Dollar Mostly Little Changed, Oil Extends Pullback, and China Rejects US Unilateral Sanctions on Iran

The US dollar is mixed against the G10 currencies. If it weren’t the nearly 0.3% decline in the Norwegian krone, fueled by the second consecutive of more than 2% in the price of Brent oil, the G10 currencies would be mostly +/-0.1% change today as narrow ranges prevail.  The prospect of an extended trade war with the US continues to weigh on the Canadian dollar.  Despite falling US yields, and a small rise in long-end Japanese government bonds, the market lifted the greenback to a four-day high against the Japanese yen near JPY159.50. 

China has formally rejected the unilateral and secondary sanctions the US announced against Iran and anyone that trades with it.  After the UAE cut off economic ties with Iran earlier this month, China is Tehran’s largest trading partner.  US Treasury Secretary Bessent has hinted that a major financial institution may be sanctioned in the coming days.  There is some speculation that it could be either one of the two large Chinese banks that reportedly received a formal warning letter from the US Treasury back in April.  Such a move would ahead of next month’s Trump-Xi meeting could be especially disruptive.  

Prices 

G10

• The euro slipped to a new session low near $1.1655 yesterday, a three-day low. It made a marginal new low near $1.1650 in late Asia Pacific turnover and caught a bid in early European activity that lifted it to the session high near $1.1675. Yesterday’s high was slightly above $1.1685. Recall that twice last week, Europe bid the euro to around $1.1710 and North American participants sold it.

• Despite the nearly five basis point decline in the US 10-year yield yesterday, the greenback remained firm against the Japanese yen. Today, US yields are softer while the 10-year JGB yields rose, and the dollar reached a four-day high near JPY159.50. For two weeks, it has chopped between about JPY158 and JPY159.60-80.  Many, if not most, observers are skeptical of the effectiveness of the recent intervention, but swaps market boosted the likelihood a hike BOJ hike next month to around 80% from less than 30% before the central bank action. The odds of another hike before the end of the year have risen to about 60% from less than 10% on eve of the intervention. 

• Sterling recorded an inside day yesterday as it spent the session within the pre-weekend range (~$1.3620-$1.3675). It remains in that range today. The daily momentum indicators are overextended, but there may be scope for a marginal new high. A break of the $1.3590-$1.3600 area may be the first signal confirming a consolidative or corrective phase. 

• The Canadian dollar was weakest among the G10 currencies yesterday.  Its roughly 0.6% loss was the largest since the hawkish hold was delivered by the Federal Reserve at Warsh’s first meeting as Chair. The US dollar reached CAD1.3860 yesterday and slightly above CAD1.3865 today.  The next technical target is in the CAD1.3900-10 area. The channel of transmission was thew two-year interest rate differential. The US premium widened by nearly 10 bp to almost 130 bp. 

• After reaching $0.7180 before the weekend, the Australian dollar pulled back yesterday to about $0.7140.  It made a marginal new low today before recovering to almost $0.7160. Although momentum indicators are stretched, there is potential to re-challenge last week’s high. 

EM 

• The risk-off mood and a disappointing monthly IGAE measure, couple with a slight downward revision in Q2 GDP (1.4% vs. 1.5% quarter-over-quarter) weighed on the Mexican peso. The dollar rose to about MXN16.9735. With stronger risk appetites, it held today, and the dollar eased back to almost MXN16.93. Last week’s high was MXN17.07-MXN17.08. The Mexican peso fell by about 0.3% yesterday, its biggest loss in a month, and the high-flying Colombian peso dropped about 0.8%. The Brazilian real slipped by ~0.25%.  

• After falling to a new marginal low since February 2023 yesterday against the offshore yuan (~CNH6.7130), the greenback recovered to CNH6.7255, the pre-weekend high, and marginally higher today. From a technical and fundamental perspective, we continue to see risks of some consolidation. The PBOC fixed the dollar slightly higher today, for the third consecutive session (CNY6.7852 vs. CNY6.7841 yesterday). Separately, but not totally unrelated, reports suggest that the US is considering an additional 7.5% tariff on Chinese goods over concerns about excess manufacturing capacity ahead of next month’s Xi-Trump meeting, and China rejects the unilateral sanctions on Iran.

• Apparently helped by intervention, the Indian rupee rose to a seven-day high today. The dollar fell to almost INR95.39 today. The 0.35% gain was the rupee’s biggest advance of the month. The dollar settled near INR95.4150, the first settlement below the 20-day moving average (~INR95.48) since last Monday. 

Other Markets

• Equities are mostly firmer today.  Most of the large bourses in the Asia Pacific region advanced but Hong Kong and the China’s CSI 300, but the regional MSCI index recovery from yesterday’s 1.2% fall was marginal. Europe’s Stoxx 600 was flat yesterday and is up nearly 0.5% today.  US index futures are firmer today. The S&P 500 futures are about 0.55% higher after slipping almost 0.3% yesterday. The Nasdaq fell by about 0.75% yesterday and the futures contract is 1% higher today. 

• Benchmark 10-year yields softened yesterday, ostensibly helped by the decline in oil prices.  News wires cited a couple of Treasury officials suggesting the US bond buying effort could tap the Treasury’s General Account, which would create reserves in the banking system.  Treasury Secretary Bessent has been critical of the “ample reserve regime” and it would complicate Warsh’s goal of reducing the Fed’s balance sheet. Heavier oil prices today have helped European yields fall around 2-4 bp today and the 10-year US Treasury yield is near 4.67%. It settled slightly below 4.70% yesterday. 

• Gold’s four-day surge stalled near $4681 yesterday, its highest level in a little more than three months. Still, it settled above the pre-weekend high (~$4632). It reached slightly above $4696 today before it was sold a little below $4619. It is nursing small losses in the European morning.  A break of $4600 could see $4540 initially. Silver has been capped near $70 for the past two sessions. It tried again today and failed. The disappointment led to some liquidation, and silver fell to a three-day low, slightly below $67.60. 

• October WTI spent the last two sessions inside the range set August 20 (~$84.25-$87.70). It broke to the downside today and fell to almost $82, a six-day low. This met the (38.2%) retracement of this month’s rally (from ~$73 on August 5). The 20-day moving average is near $81.25 and the next retracement target is around $80.40. 

Data

• Today’s US data includes house price, new home sales, building permits, a few regional Fed surveys and the Conference Board’s August consumer confidence survey.  However, given the larger context, tougher economic sanctions on Iran, and threats to enforce other countries to comply, reports suggesting that the US Treasury could use its TGA (Treasury’s General Account) to buyback more government bonds, and Fed Chair Warsh’s speech tomorrow at Jackson Hole, there may be little more that headline risk with today’s reports. 

• Mexico reports Q2 current account figures today.  Despite Mexico’s trade surplus, it runs a small current account deficit.  It was about 0.5% of GDP last year, and the IMF projects to be nearly the same size this year.  The markets tend not to reaction much to the quarterly figure.

• Germany revised Q2 GDP to 0.3% from 0.2% and provided more details.  Private consumption rose a meager 0.1% but it fell by 0.6% in Q1. Capex disappointed. It fell by 0.2% after a 1.3% contraction in Q1. Government spending edged up 0.1% after rising 0.9% in Q1. Separately, the IFO survey showed sentiment improved and the overall assessment of the business climate increased for the fourth consecutive month. At 88.8, it is at a new high since last August. 

• The minutes from this month’s Reserve Bank of Australia meeting confirmed the hawkish hold message the market understood at the time.  Several board members think that another interest rate hike may be needed, and inflation risks were to the upside. The market recognizes the central bank is in no hurry to hike rates again after three moves earlier this year.  Still, the futures market has a little more than a 60% chance of another hike before the end of the year, up from slightly less than 60% at the end of last week.  A softer July CPI reading tomorrow may not be sufficient to change views significantly.  While headline CPI may slow to 3.3% (from 3.8%) the underlying trimmed mean may be stickier at 3.5% (from 3.6%). 

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