After Marginal Extension of Last Week's Gains, the US Dollar is Mostly Softer Ahead of the North American Open

Overview: After finishing last week with a bid tone, the US dollar's gains were initially extended against most G10 currencies before a mild bout of profit-taking emerged. It was extended in the European morning but may stall in North America. Several pairs have options near today's highs that expire at 10:00 AM ET. The US announcement that dramatically raises the prices of H-1B visas is a key talking point, with India seen particularly exposed. The US tariffs make it more expensive to import goods and now the administration will make it more difficult to import skilled labor. Meanwhile, Argentina's drama continues, and it is seeking a US loan on top of the IMF. 

Although the Bank of Japan announced intentions to reduce its equity ETF holdings, the pace is slow (~20 mln a day) that it is not much of a hurdle for Japanese stock, which rallied today. Most of the large bourses in the region did, but Hong Kong and mainland stocks that trade there, and India. The Stoxx 600 in Europe is off around 0.2% and US index futures are also trading heavier. Benchmark 10-year yields are narrowly mixed and there has been little reaction to news at the end of last week that Fitch upgraded Italy's rating BBB+ with a stable outlook. The 10-year US Treasury yield is little changed, slightly below 4.13%. Five Fed officials speak today, three of whom are slated for noon ET. Gold reached a new record high around $3726 before steadying. November WTI is held $63 and was pushed back to the pre-weekend low near $62.25. 

USD: The Dollar Index enters today, with a three-day advance in tow, the longest advance since late July. It is trading lower in a consolidative fashion after stalling in front of 97.85. It has found initial support near 97.50 and could ease toward 97.20 without causing much technical damage. A push above 97.80 targets the 98.25 area, and possibly 98.70. Post-FOMC and before the next employment report, sentiment may be the key to the greenback's near-term performance. The market does not put much weight on today's national activities report by the Chicago Federal Reserve. Five Fed officials speak today amid a wide dispersion of views. Tomorrow sees the preliminary September PMI and Q2 current account. The PMI may pose headline risk, but the market seems to react more to the ISM. After a record Q1 25 current account deficit (~$450 bln), the dramatic reduction in the Q2 trade deficit (~$190.4 bln vs. $381.5 bln in Q1) points to a narrower Q1 current account deficit. The TIC data showed foreign investors bought a net $382 bln of US financial assets in Q2 after a little less than $385 bln in Q1. As we have noted, foreign investors bought more US stocks and bonds in H1 25 than H1 23 and H1 24 together. BIS data and other research suggest that the pressure on the dollar is coming not from a capital strike but hedging dollar exposure. 

EURO: The euro initially extending its last week's losses and slipped to about $1.1725 before recovering to almost $1.1770 in the European morning. The intraday momentum indicators are stretched. Additional gains look likely to be limited in North America, and there are 1.1 bln euros in options struck at $1.18 that expire today. Tomorrow's preliminary October PMI is the most important economic report this week for the market, though the lending data with the money supply report may draw more attention from economists. Over the last couple of weeks, Russia incursion into the airspace of Poland and Estonia raises the temperature of geopolitical tensions as Russian forces step up their attacks on Ukraine. The market impact is minimal until it isn't. The Swiss National Bank meets on Thursday. Its policy rate is at zero and the two-year yield is almost negative 20 bp. The Swiss franc is in the upper end of this year's range against the euro. However, the SNB does not seem prepared to adopt a negative policy rate. The EU harmonized CPI was at zero year-over-year last month and the core rate was 0.7% (slightly below China's 0.9%). The SNB does not quite seem ready to return to a negative policy rate. 

CNY: The dollar fell to the new low for the year against the offshore yuan in the middle of last week near CNH7.0850. The greenback's broad recovery saw it rise to CNH7.12 ahead of the weekend. It is consolidating quietly in the pre-weekend range. The PBOC set the dollar's fix lower today after raising it in the past two sessions. It was set at CNY7.1106 today (CNY7.1128 before the weekend and CNY7.1056 a week ago). US Treasury Secretary Bessent's acceptance of the yuan's modest appreciation this year may be understood within the context of US talks with China and seems consistent the administration's distancing itself from Taiwan in terms of weapon sales and high-level defense meeting. These measures coupled with the US treatment of Ukraine cannot set will Taipei. Meanwhile, Chinese banks left their loan prime rate steady at 3.0% and 3.5% for the one- and five-year tenors, respectively. China's economic calendar is light this week. We find that the yuan tends to do relatively better on the crosses in a firm US dollar environment, as was the case in July, for example. 

JPY: The dollar edged up to make a marginal new two-week high near stalled near JPY148.40 today before easing. Firmer US rates could help lift the greenback into the JPY148.65-85 area next. The greenback has risen for four consecutive weeks against the yen, matching its longest advance in January-February 2024. The hawkish hold by the BOJ failed to inspire the fx market while boosting the odds of a rate hike in the swap market from about a 1-in-3 chance to slightly more than 50%. This underscores our observation that the exchange rate is more driven by US rates than Japanese. Japanese markets are closed tomorrow for the fall equinox. The flash PMI will be reported Wednesday but tends not to elicit much of a local response. Thursday sees Tokyo's September CPI, which is a robust signal of the drivers of the national reading that is reported later in October. Some observers are particularly pessimistic Japan, but this is nearly a perennial. We note that the 40-year yield peaked in May near 3.70% and is now 3.40%. The US 10-year premium over JGBs is 250 basis points after approaching three-year lows last week. The Nikkei and Topix were knocked off their record highs at the end of last week following the BOJ's decision to reduce its holdings of its ETF. Still, the divestment will be so slow that we suspect it will not derail the bull market. The Nikkei closed 1% higher today and the Topix gained 0.50%. 

GBP: Sterling settled heavily at the end of the last week. It reversed lower from about $1.3725 in the middle of last week and finished last week setting a two-week low near $1.3465. The losses were initially extended to about $1.3455 today before it recovered. It held chart support near $1.3435. It poked slightly above $1.3500 in Europe. Options for about GBP400 mln at $1.3500 expire today. The high from last Friday was around $1.3565, and only a move above there would call into question this near-term bearish outlook. It is a light week for UK data outside of tomorrow's preliminary September PMI. After last week's larger deficit, driven by higher inflation lifting public service spending and debt services and weaker revenue, the performance of the UK's debt market remains important. While we argue, firmer rates can support the US dollar, higher bond yields in the UK are consistent with sterling weakness. 

CAD: The Bank of Canada's rate cut last week, which was largely anticipated, did not have much impact on the exchange rate. In fact, in the firmer US dollar environment that emerged after Fed's cut was the key to the Loonie's performance. It was the strongest of the G10 currencies with a nearly 0.45% gain. As we have observed, the Canadian dollar performs better in the stronger greenback environment. This was obviously the case in July when the US dollar rose for the first month this year. Given the extent of US dollar bearishness, the common tactic of short-term momentum traders and trend followers is to be short the Canadian dollar on crosses, like against sterling or euro. If the greenback enjoys a correction as we anticipate short Canadian dollar positions, get squeezed out. The US dollar is trading within the pre-weekend range (~CAD1.3770-CAD1.3825). Options for about $520 mln at CAD1.3800 expire today. Key US dollar support is near CAD1.3720, the potential neckline of a topping pattern. Nearby resistance is seen in the CAD1.3830-50. 

AUD: The Australian dollar's key reversal last Wednesday after setting a new high for the year slightly above $0.6705 signals near-term weakness. Follow-through selling in the last two sessions saw the Aussie finish the week a little below $0.6600. It was pushed into a support zone today in the $0.6560-80 area. Although it stabilized, it is stalling in front of $0.6600, where options for about A$705 mln expire today. Meanwhile, poor New Zealand GDP (-0.6% vs. a flat reading expected by the median forecast in Bloomberg's survey), sent the Kiwi sharply lower. It was the worst G10 performer last week; tagged for almost 1.6%. The implied year-end rate in the swaps market fell 20 bp last week. There are two RBNZ meetings left this year, and the swaps market has two quarter-point cuts fully discounted, and a little more than a 1-in-3 chance that one will be for 50 bp. The Aussie reached a three-year high against the Kiwi last week. 

MXN: The dollar fell to MXN18.20 last week, the lowest level since July 2024. In the greenback's rebound in the second half of last week, it recovered to almost MXN18.47. It is consolidating quietly between roughly MXN18.3750 and MXN18.4325. There is scope for some additional near-term gains ahead of the first half September CPI on Wednesday and the central bank meeting on Thursday, but dollar sellers are likely to re-emerge. The carry remains attractive and allows peso longs to hold on to their positions during the consolidative phase before the dollar takes another leg down. The next target is near MXN18.00. Mexico's central bank is widely expected to cut its overnight target rate by 25 bp to 7.50%. The greenback posted a key upside reversal against the Brazilian real last Thursday by settling above Wednesday's high after first falling to a new low for the year. Given that Brazil's overnight rate is 15.00%, it is expensive to short. There may be near-term potential toward BRL5.36-BRL5.38. 

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