Dollar Stabilizes

Overview: After yesterday's jump, the dollar is mostly consolidating at lower levels today. The Scandis and euro are leading the recovery of the G10 currencies, the New Zealand and Canadian dollars, and yen are nursing small losses. Japanese Prime Minister Ishiba was not blamed for the electoral losses in a party investigation, but the LDP will vote on Monday whether to have a leadership contest this year. France will hold a confidence vote on its prime minister the same day. Most emerging market currencies are also firmer today. 

Japanese, Chinese, Hong Kong, and Australian equities tumbled today but other large bourses in the region rose, including Taiwan, South Korea, and India. Europe's Stoxx 600 is up about 0.6% in late morning turnover after shedding 1.5% yesterday, its steepest loss in a month. In the US, the S&P 5000 and the Nasdaq gapped lower, and although the gaps were entered, they were not closed. The gap extends to about 6444.60 in the S&P and 21398 in the Nasdaq. Both look poised to gap higher today. If today's gap is not filled, a bullish island bottom would be lift in the wake. European 10-year bond yields are mostly softer today, including almost 1.5 bp decline in the 10-year Gilt yield. French bonds slightly lagging. The 10-year Treasury yield is almost two basis points higher near 4.28%, and the 30-year yield is firm to threaten the 5.00% threshold. Gold made a marginal new record higher today near $3547 but is about $10 lower now. October WTI soared nearly 2.5% yesterday but is giving back more than half and is near $65.60. 

USD: After yesterday's surge, the Dollar Index is consolidating today. It rose briefly above yesterday's high as European markets opened but was greeted by sellers who pushed it to a new session low slightly below 98.20. Initial support is seen near the yesterday's North American low, a little ahead of 98.00. Focus this week is on the labor market but today's July JOLTS is not the real thing. Still, job openings are expected to have slowed but it seems like old news. The ADP private sector job estimate for August is due tomorrow. It is seen slowing to 80k from 104k in July. The median forecast in Bloomberg's survey is now for a 75k increase in non-farm payrolls in July and a rise in the unemployment rate to 4.3% (from 4.2%), which would be a new cyclical high. The Fed funds futures imply almost a 90% chance of a rate cut later this month, and another cut in Q4. St. Louis Fed President Musalem, seen as among the more hawkish voting members of the FOMC, speaks at 9:00 am ET today and the Beige Book is out later today. 

EURO: With a brief exception, the euro has been confined to the range set on August 22, the day Fed Chair Powell spoke at Jackson Hole. That range was about $1.1585-$1.1745. It briefly traded below the low last Wednesday, recording a low near $1.1575. On Monday, it reached $1.1735. In yesterday's sell-off it fell to nearly $1.1610 to test the trendline drawn off the August 1 and August 27 lows, which also corresponds to the (38.2%) retracement of last month's rally. It slipped a 5/100 of cent below yesterday's low and found new bids ahead of $1.1600 today. It is near session highs around $1.1665 in European late morning activity. Today's final look at August services and composite PMI coincided with the euro's recovery though it seemed coincidental. The composite was revised to 51.0 at 51.1 (from 50.9) and is the highest since last May. The German composite was revised down. It no longer rose for the third consecutive month. At 50.5 it is where it was in January. Of the largest four members of the eurozone, France is the only one to have a composite PMI that is still below the 50 boom/bust level. France will hold a confidence vote next week, which it does not look likely to survive. 

CNY: The dollar has risen against the offshore yuan for three consecutive sessions coming into today, which is the longest advance in a little more than a month, and it is trading firmer today. It reached almost CNH7.15 yesterday and has held slightly below today, so far. It had recorded the year's low before the weekend near CNH7.1160. In a period in which capital flows outstrip trade flows it almost seems quaint to argue that China's trade surplus should drive the yuan higher. Indeed, as we have noted, by some measures, the Japanese yen is more under-valued than the yuan, and Japan typically records trade deficits. There are other fundamental drivers of exchange rates than trade flows. The Chinese economy is struggling to maintain forward momentum and deflation continues to cast a pall, and the housing market remains a drag. China offers about 255 bp less than the US on 10-year bonds. Yes, the yuan is undervalued against the dollar, but most currencies are. The common element is the over-valued dollar. In July, when the greenback had a counter-trend rally, the yuan fared the best. The PBOC set the dollar's reference rate at CNY7.1108 (CNY7.1089 yesterday). The year's low fix was set before the weekend (CNY7.1030). The RatingDog (formerly Caixin) services and composite PMI were reported earlier today. The services PMI rose to 53.0 from 52.6, helped by summer travel and new orders. The composite rose to 51.9 from 50.8.

JPY: The combination of the jump in US rates and heightened political uncertainty in Japan helped lift the dollar to almost JPY149 yesterday. It frayed the 200-day moving average (~JPY148.90) before settling near JPY148.40. It rose to almost JPY149.15 today, in late Asia Pacific turnover, but is finding support in the European morning ahead of JPY148.50. The final service and composite PMI readings had minor impact, though for the record, the 52.0 composite PMI is the highest since February. Still, the weakness of recent data (e.g., retail sales and industrial production) reported last week, and the political uncertainty with senior LDP officials resigning, further isolating Prime Minister Ishiba, the odds of a BOJ rate hike this year have been scaled back to about 14.5 bp from around 18.5 bp early last week. The LDP report on the recent election results blamed the party and its anti-inflation efforts for the poor showing. A party vote will be held Monday to decide whether to bring forward next year's scheduled leadership contest. There are 342 party members and regional representatives that will vote. The vote is not anonymous, and only those who want to have a leadership election this year need to vote. Two surveys conducted found about 100 LDP officials favor the early contest and 50 are opposed. At the end of the week, Japan will report labor earnings and household spending. Both are expected to have increased.

GBP: Sterling was tagged for two cents yesterday before stabilizing. It was sold from Monday's high (~$1.3550) to $1.3340. This overshot the (50%) retracement of August's rally, seen near $1.3370, and approached the (61.8%) retracement around $1.3315. It made a marginal new low, slightly below $1.3335 before rebounding and reached through $1.3415 in early European activity. Sterling seemed particularly sensitive to the jump in Gilt yields. Still, the UK sold a record GBP14 bln 10-year Gilts yesterday, and the demand was 10-times more than was offered. While the French fiscal challenges look poised to topple the government next week, and lead to a possible downgrade (vote of confidence on Sept 8 and Fitch review AA- rating with negative outlook on Sept 12), the UK's fiscal situation is going to come to a head a later  with the Autumn budget. Chancellor Reeves has a roughly GBP35 fiscal hole to fill if the government's self-imposed fiscal rules are to be honored. The higher interest rates only aggravate the problem, and the government cannot look to the BOE for much help. The swaps market sees little chance of a hike in the next couple of months and has less than a 40% chance of a hike by the end of the year. The final services and composite PMI reports were revised higher, but sterling's recovery began before their release. Still, both were revised higher. The services PMI was revised to 54.2 from 53.6 of the flash reading and 51.8 in July. The UK's final composite PMI stands at 53.5, up from 53.0 initially and 51.5 in July. It is the highest level since last August 2024. 

CAD: The greenback rose to CAD1.3815 amid its broad gains yesterday. The peak was recorded in early North American dealings and as the US dollar's gains were pared, it returned to the CAD1.3780 area, around the middle of the day's range. At its best, the US dollar overshot the (38.2%) retracement of the losses since Powell's speech at Jackson hold that was found near CAD1.3805 but stopped short of the next retracement (50%) objective (~CAD1.3825). It is trading quietly today, mostly between about CAD1.3780 and CAD1.3810. Yesterday it was reported that Canada's August manufacturing PMI rose to 48.3 (from 46.1 in July) and is at its best level since January, which was the last time it was above the 50 boom/bust level. Still, the disappointing Q2 GDP, reported before the weekend, boosted the prospect of a rate cut later this month (Sept 17). The odds were steady at around 55%, the highest since July 10. Given the trade impact on GDP, the July merchandise trade balance tomorrow could impact expectations but the jobs data at the end of the week may be more important. The median forecast in Bloomberg's survey calls for a 10k increase in overall jobs, which will not be sufficient to prevent another rise in the unemployment rate (7.0% vs. 6.9% in July and 6.7% in August 2024).

AUD:  The Australian dollar was sold to about $0.6485 yesterday, roughly the halfway point of its rally since the August 22 low (the day Powell spoke at Jackson Hole). and recovered in North America to around $0.6525. It held just shy of Monday's low. The Australian dollar held above $0.6500 today and is probing near session highs near $0.6535 in late European morning turnover. The final August services and composite PMI were overshadowed by the Q2 GDP report. The economy expanded by 0.6% in Q2, twice the pace seen in the revised Q1 figures. The economy grew about twice as fast in H1 25 than it did in H1 24, but it is unlikely to be sustained. The Reserve Bank of Australia forecasts 1.6% growth this year after 1.1% last year. The IMF is a little more optimistic and it projects a 1.8% increase in GDP this year. For the record, the final composite PMI was revised to 55.5 from 54.9 initially and 53.8 in July. It is the highest since at least April 2022. New orders edged to a new high since April 2022 (55.8 vs. 55.5 in July). Still, while the odds of a rate cut at this month's central bank meeting (September 30) are slim, the futures market has about an 85% chance of a cut at the following meeting (November 4), down from 100% yesterday. 

MXN: The US dollar spiked to a two-week high yesterday near MXN18.8635 in early North American turnover before pulling back to about MXN18.7145. Nearly all emerging market currencies were caught in the dollar's surge, which moderated early in the North American session. However, the broader risk off appeared to limit the peso's recovery. The greenback is trading between about MXN18.6930 and MXN18.7810 today. The dollar gapped higher against the Brazilian real yesterday and briefly poked above BRL5.50. As the dollar's gains were pared broadly, it entered the gap but did not fill it. The gap extends Monday's high around BRL5.4495. Brazil reported that Q2 GDP rose by 0.4%, slightly more than economists in Bloomberg's survey expected, but a marked slowdown from the 1.3% quarter-over-quarter pace seen in Q1. Economists expected H2 growth to slow further before recovering next year. 

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