Overview: The US dollar's recovery accelerated today, and it has not deterred gold from surging through the $4000-mark in the spot market. With the US government still shut and no apparent negotiations to end it, greenback's gains seem to be a reflection of poor developments elsewhere. Following the LDP's leadership election over the past weekend, the yen has plunged more than 3.5% this week and the sell-off does not appear complete. Unexpectedly poor German data and the French political morass has sent the euro lower for the third consecutive session. It approached last month's low near $1.16. It reached a multi-year high on September 17, near $1.1920. There is some optimism of compromise in France today, and while it has helped French assets, it has done little for the euro. The Reserve Bank of New Zealand delivered a dovish 50 bp cut and indicated that its monetary easing cycle is not over. The New Zealand dollar was sold to its lowest level in nearly six months. As is often the case in the firm US dollar environment, the Canadian dollar is performing best, nursing minor losses. The greenback is also firmer against most emerging market currencies.
Equities were mixed in the Asia Pacific region, but the MSCI regional index snapped a six-day advance yesterday and slipped a little further today. Europe's Stoxx 600 is up a little more than 0.5% and is poised to post a gain for the first time this week. US index futures are slightly firmer. Bonds have rallied. European yields are off 2-4 bp, with French bonds leading the way. The 10-year US Treasury yield is off a basis point to almost 4.11%. Gold soared to nearly $4046. November WTI is near a five-day high around $62.65.
USD: The Dollar Index held above 98.00 yesterday and settled firmly before accelerating today to almost 99.00. It has taken out the (61.8%) retracement of the decline since August 1, which was a little above the late September high (~98.60). A bottoming technical pattern may have been forged and the move above 98.70 could project a correction back toward 100.25. The FOMC minutes from last month's meeting may draw more attention than usual. First, with the federal government shut, there is little official data to compete with it. Second, color around Miran joining the board may be of interest. The new Summary of Economic Projections was generated, and Chair Powell made it seem like Miran was isolated. Still, comments from Governor Bowman, including yesterday's remarks, suggest she may join Miran at this month's meeting, in which he will most likely dissent again in favor of a 50 bp cut. Minneapolis Fed President Kashkari, a non-voter this year, speaks today but his views are known after speaking yesterday too (sees two more rate cuts this year). Governor Barr speaks on the community developments and St. Louis Fed President Musalem, who has the vote this year, introduces the community development conference. Powell speaks tomorrow but his remarks have been pre-recorded and there will be no Q&A.
EURO: The euro cannot get out of its own way. Between the collapse of another French government and continued disappointing German data, and the risk of a Belgium credit downgrade, the euro is at the lower end of where it has traded in the past month. It was sold to a little below $1.1610 so far today. The (61.8%) retracement of the rally since August 1 is near $1.1595. Some pressure on the euro may be option related with over 3 bln euros in options struck at $1.1650 expiring today and Friday. Yesterday, German reported factory orders fell for four consecutive months through August and six of the first eight months of the year. Today, it reported a heady 4.3% plunge in August industrial output. The median forecast in Bloomberg's survey was for a 1% decline. It was the largest decline since 2022. Auto output collapsed by 18.5%, which may be partly a reflection of annual plant closures for holidays and production line changes. Excluding energy and construction, output fell 5.6%. French Prime Minister Lecornu who lasted a little more than half as long as the UK's Truss did a few years ago seems more optimistic that a new government with the same parliament can find a way through the impasse, which may go through small budget cuts next year and a suspension in the pension law until the 2027 presidential election. French bonds and stocks are among the strongest in Europe today.
CNY: Mainland markets re-open tomorrow. When the onshore yuan stopped trading, the dollar was near CNH7.13. The generally firmer greenback tone has seen in rise above CNH7.15 for the first time since late August. If the yuan were less closely managed, the CNH7.15 area would appear as a neckline of a bottoming pattern that projects back to a little above CNH7.20. There continue to be reports suggesting that international investors are looking to boost their exposure to Chinese equities.
JPY: Even without higher US yields, the greenback extended its gains to JPY152 yesterday to reach its best level since February. It has extended the gains today to almost JPY153.00. It settled Monday and Tuesday above its upper Bollinger Band, found near JPY151.70 today. The greenback peaked a little more than a week before President Trump's second inauguration near JPY158.85. There is little on the charts now until around JPY153.20 and then JPY154.40. Earlier today, Japan reported slower labor cash earnings for August (1.5% vs. a revised 3.4% from initially 4.1%). Adjusted for inflation, real cash earnings fell 1.4% (July's 0.5% increase was revised to -0.2%). Still, as was reported yesterday, it did not deter Japanese household spending, which rose 2.3% from a year ago. Separately, Japan reported a larger August current account surplus (~JPY3.78 trillion, up from JPY2.68 trillion in July but down from JPY3.97 trillion in August 2024). The trade deficit narrowed to JPY105.6 bln from JPY189.5 bln in July and JPY385.5 bln in August 2024. Despite the weakness in yen, what is expected to be the new LDP-led government is seen deterring a rate hike by the BOJ. At the end of last week, the swaps market had pricing in 14 bp of a hike. It fell to slightly less than five basis points on Monday and now it is a little more than six.
GBP: Sterling was pressed to a six-day low in the North American morning yesterday near $1.3390. It absorbed the bids below the figure and recovered to almost $1.3450. Today, sterling has made a marginal new low near $1.3385. It recovered to around $1.3425 in early European trading before stalling. Sterling needs to re-establish a foothold above $1.35 to help improve the technical tone. As one would suspect, European bond yields are highly correlated. There is an intuitive logic to it. The UK fiscal issue will come to a head with next month's Autumn budget presentation. The markets are wary, and the correlation between changes in French and UK 10-year yields has returned to the year's highs, slightly north of 0.85. The year's low in April was near 0.50, and more recently, in late August, and is now a little above 0.55. Gilts are a laggard today, with the 10-year yield off less than a basis point.
CAD: Canada reported a larger than expected August merchandise trade deficit yesterday (C$6.32 bln vs C$5.6 bln), but the downward revision to the July deficit kept the two-month average in line with projections. The September IVEY PMI jumped to 59.8 from 50.1, which is strongest reading since June 2024. The greenback was confined to a narrow range against the Canadian dollar yesterday, mostly traversing between about CAD1.3940 and CAD1.3965. As it often does in a firm US dollar backdrop, the Canadian dollar performed well on the crosses against the other G10 currencies. Still, it remains within the range set last Thursday: ~CAD1.3935-CAD1.3985.
AUD: According to Bloomberg's data, yesterday, the Australian dollar took out Monday's low by 1/100 of a cent to almost $0.6480. Follow-through selling today took it to almost $0.6555. Nearby support is seen in the $0.6545-50 area. Once source of demand for the Australian dollar in recent months has been against the New Zealand dollar. It has risen by a little more than 5% since the end of June. It reached a three-year high last week near NZD1.1420, which it took out today on its way to NZD1.1445 today. A key driver is the divergence of monetary policy. The Reserve Bank of New Zealand has been considerably more aggressive in easing policy than the Reserve Bank of Australia. With today's cut 50 bp cut, the RBNZ has cut its policy rate by 175 bp this year after 125 bp cuts last year. The RBNZ kept the door open to additional easing. The RBA began its easing cycle this year and has cut rates three times for a total of 75 bp. Its cash rate target is 3.60% compared with 2.50% in New Zealand. The swaps market has one more quarter-point RBNZ cut this year discounted. The Kiwi fell to almost $0.5735 today, its lowest level since April.
MXN: The dollar consolidated quietly yesterday inside Monday's range. The greenback held support near MXN18.3300. It was capped near MXN18.4160 yesterday and reached MXN18.4355 today. Monday's high was near MXN18.49 and last week's high was about MXN18.5160. A trendline drawn off the Sept 25 high (~MXN18.5640), the last week's high (October 2), and Monday's high comes in today near MXN18.4750. Mexico's vehicle production increased 1.6% in September to its strongest level since June. Exports rose even faster. Mexico exported about 88.5% of the vehicles up from a little less than 85% in August. In September 2024, Mexico exports nearly 83.4% of its vehicle production. Estimates suggest China exports about 20% of its vehicle production. China's scale and trade practices are daunting but as a share of its output, it is less reliant on exports that commonly imagined.
Reviewed by Marc Chandler
on
October 08, 2025
Rating:
