The Dollar Limps into the Weekend

Overview: The US dollar is trading softer but most inside yesterday's ranges. An unexpected jump in Japanese unemployment has weighed on the yen, which is the only G10 currency that is not gaining on the dollar today. The soft greenback means the Canadian dollar is likely under-performing and it is barely firmer on the day. Sterling is the next to weakest following the final September composite PMI reading that lowered to slightly above the 50 boom/bust levels. Most emerging market currencies are also firmer. The JP Morgan and MSCI emerging market currency indices are up 0.2%-0.3% this week. 

Equities are pushing higher. In the Asia Pacific region only Hong Kong among the large bourses fell. Japan's major indices were up over 1%. Taiwan is pushing against US pressure to bring half of its chip making capacity to the US, but stocks rallied 1.45% today, about half of this week's gains. South Korea's Kospi rallied 2.7% today and was up 2.25% on the week. Europe's Stoxx 600 is up for the sixth consecutive session. It nearly 2.8% rally this week is the most in five months. US index futures are trading higher. Benchmark 10-year yields are narrowly mixed in Europe, except for the 10-year Gilt, where the yield is off a couple basis points. The 10-year US Treasury yield is up one basis point to 4.09%, roughly the middle of the recent range. Gold is firm but off record high set yesterday near $3897. It is up for the seventh consecutive week. November WTI has stabilized after tumbling more than 2% yesterday to approach a four-month low near $60. 

 

USD: The Dollar Index snapped a four-day slide yesterday, after retracing almost half of the post-Fed rally. It reached almost 98.15 yesterday, a three-day high. Monday's high was closer to 98.20. There has been no follow-through buying today. It has held below 98.00 and recorded the session low near 97.70 in Europe. The September employment report should be the highlight of the day, but the government shutdown is continuing to disrupt the release of economic reports. Still, it seems an exaggeration to claim the Fed (and investors) are "flying blind". The use of private sector data has grown from looking at corrugated cardboard orders, train car loadings, and holiday wrapping paper sales. The PMI/ISM, ADP, Boeing orders, auto sales, Challenger job cuts, and house prices are examples of private sector generated data. The University of Michigan and Conference Board surveys have moved markets. There are numerous regional Federal Reserve surveys that are also tracked by policymakers and investors, which should not be disrupted by the political impasse in Washington. On tap today is the final services and composite PMI and ISM services. The preliminary PMI showed slower growth in services and composite output and at 53.9 and 53.6, both are at three-month lows. The ISM services index is seen softening to 51.7 from 52.0. The employment sub-index has been 50 since June. 

EURO: The euro slipped below $1.17 yesterday for the first time in three sessions. It recorded a new low for the week slightly below $1.1685. The upside stalled near $1.1780 Wednesday, the (50%) retracement of its post-Fed pullback. Nearly 3 bln euros in options expired slightly higher yesterday. The euro is trading between $1.1715 and $1.1745 so far today. The flash PMIs are sufficiently accurate to render the final report uninspiring. For the record, the composite PMI rose (51.2 vs. 51.0) for the fourth consecutive month and is the highest since May 2024. The Q3 average was 51.0, the strongest quarter since Q2 24. Separately, France reported a 0.7% decline in August industrial output. The median forecast in Bloomberg's survey was for a 0.3% increase. However, the upward revision in July from a 1.1% decline to -0.1%, softened the sting. The eurozone also reported weaker than expected producer prices. They were 0.6% lower year-over-year in August (+0,2% in July). It is the first negative reading of the year. Lastly, reports suggest the EU is considering raising tariffs on steel to 50%, aligning with the US. There is currently a temporary mechanism in place for a 25% levy (above quotas) that expires next year. 

CNY: The dollar has forged a shelf in the past three sessions around CNH7.1225-50. In the broad USD upticks in the North American morning, the greenback reached CNH7.1370. Wednesday's high was near CNH7.14. It has not moved off the CNH7.13-handle today. When push comes to shove, the greenback remains in the range set Monday (~CNH7.1185-CNH7.1430). Mainland markets do not re-open until next Thursday, October 9. 

JPY: The dollar found support around JPY146.60 on Wednesday and Thursday. That is slightly above the trendline drawn off the year's low on April 22 (~JPY139.90) and the early July low (~JPY142.70). It was violated on an intraday basis when the Fed cut rates on September 17 but settled above it. The dollar recovered in the North American morning yesterday and made a new session high around JPY147.50. It has risen a little above JPY147.80 today, around where the 20-day moving average is found. The (38.2%) retracement of the decline since last Friday's high (~JPY149.95) is found slightly higher (~JPY147.90). Today, Japan reported an unexpected jump in the unemployment rate in August to 2.6% from 2.3%. That matches the highest since March 2023. It has been in a 2.3%-2.5% range since the middle of last year. The job-to-applicant ratio fell to 1.20 from 1.22, the lowest since 2022. The final PMI readings were little changed from the preliminary estimate, but it is not a market-sensitive report in Japan. For the record, the composite PMI eased to 51.3 (51.1 initially) and 52.0 in August. Still, 51.6 average for Q3 was the highest quarterly average since Q3 24 (52.5). Tomorrow, the LDP will choose a new leader, who will be the next prime minister. Koizumi, the son of the former prime minister appears to lead the pack but will likely fall shy of a majority in the first round. In the run-off second round, he will likely be challenged by a conservative woman, Takaichi, who was the runner up in last year's contest with the current prime minister Ishida.

GBP: After rallying from last week's low (~$1.3325), its lowest level since early August, sterling advanced two cents to approach last week's high (~$1.3535) before stalling in the middle of the week. This met the (50%) retracement of sterling's losses since the Fed's rate cut on September 17. Sterling took out Wednesday's low near $1.3435 in the North American morning yesterday and fell to almost $1.3400. The week's low was set Monday near $1.3390. It is trading quietly today between $1.3430 and slightly above $1.3465. The UK's final PMIs were revised lower. The composite was revised to 50.1 from 51.0 initially and 53.5, the high for the year in August. It is at lowest since April. Next week, the UK has a light economic calendar. 

CAD: In the weaker US dollar environment this week, true to form, the Canadian dollar is the laggard. It is the only G10 currency unable to gain ground against the greenback this week. The US dollar reached CAD1.3985, to push above last week's high and record a new high since May and approach the 200-day moving average, which it has not traded above since April. The CAD1.4000-CAD1.4020 is important from a technical perspective. There is little on the charts above there until CAD1.4150-60. Canada sees the September services and composite PMI. The composite has not been above 50 since last November. It has been alternating monthly between gains and losses since April. It eased slightly in August (48.4 vs. 48.7), which are the highest readings since January. Still, the swaps market has about a 54% chance of another rate cut this month and more than 90% chance it is delivered before the end of the year.

AUD: The Australian dollar was sold through the $0.6600 level before the A$1.9 bln option there expired at 10:00 am ET yesterday. Another chunky set for almost the same amount expires there today. The low was slightly above $0.6575, which met the (50%) retracement of the bounce from last week's low near $0.6520. It is straddling $0.6600 today and has not moved much more than one-tenth of a cent away from it. Australia saw its final services and composite PMI readings. The composite was revised to 52.4 from 52.1. August's reading of 55.5 since before the pandemic. 

MXN: On Wednesday, the US dollar recovered from MXN18.24 to above MXN18.39. Follow-through buying yesterday saw the greenback extend its recovery to almost MXN18.5160. Recall that the MXN18.51 area was the July and August low. Last week's high was around MXN18.5640. Mexico's Bolsa set record highs on Wednesday before reversing and settling below recent lows, leaving a bearish key reversal in its wake. There was follow-through selling yesterday, and perhaps the profit-taking contributed to some of the pressure on the peso. The dollar is holding below MXN18.45 today and was pushed a little below MXN18.40 in Europe. Mexico reported a 5.6% decline in September auto and truck sales, but they were still up slightly from September 2024. Through Q3, Mexico's domestic auto and truck sales are essentially flat compared with the first three quarters of 2024. 

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