Overview: The dollar is soft and trading near session lows in late European morning turnover. The news stream is light and large parts of the US federal government remain closed. China's mainland markets are on holiday. Among the G10 currencies, the Canadian dollar remains the laggard in a soft greenback environment. Most emerging market currencies also are firmer against the US dollar. The Argentine peso sold off for the third consecutive session yesterday after rallying every day last week. It settled at its highest level since September 22 yesterday. Gold demand persists and it looks poised to challenge yesterday's record high near $3895.
Equities are mostly stronger today. Though Japanese markets were mixed, nearly all of the other markets outside of China and India, which is also on holiday today, rallied, led by South Korea's Kospi's 2.7% rally. Europe's Stoxx 600 is up about 0.75% after a 1.15% surge yesterday. It is the fifth consecutive gain. US index futures overcame early worries about the government shutdown to close higher yesterday and are trading with a firmer bias now. Most benchmark 10-year rates in Europe are softer, though the 10-year Gilt yield is slightly firmer. The 10-year US Treasury yield is a little below 4.10%, the middle of the recent range. November WTI is hovering near $61.50. It has not been much lower since testing $61 in early September.
USD: The Dollar Index is holding above the (50%) retracement of its gains since the Fed's rate cut on September 17 found near 97.40. It is trading softly but within yesterday's range and still looks vulnerable. The (61.8%) retracement is slightly below 97.15. The Dollar Index has fallen in the past four sessions, which matches the longest losing streak since June. Sentiment is poor and the unexpectedly poor ADP private sector jobs estimate (and downward revision to the August series) made the market a little more confident of another rate cut at the end of the month. The ADP estimate showed a loss of private sector jobs for the second consecutive month and the third month this year. Although the ADP report seemed broadly consistent with other data on the labor market, it said that the bulk of the jobs loss in September was the result of it periodic recalibration with data from the BLS (curve fitting?) and that the adjustment resulted in a 43k loss of jobs compared with the pre-benchmarked data. Still, it does not explain the downward revision in August. The final manufacturing PMI was unchanged from the preliminary reading (52.0), while the manufacturing ISM edged up to 49.1 from 48.7, but remains below 50 since February. Prices paid eased from 63.7 to 61.9 but is still elevated and rising, even if at a slower pace. Employment firmed to 45.3 from 43,8 but is still contracting. New orders, which were above 50 in August (51.4, the highest since January) retreated to 48.9.
EURO: The euro approached but held slightly below the (50%) retracement of its losses since the Fed's rate cut. That retracement is found a little above $1.1780. Options for almost 3 bln euros, struck at $1.1785 and $1.1790 expire today. Above there is the (61.8%) retracement and last week's highs near $1.1815. Meanwhile, the US two-year premium over Germany narrowed for the fourth consecutive session yesterday. It bottomed near 150 bp before the Fed's rate cut and recovered to a little above 162 bp last week. It slipped below 153 bp yesterday and is little changed today. The slightly more than six basis point narrowing yesterday was the most in a little more than a month. Meanwhile, despite sluggish growth, the eurozone August unemployment rate of 6.3% matches the average since last August after matching the low since the advent of the monetary union of 6.2% in July. Separately, Switzerland reported that its EU harmonized measure of CPI fell 0.3% in September for a year-over-year rate of zero. It was briefly negative in May. The SNB's deposit rate is at zero but yields out to five-years are negative.
CNY: The dollar posted an outside day yesterday against the offshore yuan. It initially rose to almost CNH7.14 (Tuesday high was ~CNH7.1330). It proceeded to reverse lower and was sold through Tuesday's low (~CNH7.1245). Monday's low was slightly below CNH7.1190. It is trading quietly today, inside yesterday's range. Below there, support may be seen near last week's lows (~CNH7.1110). When the onshore yuan stopped trading on Tuesday, ahead of the long holiday, the greenback was around CNH7.13.
JPY: After approaching JPY150 at the end of last week, the US dollar has been sold every day this week and reached about JPY146.60 yesterday. It is barely holding above it today but looks vulnerable. The dollar has retraced about 3/4 of the rally since the Fed's rate cut last month. In fact, yesterday's low was the lowest it has been since the Fed cut. It was recorded in the immediate aftermath of the dismal ADP report and the drop in US rates. The US 10-year premium over Japan is hovering near 245 bp, its narrowest since April 2022. The year's high was seen in January around 355 bp. The deputy governor of the BOJ, Uchida reiterated the central bank's position that if the economy and prices continue to evolve as expected, rates will be hiked. He cited yesterday's Tankan survey but not the unexpected weakness in industrial output or retail sales reported earlier this week. The swaps market is little changed in its assessment of around a 63% chance of a hike later this month and a little more a 75% chance of a hike before the end of the year. Japan will report on August's labor market tomorrow and it will see the final PMI.
GBP: Sterling briefly traded above $1.3525 yesterday, where it met the (50%) retracement objective of its losses since the Fed's rate cut. It is trading in the upper end of yesterday's range. Today's low is slightly below $1.3470, where options for GBP556 mln expire today. Last week's high was slightly $1.3535. Above there is the (61.8%) retracement around $1.3570. With the Bank of England on hold and the market anticipating continued Fed cuts, the UK two-year premium over the US is a little more than 44 bp. As recently as early August, the UK was at a small discount to the US. The day before the Fed's cut last month, the UK premium was about 46 bp, the most since July 2023.
CAD: The greenback remains firm against the Canadian dollar. It briefly frayed support at CAD1.39 on Tuesday but settled above it and challenged last week's high yesterday near CAD1.3960, which was also a four-month high. So far, it is holding above CAD1.3930 and below CAD1.3950. There are options for about $360 mln that expire today at CAD1.3965. It appears to be carving out a bullish wedge or pennant formation. Several technical considerations converge in the CAD1.4000-CAD1.4020 area: the 200-day moving average is slightly below the band, the May highs were around CAD1.4015, and the (38.2%) retracement of this year's decline is near CAD1.4020. Weak economic data and the heavier US dollar environment are the two chief drags on the Canadian dollar. Yesterday's manufacturing PMI slipped to 47.7 from 48.3. It has not been above 50 since January.
AUD: The Australian dollar consolidated yesterday in the upper end of Tuesday's range. It recovered from around $0.6520 at the end of last week to almost $0.6630. The Aussie has held above $0.6600 today, where A$1.9 bln options expire today and another A$1.7 bln tomorrow. It has been unable to rise above $0.6625 where another set of options for almost A$800 mln expire today. The (61.8%) retracement of the losses since the Fed's rate hike is a little higher near $0.6635. Last week's high was also slightly below $0.6630. Above there, the next hurdle is seen around $0.6665. Earlier today, Australia reported a smaller than expected August goods trade surplus of A$1.83 bln. Last August's trade surplus was A$5.4 bln. Through August, Australia's goods trade surplus has averaged about $4.2 bln this year compared with an average monthly surplus of almost A$6.0 bln in the first eight months of 2024. Australia's trade with China is greater than with its next five largest trade partners (Japan, the US, and South Korea, Singapore, and India). Imports from the US fell for the third consecutive month. Separately, household spending slowed 5.0% year-over-year in August, from July's revised 5.3% pace (initially 5.1%), the fastest pace since late 2023, and is one of the considerations that make the central bank cautious about easing monetary policy further. The futures market does not have the next cut fully discounted until late Q1 26.
MXN: Yesterday's dollar low was recorded after the ADP disappointment near MXN18.24. It snapped back to almost MXN18.38 and rose a bit further today to slightly above MXN18.42 before sellers emerged and pushed it back to almost MXN18.34 today. The year's low was recorded on September 17 (FOMC rate cut) near MXN18.20. The greenback recorded the low of the year the following day against the Brazilian real slightly below BRL5.27. It reached a little above BRL5.37 last week and briefly traded below BRL5.30 yesterday before rising through Tuesday high (~BRL5.3340). The dollar settled within Tuesday's range, neutralizing the technical signal. Brazil's manufacturing PMI eased to 46.5 (from 47.7). It has fallen since March, and it was last above 50 in April. The September reading is the lowest since April 2023. For its part, Mexico saw its manufacturing PMI slip to 49.6 from 50.2 in August, which was the first 50 reading since June 2024. But this merely confirms that Mexico's own version of the PMI (IMEF) continued to show--sub-50 readings. Mexico's August worker remittances surprised on the upside, rising to nearly $5.58 bln from $5.33 bln in July. Still, the fact of the matter is that worker remittances have slowed this year, and it may reflect tougher US immigration policy. In the first eight months of the year, workers have sent nearly $40.5 bln back home compared with $43 bln in the same period in 2024. Moreover, the dollar buys less pesos than it did a year ago (~5.5% less).
Reviewed by Marc Chandler
on
October 02, 2025
Rating:
