Overview: Most the dollar's late sell-off yesterday after the White House endorsed Stephen Miran to fill the remainder of Governor Kugler's term at the Federal Reserve has been recouped today. In mostly narrow ranges, the greenback is firmer against the G10 currencies but the Canadian dollar and sterling. The dollar is also trading with a stronger bias against emerging market currencies. China reports its CPI and PPI figures tomorrow, and next week's US July CPI is expected to have risen for the third consecutive month. In an otherwise quiet session, the gold futures market was roiled by news that US Customs will be imposing a tariff on one -kilogram and 100-ounce gold bars, which previously were exempted. There is still much confusion, and some continue to suspect a mistake was made. In the spot market, gold is firm and probing the $3400 area. A higher close today would be the sixth in the past seven sessions.
Outside of Japan and Taiwan, the large bourses in the Asia Pacific region fell today to pare this week's gains. Today's losses in India, facing a 50% tariff from the US, were sufficient to turn it lower on the week. Europe's Stoxx 600 is holding on to a small gain near midday. If sustained, it would be the fourth gain this week and it would recoup most of last week's 2.6% decline. US index futures enjoy a firmer bias. European benchmark 10-year yields are mostly 1-2 bp higher today. The 10-year Gilt yield is making new highs for the week, near 4.57%, a six-point increase on the week. The 10-year US Treasury yield is softer, slightly below 4.25%, up about five basis points this week. September WTI slumped to $63.20 to take out last month's low before recovering back above $64.00. Today is ostensibly the deadline that President Trump had given Russia to agree to a truce.
USD: The Dollar Index rallied from July 1 through August 1, and this week's pullback nearly met the 61.8% of the rally (~97.85). It is consolidating today and is holding below yesterday's high (~98.50). It recorded the North American session low yesterday after reports suggested Stephen Miran would be nominated to finish Governor Kugler's term at the Fed. Meanwhile, the event markets favor Waller to be Powell's successor. The US economic diary is light until next Tuesday's CPI. The headline and core rates are expected to have risen in July for the third consecutive month. At the same time, a consensus appears to be forming for a rate cut at the next FOMC meeting (September 17). The Fed funds futures are discounting about a 90% chance of a September cut compared with slightly less than 40% before the July employment report. The current effective Fed funds rate (weighted average) is 4.33%. The futures market puts it at 3.74% at the end of the year. It was near 4% before the jobs report, which was up almost 10 bp from before the FOMC meeting, which the market saw the Fed's hold at the end of July, despite two governor dissents, as hawkish.
EURO: The euro rose through the (61.8%) retracement of its losses since the July 1 high (~$1.1830) in early European activity yesterday and was turned back from almost $1.1700. It was sold back to nearly $1.1610 as European dealers were closing their books. It recovered to settle higher on the day after the Miran news. It is trading quietly today between $1.1635-$1.1680. Recall that the high set after last week's poor US jobs data was slightly below $1.16. Given that the euro rallied three cents off last Friday's low some consolidation seems likely, especially ahead of the US CPI on Tuesday.
CNY: China's large external surplus (trade and current account) is understood to mean that the yuan is undervalued. Most calls to revalue it are missing two elements. The first is the broader context of the foreign exchange market. The IMF says it is around 15% undervalued, though some economists think it is closer to 20% below fair value. Consider that the OECD's model of purchasing power parity has the yen and euro almost 55% undervalued and the Canadian dollar 21% undervalued. In fact, the only G10 currency overvalued is the Swiss franc (~17%). The US has often sought to have other countries re-value rather than accept the stigma of a dollar devaluation. If the dollar were to return to fair value against the euro and yen, it would also likely be considerably less overvalued against the yuan. That is to suggest rather than a yuan problem per se, there is a dollar problem. The dollar's overvaluation explains more than the yuan's undervaluation. The second element missing from most discussions is the process by which the foreign exchange adjustment should be made. How are we getting from here to there? This goes largely unaddressed, whether one is talking about the euro, yen, or yuan. To re-value their respective currencies, do the advocates want central banks to sell Treasuries (or Agency bonds) and buy dollars? With deflation (and China's July CPI and PPI will be reported tomorrow, Saturday), are critics arguing that the PBOC should hike rates? And few of the calls for a revaluation of the yuan acknowledge that last month when the US dollar rallied, the yuan was the strongest currency in emerging markets and outperformed all the G10 currencies. More immediately, this week's range was set on Monday: ~CNH7.1765-CNH7.1960. The PBOC set the dollar's reference rate at CNY7.1382 (~CNY7.1345 yesterday, the lowest since last November). The absolute value of the change in the dollar's fix this week was almost 0.40%, the most since last November.
JPY: This week's range was set on Monday and Tuesday: ~ JPY146.60-JPY148.10. The dollar nearly covered the range yesterday (~JPY146.70-JPY147.70) and remains inside yesterday's range today. The five-day moving average crossed below the 20-day moving average yesterday for the first time in a month, which is a good proxy for the near-term trend. On the upside, the dollar must get above JPY148.25 to be notable from a technical perspective. Household spending disappointed, rising 1.3% year-over-year in June, about half of what economists projected in Bloomberg's survey and down from 4.7% in May. Yet the takeaway is really the improvement this year. Consider that outside an occasional statistical fluke, household spending, which is reported in real terms, has been falling from late 2022 through late last year. In December 2024-January 2025, the first back-to-back increase was posted in two years. With today's data point, the H1 average year-over-year increase was 1.4%. In H1 24, household spending fell by 1.8% on average, year-over-year. The current account surplus narrowed to JPY1.35 trillion from JPY3.4 trillion in May. Only a small part of this narrowing can be explained by trade. The trade surplus narrowed to JPY470 bln from JPY522 bln in May. The swaps market is pricing in 14 bp of tightening this year, down from 15 bp at the end of last week.
GBP: Sterling recorded the session high yesterday, almost $1.3450 after the Bank of England announced what appears to be a hawkish cut. It made a marginal new high today. The closeness of the vote (5-4) after an initial three-way split encouraged market participants to reduce the chances of another cut in Q4. That cut was fully discounted at the close of Wednesday, but it has been reduced by a little more than a quarter. In the statement, BOE officials seemed more attentive to the upside risks of inflation. The last push higher to session highs, was following the Miran news. Sterling settled above the 20-day moving average (~$1.3395) for the first time since July 23. The $1.3465 area marks the (50%) retracement of last month's pullback, which bottomed last Friday near $1.3140. The next retracement (61.8%) is around $1.3540.
CAD: The US dollar fray support around CAD1.3725. It houses the 20-day moving average and the (50%) retracement of the gains from the July 23 low near CAD1.3575. Nearby resistance is seen near this week's high (~CAD1.3810). The greenback is pinned near yesterday's lows. Canada's July employment data is the pre-weekend data highlight in North America. In H1 25, Canada has created almost 144k jobs (~183k in H1 24). Of these, about 56k were full-time positions (~66k in H1 24). The median forecast in Bloomberg's survey is for a 10k increase in overall jobs (83.1k in June). The unemployment rate may return to 7%, the post-pandemic peak reached in May. Ahead of the report, the swaps market is discounting around a 30% chance of a cut at the September 17 meeting. Barring a surprisingly poor report, expectations are unlikely to change much in response to today's jobs data.
AUD: The Australian dollar came within around 5/100 of a cent from the (61.8%) retracement of the losses from the July 24 high of the year (~$0.6625) to last Friday's low (~$0.6420). Yesterday's low was near $0.6490 was seen toward the end of the European session. It is trading in about a quarter-cent range so far today above $0.6510. The Australian dollar has held its own this week, gaining about 0.70%, the second strongest G10 performance this week behind sterling (~1.2%), even though a quarter-point rate cut is widely expected next week.
MXN: As widely expected, Banxico cut its overnight rate target 25 bp to 7.75%. The quarter-point reduction follows four half-point cuts in H1 25. The easing cycle began in March 2024, and in all, five quarter-point cuts were delivered last year. The swaps market sees the terminal rate around 7.25%. Before the central bank meeting outcome was announced, Mexico reported the sharp drop in headline CPI that was expected (3.51% vs. 4.32%). The core rate stands at 4.23% (4.24% in June). Banxico forecasts an average headline pace of 4.1% and 3.8% in the core in Q3. After reaching nearly MXN18.760 in late NY morning turnover, the dollar trended back toward the lows before and after the rate announcement. It settled near MXN18.6130. The greenback is a narrow range in this week's trough. Last week's low was almost MXN18.51. This week's low, set Wednesday, was about MXN18.5825. Meanwhile, the US dollar has been sold against the Brazilian real and approached the year's low set last month near BRL5.40. The low in H2 24 was closer to BRL5.37.
Reviewed by Marc Chandler
on
August 08, 2025
Rating:
