the year (~$0.6625) that is found near $0.6545. As it did before the weekend, the Aussie is trading in a narrow range in the upper end of last Thursday's range. It is in an exceptionally narrow range today of roughly $0.6515-$0.6530. The Reserve Bank of Australia meets tomorrow. Undaunted by getting caught leaning the wrong way last month with the stand-pat decision, the futures market has a quarter-point cut fully discounted. It has another cut this year priced in and a little more than 50% chance of an additional move.
MXN: The greenback recorded the low for the year in late July against the peso near MXN18.51. It poked above MXN18.98 on August 1, and at the end of last week it was back near MXN18.5250. This comes after the latest rate cut was delivered (quarter point to 7.75%). It is consolidating around MXN18.60 in Europe. A convincing break of MXN18.50 targets MXN18.40 next. The outlook for the central bank does not rest on the June industrial production to be reported today. In the first five months of the year, Mexico's industrial output rose by an average of 0.35% a month. In the first five months of 2024, it fell by an average of almost 0.1%. Lower headline inflation and rate cuts by the Federal Reserve will give Banxico more room to maneuver.
Reviewed by Marc Chandler
on
August 11, 2025
Rating:
