Telling the Fed What to Do is Not Sufficient, US Treasury Secretary Tells BOJ How to Conduct Monetary Policy.

Overview: The US dollar is mostly firmer today against the G10 currencies, but exceptions are notable. The yen is rising for the third consecutive session, apparently boosted by calls from the US Treasury Secretary for the Bank of Japan to raise rates. The Norwegian krone is slightly higher after the central bank kept rates steady and indicated another rate cut would be forthcoming this year. Sterling is the other exception to the greenback's bounce today after a stronger headline Q2 GDP lifted by government spending. The US dollar is firmer against most emerging market currencies. Intervention by Hong Kong Monetary Authority to defend the peg helped the HK dollar tick up and the PBOC set the dollar's reference rate at a new low for year, supporting the yuan's resilience today. 

Benchmark 10-year yields are mostly softer today. Japanese and Swiss yields are the exceptions and are a little firmer. Most European yields are off around two basis points, though the Gilts yields are a laggard today and are barely lower. The 10-year Treasury yield is 2.5 bp softer to near the 4.20% threshold. The US two-year yield is a little softer as it edges toward 3.65%, the low from earlier this month. It has not traded below there in more than three months. Asia Pacific equities were mostly lower today. South Korea, Australia, New Zealand, and India are the noted exceptions. The Stoxx 600 in Europe is advancing for the third consecutive session, which if sustained, would be the longest rally in a month. US index futures are little changed but softer. Gold has traded on both sides of yesterday's range and is little changed late in the European morning. September WTI has steadied today (~$62.70-$63.10) after slipping below $62 yesterday for the first time since early June. 

USD: The Dollar Index tested the trendline connecting last month's two lows. It held on a closing basis and is found slightly above 97.65 today. However, it did settle below the (61.8%) retracement of last month's rally found near 97.85. It has steadied today and is holding below 98.00. Chicago Fed's Goolsbee comments, striking a more cautious tone on the rate outlook, failed to have much impact and the September Fed funds futures are pricing in a small chance of a 50 bp cut next month. The expected rise in July PPI that will likely be reported today is unlikely to deter the market. Still, a 50 bp cut, however, does not seem particularly likely now, but before the next FOMC meeting, another employment report (and the BLS preliminary benchmark revisions to the establishment survey) and CPI and PPI will be in hand. Market participants and the media have emphasized the weakness of nonfarm payroll growth and the sharp downward revision of past months. Yet, Fed Chair Powell was explicit at last month's press conference the key is not job growth as the administration's immigrant policies have reduced the supply of labor at the same moment that the demand has fallen. Therefore, Powell argued the key now is the unemployment rate, which captures the balance of the two forces. Also, today sees weekly initial jobless claims for the week ending August 8. While most survey data have pointed to a deterioration of the labor market, weekly jobless claims were an exception. Initial claims fell from mid-June through mid-July when they reached three-month lows. Weekly initial claims rose for the past two weeks, and the median forecast in Bloomberg's survey anticipates a small decline. The four-week moving average, used to smooth the noisy time series has fallen for the past seven weeks, but likely rose last week. On the other hand, continuing claims are elevated at their highest level since November 2021. The data seems to confirm that businesses may not be laying off workers very aggressively, the hiring has slowed. 

EURO: The euro peaked yesterday near $1.1730 shortly before the North American session. It consolidated after dipping below $1.1700 in early North American turnover. The trendline connecting the July highs comes in near $1.1745 today. If that is taken out the next target is the late July high slightly below $1.1790, but instead, the euro is trading with a heavier bias today and is fraying yesterday's low (~$1.1670) in the European morning. A break of $1.1660 could see $1.1600. There are option at $1.17 for 3.9 bln euros that expire today. The eurozone's data had a negligible impact. Q2 GDP's initial 0.1% increase was left unchanged. The quarter ended on a soft note, with industrial output falling by 1.3% after a 1.7% increase in May. Economists do not expect growth here in Q3 to be much better. In fact, the year-over-year rate is seen slowing to below 1% in Q3 for the first time since Q2 24. 

CNY: The dollar was sold from the upper end of its recent range on Monday and Tuesday, slightly shy of CNH7.20 to fray the lower end of its recent range yesterday near CNH7.1755. The losses were extended to about CNH7.1680 today, a nearly three-week low. It bounced back to around CNH7.1770 in the European morning where sellers were met. More important chart support is seen in the CNH7.1600-30 area. The PBOC set the dollar's reference rate at a new low for the year today (CNY7.1337 vs. CNY7.1350 yesterday). Chinese officials are allowing the yuan to appreciate against the dollar but more slowly than some of its critics want. The onshore yuan has risen by a little more than 1.75% against the dollar this year, which is slightly less than the inflation differential and two-year interest rate differential would imply. US Treasury Secretary Bessent is arguing against accepting Chinese investment as part of a trade agreement because of the need to re-shore critical industries away from China. 

JPY: Softer US rates helped pressure the dollar lower against the yen. It fell from a seven-day high on Tuesday near JPY148.50 to a low yesterday around JPY147.10. It is lower for the third consecutive session. Ostensibly with the help of US Treasury Secretary Bessent calling on Japan to raise interest rates, the greenback was sold through the shelf forged last week in the JPY146.60-70 area. It found support near JPY146.20, a three-week low. The next technical target is closer to JPY145.85. The US 10-year yield fell by a little more than five basis points yesterday to settle at a five-day low (~4.23%) and is softer today to test 4.20%. The yield has traded below there in three sessions this quarter and two of which took place this month. The swaps market saw an increase to almost 16 bp from 14 bp, the likely rate hike before the end of the year. It is the most this month, but settled July closer to 18 bp. Japan provides its first estimate for Q2 GDP first thing tomorrow. The median forecast in Bloomberg's survey is for a 0.4% annualized expansion in Q2 after a 0.2% contraction in Q1. The key change may have been net exports, which shaved Q1 GDP by 0.8% and may have contributed 0.1% in Q2. But part of this may be offset by the unwinding of inventory accumulation. Consumer spending looks steady around 0.1%, while capex may have slowed. 

GBP: Sterling rose by about 0.5% yesterday to lead the G10 currencies. It is also the best performer this month, with a 2.75% coming into today. Unlike the euro, sterling recorded the session high yesterday in North American session, late in the European day. The high was about $1.3585, and it has been extended marginally today to slightly above $1.3590, its best level in a month. Options for GBP953 mln at $1.36 expire today. Above $1.3600, may encounter nearby resistance around $1.3630. The UK reported that growth held up better than expected in Q2. The 0.3% expansion compares with 0.1% projections and 0.7% in Q1. The increased government spending (1.2% vs -0.4% in Q1) helped offset the slower consumption (0.1% vs 0.4%) and business investment (-1.1% vs 2.0%). Net exports also deteriorated. Still, the economy appeared to end the quarter on better footing, with June's monthly GDP rising by 0.4%, twice the median forecast in Bloomberg's survey, helped by stronger industrial outputs, services, and construction. Growth is expected to remain subdued in H2 25. The Bank of England forecasts 1.3% growth this year. The IMF projects 1.2% and the median forecast in Bloomberg's survey is 1.1%, the same as last year. The swaps market has 17 bp of easing discounted before the end of the year, of about a 65% chance of a cut, down from 100% before last week's BOE meeting. 

CAD: The Canadian dollar was sidelined yesterday. During the North American session, the US dollar chopped in a 10-tick range on either side of CAD1.3765. It is posting an outside day by trading on both sides of yesterday's range. The technical significance depends on the close. A break of the CAD1.3720-25 area would be notable. It could signal a move toward CAD1.3640. On top side, only a move above the CAD1.3800-10 area would undermine this less favorable outlook for the greenback. Still, the pattern for the Canadian dollar to perform relatively better in a strong US dollar environment and typically a laggard in a weak dollar environment continues to be borne out. Last month, during the greenback's first monthly bonce this year, the Canadian dollar was the best performer in the G10, losing only 1.80%. This month, as the US dollar has weakened, the Canadian dollar is the weakest of the G10 currencies, appreciating by about 0.60%. 

AUD: The Australian dollar stalled yesterday in European late morning turnover slightly below $0.6565. It traded to almost $0.6570 before reversing lower. A break of yesterday's low near $0.6515 would weaken the technical tone, and a close below $0.6500, which it has not done for six sessions, would be disappointing. Australia grew 24.5k jobs in July, of which a whopping 60.5k were full-time positions (part-time work fell by 35.9k jobs). It had lost 36.6k full-time jobs in June but the July increase was the most since February 2024. The unemployment rate slipped to 4.2% from 4.3%. It was steady at 4.1% in the first five months of the year. The participation rate was steady at 67.0%, after the June estimate was revised down from 67.1% to 67.0%. It is unchanged now from the end of 2024. The report saw the odds of a cut at the next meeting in late September pared to about 30% from the anticipated trajectory of monetary policy. There is about 40% chance of a cut at the next meeting at the end of September from about 45%. The futures market has about 38 bp of cuts discounted before the end of the year, down from 40 bp yesterday. The futures market has a terminal rate of around 3%, while the swaps market sees it closer to 2.75% from the 3.60% current target. 

MXN: The dollar made a new low for year against the Mexican peso and Brazilian real yesterday, but it recovered against both and settled 0.20%-0.25% better. The MXN18.50 area is proving to be formidable. It stopped last month's descent, and then the market got a running start at it again after having peaked a little below MXN19.00 on August 1. It made a marginal new low yesterday but recovered approaching MXN18.51. It set session highs around midday in NY near MXN18.6650. Initial resistance may be in the MXN18.70-75 area. The dollar recorded the session and year's low yesterday shortly after the local markets opened, reaching almost BRL5.38. It recovered to around BRL5.41 around the same time that it peaked against the peso. The greenback spent the NY afternoon consolidating in a narrow range, mostly BRL5.3920-BRL5.4030. 

 

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