Overview: Leaving aside the New Zealand dollar, which has been tagged for more than 1% after the dovish forward guidance following the central bank's well-telegraphed rate cut, and the Australian dollar, which has been dragged lower after yesterday's poor price action, the G10 currencies are little changed. The greenback is firmer against most emerging market currencies. Outside of New Zealand, the macro data has been limited to a larger than expected Japanese trade deficit, as exports to the US, EU, and China fell, and firmer than expected UK July inflation. The highlight from the US today are the FOMC minutes, which seem less relevant after the August 1 jobs report and official comments.
While Japanese, Taiwan, and South Korea stocks sold off, most of the other markets in the Asia Pacific region rose with China's CSI 300 rising more than 1% and the Shanghai Composite reaching a new 10-year high. Europe's Stoxx 600 is posting a minor gain but sufficient to extend its advance for the third consecutive session and the sixth in past seven. US index futures are nursing small losses after yesterday's sell-off. European benchmark 10-year yields are mostly 1-2 bp lower, but the UK 10-year Gilt yield is off four basis points, despite the higher CPI reading. The 10-year Treasury yield is off almost a single basis point to slip back below 4.30%. Gold has steadied after losing 0.5% yesterday. It dipped below $3312, its lowest level since August 1, but recovered to session highs, a little above $3327 in Europe. October WTI continues to trade in Monday's range ($61.45-$63.00).
USD: The Dollar Index has not gone anywhere really in the past five sessions. The range set in the second half of last week, roughly 97.65-98.35 continues to dominate. It did edge up to almost 98.45 today to test the 20-day moving average, but it is back within the well-worn range. The trendline off July and now August lows is near 97.80 today. At the same time, this month's downtrend line comes in slightly below 98.25 today. The FOMC minutes today have been superseded by events, and especially the employment data, and subsequent official comments. At next month's FOMC meeting, we expect a quarter-point rate cut, which will remove some restrictiveness of the current setting, updated Summary of Economic Projections, where the median dot may be for one more cut this year and four in 2026, and a decision to reduce or end quantitative tightening as reserves appear to be approaching "ample" levels as reflected in the dwindling use of the reverse repo facility.
EURO: The euro remains mostly in the range set last Thursday, August 14, of about $1.1630-$1.1715. It eased to almost $1.1620 today and tested the 20-day moving average. The trendline connecting the July highs comes in near $1.1745 today. Options for 1.1 bln euros at $1.1675 and another 855 mln euros of options at $1.1600 expire today. The news stream continues to be light. Germany's July PPI fell by 0.1% and the year-over-year slipped deeper into negative territory (-1.5% vs. -1.3%). It has been deflating since March. Recall that producer price deflation began in July 2023 but was positive in the last two months of 2024 and the first two months of this year. Outside the eurozone, Sweden's Riksbank stood pat with it target rate at 2.0%. It began easing in May 2024 from 4.0%. The swaps market has another cut nearly fully discounted before the end of the year. The Swedish krona often seems to trade like a high-beta euro, which is to say it frequently moves in the same direction as the euro against the dollar but more so. In July, when the euro fell by 3.15%, the krona dropped 3.4% against the dollar. In this month's rally, the krona has edged out the euro. The Swedish krona was the strongest G10 currency in H1 25, rising 17%. The euro rose by slightly more than 13.8%.
CNY: Surprising no one, China's loan prime rates were left unchanged at 3.0% and 3.50%, for the one-and five-year tenors, respectively. Meanwhile, data suggest that the expansion of the "Southbound Bond Connect" led to record flows last month from the mainland to HK. At the same time, foreign investors apparently reduced their holdings of Chinese bonds. Foreign investors previously were attracted to the “negotiated CDs", but these have fallen out of favor, and the use fell for the third consecutive month in July. Note that the dollar rose against most the on- and offshore yuan in July for the first time in three months. Even if several years ago, net settlement may have tracked reserve changes, the increased capital inflows, and outflows, with still a large trade surplus, suggests it now may reflect more than "stealth intervention." The greenback continues to trade in a narrow range against the offshore yuan. For the better part of 2 1/2 weeks, the dollar has been traded between CNH7.1680 and CNH7.1980, and it hovers near the middle of the range. The greenback has traded on both sides of yesterday's range, and from a technical perspective, the close is important. A close below yesterday's low (~CNH7.1820) would be more negative. Meanwhile, the PBOC continues to gradually lower the dollar's fix. Today's fix of CNY7.1384 (CNY7.1359 yesterday), it is the sixth consecutive session below CNY7.14. The reference rate was set only once last month below CNY7.14. It seems clear that the PBOC has introduced more flexibility into setting the reference rate and that is falling; while seeing capital outflows increase and the implied three-month volatility of the onshore yuan is near one-year lows.
JPY: The decline in US yields as equities fell helped drag the dollar down against the Japanese yen, even as it rose against the other G10 currencies. The dollar met sellers yesterday after it reached a four-day high near JPY148.10. There are nearly $1 bln of options at JPY148.00 that expire today and another $1.4 bln of options expire there on Thursday. It traded below JPY147.50 in the North American afternoon and was sold to JPY147.15 today. Since the August 1 sell-off, the dollar has entered a most JPY146-JPY148 trading range. It has closed above JPY148 once (August 11), but this proved to be a bit of a bull trap. The tone remains one of consolidation today. Japan reported its July trade figures earlier today. On an unadjusted basis, Japan reported a JPY117.5 bln deficit. That means in the first seven months of the year, it recorded a trade deficit of about JPY2.34 trillion (~$15.8 bln) compared with about a JPY4 trillion (~$26 bln) shortfall in the January-July 2025 period. Exports fell for the third consecutive month on a year-over-year basis, but the 2.6% drop was the largest since the pandemic. Exports to the US fell by 10.1%, and it was the fourth consecutive decline. Exports to China were off 3.5% and down 3.4% to Europe. Imports fell by 7.5%, with crude oil, coal and liquified natural gas falling at double digit paces.
GBP: Sterling rallied from the August 1 low near $1.3140 to almost $1.3600 last week. The move seemed stretched, and we anticipated a consolidative phase. Sterling traded at a five-day low yesterday slightly below$1.3480 and extended the losses to almost $1.3460 today. The next area of support is around $1.3415-20, where the 20-day moving average and the (38.2%) retracement of this month's rally are found. Still, sterling recovered after the firmer than expected July CPI. It recovered to almost $1.3510 but stalled in the European morning. Yesterday's high was a little high, near $1.3530. The UK's CPI rose by 0.1% in July, the base effect saw the year-over-year rate tick up to 3.8% from 3.6%. In the first seven months of the year, then, the UK CPI rose at an annualized pace of 4.1%. That compares to a 1.9% annualized pace in January-July 2024. The core rate edged up to 3.8% (from 3.7%). It stood at 3.3% in July 2024. Service inflation rose to 5.0% (from 4.7%), a three-month high. It was at 5.2% last July. The net effect was to push expectations of the next cut further out. In the swaps market, there is less than a 50% chance of another cut this year. The year-end rate is seen near 3.85%, the highest since late May. The next cut is not fully discounted until the end of Q1 26.
CAD: Slightly softer than expected headline July CPI yesterday saw the swaps market increase the odds of rate cut next month from about 25% to a little more than 35%. Amid the risk-off that saw the Nasdaq shed about 1%, and softness among the dollar-bloc currencies (and emerging market currencies), the US dollar rise to CAD1.3870, its highest level since August 1. In fact, the greenback posted its highest settlement against the Canadian dollar since May. Today, it has taken out the high from August 1 (~ CAD1.3880) which itself was the highest since May 21. The May high was about CAD1.4015, and the 200-day moving average is a bit higher near CAD1.4040. But this might be a bit far. Canada reports June retail sales on Friday and a strong 1.6% gain has been tipped by StatsCan in its advance estimate issued late last month. It will likely be flattered by stronger auto sales. It would offset May's 1.1% decline and comes on the heels of an 83k rise in employment in June (13.5k full time positions and 69.5k part time jobs). Excluding autos, Canada may have experienced a its first rise in retail sales in four months.
AUD: There was little follow through selling of the Australian dollar after last Thursday's bearish outside down day, until yesterday. The Aussie was sold through the (61.8%) retracement objective of this month's rally found near $0.6475 and fell to $0.6450. The losses were extended today to almost $0.6425. The month's low is around $0.6420. Its loss would have bearish technical implications and suggest potential toward $0.6350-80. The preliminary PMI is due tomorrow, and the composite stands at a cyclical high of 53.8 in July after rising sharply in June and July from the year's low of 50.5 in May. Meanwhile, as widely anticipated, the Reserve Bank of New Zealand cut its cash rate target to 3.0% from 3.2%. It was understood to be a dovish cut in the sense that the central bank projects a further easing of 45 bp by Q1 26, with the target rate below market measures of neutral (~2.50%). The New Zealand dollar is off the most among the G10 currencies, losing more than 1%.
MXN: The US dollar gains fizzled yesterday near Monday's high, slightly shy of MXN18.8675. Once again peso buying emerged on the pullback and the greenback fell below MXN18.78. But the risk-off, which deepened, saw the US dollar recover back to MXN18.8450. It is trading quietly today in a roughly MXN18.7865-MXN18.8455 range so far today. Tomorrow, Mexico reports June retail sales. They likely slipped a bit after the heady 1.8% surge in May. Minutes from August 7 Banxico meeting are also due. At that meeting, the central bank cut the target rate by 25 bp (to 7.75%) after four consecutive half-point cuts. Recall that Deputy Governor Heath dissented in favor of a standpat policy. The central banks estimate that the real neutral rate is 1.8%-3.6%. Adjusted by the one-year inflation expectations, the current real rate is slightly above 4.0%. The central bank expects the average headline inflation will be about 3.8% this quarter, down from 4.1% previously. It left the Q4 projection unchanged at 3.7%.
Reviewed by Marc Chandler
on
August 20, 2025
Rating:
