The US dollar continued to unwind last month's gains. Last week it fell against all G10 currencies, but the dollar bloc. It was more mixed against emerging market currencies. The Argentine peso was the best performer, gaining 2% but the Argentine political and economic conditions appear worsening and a weaker rather than a stronger currency looks needed. Meanwhile, the market toyed with the idea of a 50 bp cut by the Federal Reserve next month, but the firmer than expected PPI and the apparent continued strength of the US consumer (retail sales grew at a 4% annualized rate in the three-months through July) left the Fed funds futures settle little changed on the week, pricing in more than a 90% chance of a quarter-point cut.
The main high-frequency economic data point in the coming days is the preliminary August PMI. However, the impact is likely to be minimal. The Federal Reserve's Jackson Hole conference in the second half of the week may draw attention. This year's theme is particularly timely: "Labor Markets in Transition: Demographics, Productivity, and Macroeconomic Policy." Among the G10 central banks, Sweden's Riksbank may wait until late in Q4 to continue its easing cycle, while a quarter-point cut by the Reserve Bank of New Zealand is more likely. It will bring the target rate to 3.00%. The swaps market sees the terminal rate at 2.75%. The UK and Canada report July CPI figures but neither central bank is likely to cut rates next month and by the time they meet again, they will have more current data in hand.
US
Drivers: It may not be the consensus, but we continue to see the dollar's direction to be strongly influenced by US rates. It is not coincidental that US two- and 10-year rates have fallen this year, except in May and July and the Dollar Index fell in the first six months of the year before bouncing in July. The break of the pattern was in May. Rates rose but DXY fell, though the least since January. Some Fed official comments coupled with the PCE deflator implications of the higher PPI report have dampened the budding speculation of a 50 bp cut next month,
Data: This week's data will likely have a negligible impact on the outlook for next month's FOMC meeting, but the Fed's annual conference in Jackson Hole (August 21-23) could provide additional color. Powell was clear last month that given the reduced supply of labor (immigration policy) and weaker demand (slowing jobs growth), the unemployment rate is particularly useful as a gauge of the balance of the supply and demand for labor. Housing starts may help economists forecast Q3 GDP (residential investment), existing home sales and preliminary August PMI pose headline risk but are not the markets' focus. The market also seems somewhat less sensitive to the Philadelphia Fed's survey as it is too early the month to necessarily be representative. The minutes from the late July FOMC meeting will be scrutinized. Recall that even though two governors dissented from the decision to standpat, the market gave it initially a hawkish hearing and took short-term rates and the dollar higher. In any event, the employment data a couple of days later seemed to put the issue to rest.
Prices: With last week's losses, the Dollar Index overshot the (61.8%) retracement of the July 1-August 1 rally. It frayed, but did not close below, the trendline connecting the July lows, which begins the new week near 97.70. Below there, the low from late July, near 97.10, beckons. The Dollar Index has fallen by about 2.6% since the August 1 high. Given the data and the fact that the market has more than a 90% chance of a quarter-point cut next month discounted, some consolidation seems warranted.
EMU
Drivers: The euro benefits by being the most liquid alternative to the US dollar. The inverse correlation between changes in the euro and changes in the two-year US yield is hovering near -0.70. Since the pandemic, it has rarely been more extreme. The rolling 60-day correlation reached almost -0.60 earlier this month, the most since early 2023. It is now a little around -0.55. The euro's inverse correlation with changes in the German two-year yield is around -0.25 over the past 30 and 60 sessions.
Data: The eurozone data this week includes the preliminary August PMI, and June trade and construction figures. Negotiated wage settlements for Q2 will be reported. Recall that they rose by 2.45% in Q1 25, the least since the end of 2021. The bar for another rate cut is high and the data does not have the heft to be impactful. The swaps market price has slightly less than a 10% chance of a cut next month and almost a 25% chance of a cut at the following meeting in late October.
Prices: The euro's recovery from last month's slide continued last week and the single currency reached $1.1730 to recoup a little more than three-quarter of the recent loss. Ahead of the late July high (~$1.1790), the euro needs to overcome the trendline connecting the July highs. It is found near $1.1750 at the start of the new week. A close below $1.1600 weakens the technical tone.
PRC
Drivers: Beijing is committed to keeping the yuan broadly shadowing the US dollar. This is unlikely to change any time soon. That the yuan is undervalued against the dollar is a dog-bites-man story. All the G10 currencies but the Swiss franc, are undervalued according to the OECD's model of purchasing power parity. By this calculation the euro, yen, and Canadian dollar are undervalued by more than the yuan, but they all reflect an overvalued dollar.
Data: It is a subdued week for Chinese data. Without strong signals from Beijing, the banks will most likely keep the prime loan rates steady at 3.0% and 3.5% for the one-year and five-year tenors, respectively. SWIFTS's July report of currency usage for global payments is not as significant for the yuan as it may have been before China introduced its own system for settling yuan trades, which, incidentally, according to reports, will not accept trades that imply rate outside of the approved band. China's industrial output and retail sales were weaker than expected but because the weakness could be attributed to the hot weather, rains, and floods, Beijing may not feel a strong urgency to respond, allowing the current fiscal measures to run their course.
Prices: Few of China's many critics acknowledge that the PBOC set the dollar's reference rate at the lowest since last November and has been adjusting the dollar's daily fix by more on average than it did at the start of the year. Still, with a few exceptions, the dollar has been in a CNH7.15-CNH7.20 trading range since late May. The 20- and 50-day moving averages have converged in the CNH7.1795-CNH7.1825 area. Yet, the dollar has fallen against the onshore yuan in all but four weeks since the end of April. The real complaint of the critics is not so much on direction as speed of the adjustment Beijing is managing.
JPN
Drivers: The dollar-yen exchange rate continues to be more sensitive to the changes in US interest rates than is generally recognized. The 30-day rolling correlation typically is higher with changes in the 10-year yield rather than the two-year yield, but that is not the case now. The correlation of changes in the exchange rate and the two-year yield is almost 0.80. It has not been above there since mid-2023. The 30-day correlation between changes in the exchange rate and the 10-year yield is slightly lower, near 0.75. It slipped below 0.10 in late May. The rolling 60-day correlation is near 0.66 for the two-year US yield and near 0.57 for the 10-year yield.
Data: With Q2 GDP already reported, the tertiary industry index is of, well, tertiary importance. Local participants do not put much weight on the PMI. The July trade balance, which has deteriorated from June in 14 of the past 20 years, may draw some interest given the disruption emanating from the US. Despite the undervalued yen, Japan reported a JPY2.22 trillion trade deficit in H1 25 compared with a JPY3.37 trillion deficit in H1 24 and a JPY7.05 trillion shortfall in H1 23. Exports on a year-over-year basis will likely fell for the third consecutive month in July. Lastly, Japan reports the July CPI. The Tokyo report out a few weeks ago stole the thunder. The headline and core rates likely eased by around 0.2% to 3.1%.
Prices: In an unusual commentary about foreign central banks, US Treasury Secretary Bessent opined that the Bank of Japan was slipping behind the inflation curve. Still, that and the stronger than expected Q2 GDP (with Q1 revised up) lifted expectations a little but are still less than what was anticipated at in late July. On August 8 almost 15 bp of tightening this year was discounted. Now a little more 17 bp is priced into overnight swaps (compared with 21 bp on July 24). Surveys suggest many are thinking that October would be a reasonable timeframe for the BOJ. Yet there are about 12 bp of tightening discounted, up from nearly 10 bp on August 8, but down from 14 bp at the end of July. The dollar was turned back last week from JPY148.50, a whisker below the (50%) retracement of the losses since the August 1 high, slightly shy of JPY151. Last week's low was near JPY146.20. A break could spur a test on the JPY145.85 area.
UK
Drivers: Sterling was bolstered by what was understood as a hawkish cut by the Bank of England earlier this month. In a close vote, it cut the base rate but increased its near-term inflation forecasts and Governor Bailey sounded even more cautious the forward guidance. This was followed in recent days by a stronger-than-expected Q2 GDP, helped by stronger government spending (1.2% quarter-over-quarter, after 0.4% contraction in Q1) and a mostly better than expected jobs report. The year-end rate implied by the swaps market is about 3.82%, up from 3.68% on August 1. Sterling remains sensitive to the dollar's broad direction. The rolling 30-day inverse correlation of changes in sterling and the Dollar Index is near 0.80, while the 60-day correlation is a little lower.
Data: There are three high-frequency data points begin in the middle of the week. The first is the July CPI. The base effect makes for a difficult comparison. Headline CPI fell by 0.2% in July 2024. So even a flat reading for July would boost the year-over-year rate to 3.6% from 3.8% (rounding). The UK CPI rose at an annual rate of about 6.8% in Q2 and 2.4% in Q1. The second data point is the preliminary August PMI. The composite finished last year at 50.4 and was 51.5 in July. It is not expected to have change much this month. The week concludes the July retail sales. The 0.6% gain in June, excluding gasoline, disappointed after the dramatic 2.9% drop in May. The median forecast in Bloomberg's survey is for a 0.5% increase in July.
Prices: Sterling extended its recovery off the August 1 low (~$1.3140) to almost $1.3600 last week. It has retraced more than (61.8%) of its July losses and settled above the down trendline connecting the July highs. The five-day moving average is almost a cent above the 20-day moving average, and the daily momentum indicators are rising. Pullbacks this month have been brief and shallow. The price action is constructive. There is little to stand in the way of a return to the multi-year high recorded on July 1 near $1.3790. Still, given the extent of the move and the upcoming data, we suspect consolidative forces will emerge shortly.
CANADA
Drivers: The Canadian dollar continue to appear sensitive to the US dollar's broad direction. The 30- and 60-day correlation of the changes of the USD dollar against the Canadian dollar and the Dollar Index are near their highest in over a year (both a little above 0.7)0. There was a slight inverse correlation with the US S&P 500 over the past 30 days, but it finished the week with a small positive correlation (~0.03), little different than the rolling 60 session correlation. The correlation of changes in the exchange rate and WTI has improved to the best in years (30-day correlation is near 0.60 and the 60-day correlation is around 0.25). The sign may be somewhat counter-intuitive as it indicates that the US dollar, not the Canadian dollar, has tended track oil prices a little better recently.
Data: The most important high frequency report in the coming days is Canada's July CPI on August 19. Headline CPI rose at an annualized rate of around 1.6% in Q2 after a 6.0% annualized increase in Q1. In Q3 24, Canada's CPI fell, and it was flat in Q4 24. However, the base effect in July is favorable. Canada's CPI rose by 0.4% in July 2024 and as this drops out of the 12-month comparison the year-over-year rate will move lower from the 1.9% pace seen in June. The underlying core rates are firm, averaging 3.05% in June, up from 2.8% in March and 2.5% at the end of last year. After the disappointing jobs July jobs report on August 8, the market has been fully discounting a rate cut for the December meeting. Canada also reports June portfolio flows. In the first five months of 2025, foreign investors sold about C$18 bln of Canadian stocks and bonds. In the January-May 2024 period, foreigners were net buyers of C$85 bln of Canada's financial assets. Still, knowing the portfolio flows in real time would not have help trade the Canadian dollar. It fell by nearly 3% against the US dollar in the first five months of 2025 and rose nearly 4.5% against the greenback in the first five months of this year.
Prices: The US dollar rose to meet the (61.8%) retracement objective of the decline from the August 1 high seen near CAD1.3820. It consolidated before the weekend. It settled on session highs, and the post the highest close of the month. Follow-through buying sets the sights on that August 1 high (~CAD1.3880). The lower end of the recent range is around CAD1.3720. The momentum indicators are not generating a strong signal, though the five-day moving average is above the 20-day moving average, and both are rising.
Australia
Drivers: The Australian dollar remains sensitive to the broader movement of the US dollar. The rolling 30- and 60-day inverse correlation between changes in the Australian dollar and the Dollar Index is hovering around -0.75. It is near the most in a year. The inverse correlation of the changes between the Australian dollar and the US dollar against the Canadian dollar slightly near less (~0.85) over the past 30 sessions and a somewhat less over the past 60 sessions (~-0.72).
Data: After last week's 25 bp rate cut (to 3.60%) and labor market report, participants may not be sensitive to this week's preliminary August PMI and consumer inflation expectations survey. Recall that the composite PMI rose for the second consecutive month in July, the first back-to-back increase since February-March 2024. It stood at 53.8 in July, a new cyclical high. It was at 50.2 at the end of last year and 50.2 in August 2024.
Prices: Despite posting an outside down day on August 14, there was no follow-through selling of the Australian dollar ahead of the weekend. Instead, the Aussie held the week's low seen near $0.6480 on August 12 and pushed to almost $0.6525. While there may be some resistance in the $0.6540-50 area, last week's high (~$0.6570) may be more important from a technical perspective.
Mexico
Drivers: Changes in the greenback against the peso and Dollar Index are near the most correlated of the year, nearly 0.75 (for the past 30 sessions). They were inversely correlated for most of February. Since the end of Q1 24, the rolling 30-day correlation has spent little time above 0.60. The 60-day correlation set the high for the year, slightly above 0.65 in early August and is near there now. The correlation between changes in the exchange rate and changes in US interest rates is weak (<0.10). The 30-day correlation between changes in USD-MXN and USD-CAD rose to nearly 0.40 from the year's low recorded in late May through mid-June of less than 0.10.
Data: Data from the second quarter are likely to have limited impact on the peso's exchange rate and the outlook for monetary policy. More important is the CPI reading for the first half of August. Yet before the central bank meets again (September 25), it will have the full month of August CPI and the first half of September's in hand. Also, the US tariff policy may be clearer. The current cash target rate is 7.75% and the swaps market sees a terminal rate of near 7.25%. A resumption of the Fed's easing cycle may give Banxico more room to maneuver.
Prices: The US dollar overshot the (61.8%) retracement of its losses against the Mexican peso this month on August 14. It rose slightly above MXN18.85 but settled below the retracement objective (~MXN18.80). Dollar sellers emerged and pushed the greenback below MXN18.70 before the weekend. Still, the price action warns that support near MXN18.50 is formidable. Initial support may be in the MN18.60-62 area.
Reviewed by Marc Chandler
on
August 16, 2025
Rating:
