Market Challenges US-Japan Resolve on Yen and Tehran Challenges US Resolve to Re-Open Strait of Hormuz

The most important development today is the yen’s weakness. The dollar has approached JPY158.90 in the European morning, a new high for the month. Despite a hawkish sounding record of last month’s Bank of Japan meeting, the swaps market shaved the risks of a rate hike at next month’s meeting. The market is challenging the resolve of Japanese and US officials. The greenback is more broadly narrowly mixed and the yen’s roughly 0.65% loss stands out. A record jump in Swedish industrial orders (32% month-over-month, seasonally adjusted), led by export orders for transport equipment is lifting the krona by about 0.25% to top the G10 leaders’ board. 

The Middle East is the other major story. Iran and its allies continued to press. Tehran has demanded that US lift its naval blockade, withdraw forces, lift sanctions, release frozen assets, and pay reparations before the Strait of Hormuz will be allowed to open again. President Trump has suggested that the US may rely on the economic chokehold on Iran to pressure the regime and that the US was only “semi-negotiating” with Iran. This follows reports that the US has depleted much of its defense weapons, and the Saudi-Pakistan-Türkiye defense treaty struck last week. Oil prices are firm near four-day highs. 

Prices 

G10

• The euro rose to about $1.1580 in the immediate response to the disappointing US employment report. It has not been higher since the Fed delivered its hawkish hold on June 17. The momentum was not sustained, but the euro still settled above the recent highs. It is in a narrow range, straddling the almost $1.1560 settlement. Options for 1.4 bln euros at $1.1575 expire today. With expectations for a softer US CPI reading expected on Wednesday, there may be potential for the euro to test the $1.1600-25 area in the coming days. 

• The market remains skeptical about the effectiveness of the intervention to support the yen. Indeed, the focus has shifted from the yen purchases to the euro sales by the US (and reportedly not notifying European officials to well after the fact). Before the US employment report the dollar reached slightly above JPY158.55, the highest since the intervention. That matched the (38.2%) retracement of the intervention-inspired losses. It has reached almost JPY158.90 today in Europe and is bid ahead of the North American session. The intraday momentum indicators are stretched. 

• Sterling posted its highest close since July 15 ahead of the weekend. It posted a potentially bullish outside up day ahead of the weekend. It traded on both sides of the previous day’s range and settled above its high. It is firm today and is probing the $1.3500 area but has held below the pre-weekend high near $1.3510. Last month’s high (~$1.3560) is the near-term target but more formidable resistance may be near $1.36.

• The diverging employment reports helped lift the Canadian dollar to its best level since June 10. The greenback had been finding support a little below CAD1.40. Ahead of the weekend it was sold through (38.2%) retracement objective of the US dollar’s strong rally off the early May lows (~CAD1.3980). It was sold to almost CAD1.3925. It is consolidating in about a 30-point range below CAD1.3965 today. Options for about $460 mln at CAD1.3920 expire today. The CAD1.3900 area is the 50% retracement, and the 200-day moving average is near CAD1.3855. 

• The Australian dollar reached almost $0.7080 after the US jobs report, its best level since June 16, the day before the Fed’s hawkish hold. It settled firmly above the recent highs. It is in about a quarter-cent range today above $0.7050. The next target is in the $0.7100-$0.7120 area. The Reserve Bank of Australia meets the first time tomorrow and there is little chance of a change in policy. Still, we suspect the Governor Bullock will keep the door ajar to another rate hike. 

EM 

• The dollar had approached MXN17.20, its lowest level since mid-June and busted through after the US employment data. The dollar dropped to about MXN17.0925 before steadying. It is trading quietly today and has held below MXN17.1720. The dollar recorded nearly two-year lows in mid-February (~MXN17.0865). Contrary to talk that the intervention to support the yen, undermined the attractiveness of carry trades, the strength of some of the high-yielding emerging market currencies, like the peso, suggest the funding leg may have shifted back to the Swiss franc and US dollar.  We note that the Swiss franc, another funding currency candidate, reached its weakest level against the euro late last week. 

• The offshore yuan edged higher before the weekend and reached its best level since February 2023. The dollar fell to almost CNH6.74. It has held today. The greenback’s weakness seemed to deliver a bit of fait accompli to the PBOC, which seemed to have little choice but to set the dollar’s reference rate late. And it did just that (CNY6.7884 vs CNY6.7904 before the weekend). 

• The Indian rupee rose by a minor 0.2% last week. It was the first back-to-back appreciation of the rupee since late May/early June. The rupee traded with a softer bias today. The dollar rose to INR95.30 and settled near its highs. Central bank Governor Malhotra speaks tomorrow and on Wednesday, India reports July CPI. 

Other Markets

• US equities advanced ahead of the weekend, though the S&P 500 held below the record high set in the middle of last week. However, it did post a record close at the conclusion of its best week since April (~3.6%). Europe’s Stoxx 600 reached a record high before the weekend. MSCI Asia Pacific Index rose by 0.4% last week, its third consecutive weekly advance. The large bourses in the region advanced, led the Nikkei’s 2% rally. Australia and Singapore were exceptions. The Stoxx 600 is up for the sixth consecutive session. The S&P 500 and Nasdaq futures are firm. 

• Benchmark 10-year yields fell by 2-3.5 bp last week in Japan, Europe, and the US and Canada. Yields are mostly slightly firmer today. The 10-year JGB rose almost two basis points while most European yields are +/- half a basis point. The 10-year US Treasury yield is up nearly one basis point to poke above 4.65%.

• Gold rallied 7.3% last week, its best week since late January. Lower rates and weaker US dollar seemed to help. China’s reserve figures also showed continued interest in the yellow metal. It reached almost $4378 at the end of last week. It is consolidating in the upper end of last Friday’s range. The $4400 area is the next area of technical resistance. Silver surged almost 10% last week. That is its biggest weekly advance since the end of February. It pushed slightly above $65, and although the momentum was not sustained, it did post its highest settlement since June 22. It is straddling the $64 area late in the European morning. The next area of resistance may be around $67. 

• September WTI bottomed in the middle of last week near $74.25. Iran’s aggressiveness: still attacking its neighbors and the Houthis striking Saudi Arabia helped support the recovery in oil prices. Ahead of the weekend, the September contract reached a little above $78.75 and edged up to almost $79.45 today. A move above $80 could target the $81.65 area.

Data

• Japan reported its June current account (surplus) earlier today. True to the strong seasonal pattern, the surplus narrowed, and in fact swung into deficit (-JPY9.3 bln from JPY3.97 trillion in May). It was the first deficit since January 2025. Still, the OECD forecasts Japan's current account surplus this year at 5.2% of GDP (4.9% in 2025), though it is notable that the IMF expects it to narrow to 3.8%. An even stronger seasonal tendency is for the trade balance on the balance-of-payments basis to improve, but it was defied today. The balance of payments trade balance flipped to a JPY135 bln deficit from a JPY6.9 bln surplus in May. 

• China’s July CPI was softer than expected, rising 0.5% year-over-year, half of the June pace. It is the smallest increase since before the Middle East war. Although the conventional narrative focuses on weak demand, the ceasefire saw gasoline prices all 11% on the month and that seemed to play an outsized role. Food prices fell for the fourth consecutive month on a year-over-year basis, and this does not seem to be demand driven either. On the other hand, the cost of tourism services (hotels and flights) did see weaker demand, according to reports. Core prices (excluding food and energy) rose 0.9% year-over-year, which is the slowest since January. Producer prices also moderated (3.5% year-over-year vs. 4.1% in June). It is the first such easing of producer prices since March. Oversupply in the hog industry appears to be gradually easing and the year-over-year decline in pork prices slowed. 

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