Overview: There were three highlights for today and two, the rate cut by the Reserve Bank of Australia and the UK's labor market update are behind us. The Reserve Bank of Australia delivered a dovish cut after last month's hawkish hold. It signaled scope for two more rate cuts. The UK's labor market appeared to stabilize, and this has seen the odds of another cut before the end of the pared. The third highlight is the US July CPI. We had anticipated a firmer today for the dollar ahead of the report and this has transpired. Even though headline and core CPI are likely to have edged up, we do not think that stands in the way of a cut next month. The full employment side of the Fed's mandate is seen at risk and a consensus appears to have formed to remove more of the restrictiveness of the current monetary setting. Ahead report, the dollar is trading quietly but with a mostly firmer bias.
Japanese markets re-opened after yesterday's holiday and stocks rallied, with the Nikkei gaining a little more than 2%. Most of the large bourses in the region rose with the exception of South Korea, India, and Singapore. Europe's Stoxx 600 is recouping yesterday's minor loss. US index futures are slightly firmer. Major bond markets are mixed. The 10-year JGB yield edged up to almost 1.49%. Benchmark 10-year yields are mostly narrowly mixed in Europe, leaving the 3.5 bp increase in the UK 10-year Gilt the outlier. The 10-year US Treasury yield, which has risen for the past five sessions, is around a basis point softer, near 4.28%. Gold, which was tagged for 1.6% yesterday, the most in nearly three months, has stabilized today, but is stuck near yesterday's trough (~$3341.50). After falling 5.1% last week, September WTI posted its first gain of the month yesterday, rising a few cents. It is up a few more cents today but remains in the pre-weekend range (~$62.75-$64.60).
USD: The Dollar Index rallied from almost 98.00 yesterday, in the Asia Pacific session to around 98.65 in the North American morning before the European session ended. It is flat so far today in a roughly 98.45-98.55 range. We had anticipated a firm dollar ahead of today's CPI reading, but we expected it to have been boosted by firmer US rates. US rates were soft yesterday, while the dollar advanced, and remain so now. The headline and core July CPI likely rose for the third consecutive month. A 0.2% rise in the headline rate would lift the year-over-year pace to 2.8% from 2.7%. and would be the highest since February. A 0.3% rise in the core rate, the largest since January, would lift the year-over-year pace to 3.0% from 2.9%, and be the highest in five months. So far firms have had trouble raising prices as household debt stress levels are elevated and real disposable income growth has been weak. Goods prices may firm a little while soft demand limits service price increases. The softer rent and owners' equivalent may be ending. Used car prices may have also risen. Varying by industry, a combination of narrow profit margins by US producers, firmer US goods prices are expected to absorb the bulk of the tariffs, and the risk may increase in the coming months. Two regional Fed presidents (Barkin from Richmond and Schmid from Kansas City) speak shortly after the CPI. Nevertheless, the market is convinced that the easing cycle will continue next month (~88%) and futures market is discounting two cuts fully this year still, and about a 1/3 chance of a third.
EURO: After stalling last week in front of $1.17, the euro was sold to a three-day low yesterday near $1.1590 yesterday. It is holding above $1.1605 today and has been capped near $1.1630. The (38.2%) retracement of the rally since August 1 low is near $1.1580. The (50%) retracement is around $1.1545. There are two sets of chunky options that expire today: 1.11 bln euros at $1.1650 and about 815 mln euros at $1.1575. Germany's ZEW survey showed deterioration. The assessment of current conditions slumped to -68.6 in August from -59.5 in July. It is the second-best reading since July 2023. The expectations component fell to 34.7 from 52.7 in July. It is a three-month low. The economy is still struggling. The 0.1% contraction estimated for Q2 risks being revised lower, and the median forecast in Bloomberg's survey calls for a flat Q3.
CNY: The dollar is firm against the offshore yuan. The move above CNH7.1950, the upper end of last week's range, targets CNH7.2000-CNH7.2060. That said, the August 1 high matched the June 2 high near CNH7.2240. The PBOC set the dollar's reference rate higher for the third consecutive session (CNY7.1418 vs. CNY7.1405 yesterday). Many argue that the yuan is undervalued and this boosts its exports. Yet, look at Japan. By many measures, it is more undervalued than the yuan, yet it runs a trade deficit. The trade deficit in H1 25 was about JPY2.3 trillion (~$15.6 bln). Many of Chinese exports may not be particularly sensitive to short-term moves in foreign exchange, like rare earths, magnets, batteries, and EVs, ventilators, and for solar panels, polysilicon, ingot, and wafers. Meanwhile, there is an agreement to extend the tariff truce between the China and the US for another 90 days (to Nov 10). Separately, but tellingly about the growing asymmetries, Chinese officials are dissuading the use of Nvidia's H20 processes, particularly for government-related entities. We suspect China's weaponization of critical earths, after the US weaponized the semiconductor supply chain was what has tempered the efforts to contain China.
JPY: The dollar rose to its best level against the yen yesterday near to its best level since the August 12 downside reversal. It reached JPY148.10. And today, surpassed the (38.2%) retracement from the August 1 high (~JPY150.90) near JPY148.25. The (50%) retracement is near JPY148.75. Japan returned from the long holiday weekend. The highlight of the week is Friday's first estimate of Q2 GDP. After contracting by 0.2% at an annualized rate in Q1, it is projected to have grown by 0.4% (annualized rate) in Q2. The BOJ is not in a hurry to hike rates again. The swaps market has almost 15 bp of tightening at the end of the year. It briefly traded around 20 bp in late July.
GBP: After visiting its highest level since July 25 (~$1.3575) yesterday, sterling reversed and fell through the pre-weekend low (~$1.3420). It settled barely inside last Friday's range to avoid a technically bearish key reversal. It has rallied 3 1/3 cents from the August 1 low (~$1.3140), but the move does not appear over. The five- and 20-day moving averages converged yesterday slightly below $1.34 and the shorter-dated moving average crossed above the 20-day moving average for the first time in a month. The next target is near $1.3540. The UK labor market appeared to stabilize, and this reinforces the sense that the cut earlier this month exhausted the scope for near-term easing. The swaps market has a little less than 50% chance of a cut in November and a 70% chance of a cut before the end of the year. Last Wednesday, before the BOE meeting, it was fully discounted. Now, the next cut is not fully discounted until the middle of Q1 26. Average weekly earnings moderated to 4.6% in June from 5.0% in May. It matches the lowest since August 2024. The BOE's preferred measure of earnings growth (private sector earnings excluding bonuses) slowed to 4.8% from 4.9%. The unemployment rate was steady at 4.7% in the three months through June, following three consecutive increases. It stood at 4.2% in June 2024 and 4.4% as recently as February. The number of people on company payrolls fell by 8k in July. It was the least in six consecutive months that it has declined. Jobless claims in July fell by 6.2k and June's 25.9k increase was revised to a 15.5k decline.
CAD: Amid the US dollar's firmer tone yesterday, the Canadian dollar was among the strongest G10 currencies, falling by about 0.15%. Still, the greenback rose to a four-day high slightly shy of CAD1.3800. It is holding slightly below there today, but the looks poised to take it out, at least on an intraday basis. Recall that the high from August 5 was about CAD1.3810. This area corresponds to the (38.2%) retracement of the US dollar's sell-off since the August 1 high (~CAD1.3880). The market is not typically sensitive to Canada's build permits time series, which will be reported today. After surging 12% in May, it is expected to have pulled back by 4% in June. Following last week's disappointing employment data boosted the market’s confidence of another rate cut before the end of the year from around 80% on August 4 to 100% before the weekend before consolidating yesterday around 90%.
AUD: As it did before the weekend, the Australian dollar was confined to last Thursday's range yesterday, which was roughly $0.6490-$0.6540. It is threatening to break lower today and a push below $0.6480 targets $0.6465. The Reserve Bank of Australia's rate cut was fully anticipated in the futures market. Unlike last month, the RBA did not disappoint. The futures market has the next cut fully discounted for the next meeting in November, and before the end of the year and around a 62% chance of another. Today's cut brings the cash target rate to 3.60%. The market expects it to be near 3.0% in the middle of next year, which is seen as the terminal rate. Governor Bullock said that the central bank's forecasts assume a couple more rate cuts. It downgraded its productivity growth assumption to 0.7% from 1%The Reserve Bank of New Zealand meets next week (August 20) and the market has almost a 90% chance of a cut in the 3.25% cash target rate. The terminal rate is seen near 2.75% next year.
MXN: Mexico reported a 0.1% decline in June industrial output. The median forecast in Bloomberg's survey was for a 0.3% rise. The drag was not from manufacturing, where output rose by 0.3%, but from mining (-1.4% June after a -1.1% drop in May), utility output (-0.2% vs. +0.4%) and construction (-0.2% after +3.2% in May). The disappointing report weighed on the peso in a mostly firmer US dollar environment. The dollar rose to almost MXN18.6950 after recording a low before the weekend near MXN18.5250. A move above the nearby cap around MXN18.70 could spur greenback gains toward MXN18.75-MXN18.80. Mexico's economic calendar is light for the remainder of the week. Brazil reports last month's IPCA measure of inflation today. It is seen little changed around 5.3% where it has been for the previous two months. The central bank's tightening cycle appears to have ended with the Selic rate at 15.00%. It meets next on September 17, the same day as the Federal Reserve meeting concludes and the Bank of Canada meets.
Reviewed by Marc Chandler
on
August 12, 2025
Rating:
