The US Treasury announcement early in North America yesterday that it would at least double the size of liquidity support buyback operations for longer-dated nominal coupon securities. The current maximum size is $16 bln a quarter. The stepped-up purchases will take effect on September 9. Treasury will provide more information about future buyback sizes at the next quarterly refunding, announcement scheduled for November 4, 2026. The announcement changed the tone of the capital markets. We suspect the timing and signal effect is more potent than the actual size relative to the daily turnover in the US Treasury market. It drove down long-term US yields, fueled a recovery in equities, and sent the greenback reeling.
The US 10- and 30-year yields are a couple of basis points firmer today, but the US dollar is softer against most currencies today. While Asia Pacific markets were pulled higher today by yesterday’s action, European markets are seeing little follow-through, and the Stoxx 600 is struggling to sustain upticks with a six-day drop in tow. Meanwhile, October WTI has advanced more than 2.5%, and is extending its rally for the fifth consecutive session and near $86.60 is at its highest level in a month.
Prices
G10
• What many saw as yield curve control or another US Treasury attempt to limit the increase in long-term rates, helped the euro gain the most since the end of March. At the end of the North American session, it was up about 0.90%, with new highs late, near $1.1680. Follow-through buying today lifted the euro above $1.17 for the first time since mid-May. The $1.17 area is the halfway mark of this year’s range. The next retracement (61.8%) is a little below $1.18, which also corresponds to the May highs.
• Our long-running argument linking the dollar-yen exchange rate to changes in the US 10-year yield was driven home yesterday. The JGB 10-year yield dropped five basis points as did the US 10-year Treasury. The dollar fell from around JPY159 before the US Treasury announcement to almost JPY158, a seven-day low. The low also corresponded to the (38.2%) retracement of the greenback’s recovery from the intervention-inspired low on August 3 (~JPY155.25). It is holding today and options for $1.3 bln expire there today. The US dollar recovered to almost JPY158.75, where sellers emerged. The low in the European morning was around JPY158.20.
• On the back of the dollar’s broad slump, sterling surged to $1.3630, its best level since May 11. It surpassed the (61.8%) retracement of the decline since the year’s high was recorded in late January near $1.3870. It has approached May’s highs (~$1.3650-60) today, reaching almost $1.3650 today, where options for about GBP360 mln expire.
• The three-day extension of the US tariff threat gave the Canadian dollar a bid before the US Treasury announcement. The greenback fell from around CAD1.3880 before the announcement to almost CAD1.38. The (61.8%) retracement of the US dollar rally from the May 1 low (~CAD1.3550) is found slightly above CAD1.3815. The US dollar has taken another leg lower today and approached CAD1.3760, a new three-month low. Nearby support is seen near CAD1.3700.
• The Australian dollar was underperforming before the US Treasury announcement, and it recovered smartly to test Monday’s two-month high near $0.7130. It posted an ostensibly bullish outside up day by trading on both sides of Tuesday’s range settling above its high. It has hardly traded higher today, but the market does not appear done trying. The next technical target may be in the $0.7175-$0.7200 area.
EM
• The broad dollar sell-off and the recovery US stocks saw the Mexican peso reach its best level since the run-up to the 2024 presidential election. The dollar fell to about MXN16.9425, which is holding today. The next notable chart area is around MXN16.88. The Colombian peso, though, continued to lead the regional currency advance, with a 1.3% gain. It reached its best level since October 2018. The government declared an economic emergency late yesterday, adding new spending pressures on the strained fiscal situation.
• The dollar’s weakness saw it slump against the Chinese yuan. It fell to CNH6.7280 yesterday and to almost CNH6.72 today. It is a new low since February 2023, when it recorded a low slightly below CNH6.7060. The PBOC seemed to have little choice but to set the dollar’s fix lower, and indeed it did. Today’s fix as a new multiyear low (CNY6.7808 vs CNY6.7854 yesterday).
• Hawkish minutes from the recent central bank meeting helped lift the Indian rupee initially but the underlying weakness remerged that the rupee pared its gains. Helped by the broad sell-off, the dollar initially gapped lower and fell to a three-day low against the rupee (~INR95.5675) but over the course of the session, the greenback climbed back, closed the gap and settled near session highs (~INR95.7175).
Other Markets
• The recovery in US equities yesterday set a positive tone for today’s activity. Asia Pacific markets snapped a two-day slide today, led by South Korea’s 5.9% rally. Nearly all the large bourses were higher. Singapore and New Zealand were the notable exceptions. However, Europe’s Stoxx 600 is struggling. It is threatening to extend its losing streak for the seventh consecutive session. US index futures are little changed but mostly slightly softer.
• Benchmark 10-year yields tumbled six basis points after the US Treasury’s buyback announcement. It helped fuel a recovery of European bonds. Asia Pacific yields played catch-up, while European yields are narrowly mixed, and the 10-year US Treasury yield is up a little less than three basis points to 4.67%.
• Gold liked the decline in US bond yields and dollar slump. It jumped almost $188 (4.3%) to a little above $4523, its best level in a little more than two months. It settled above the 200-day moving average is a little higher, around (~$4511 today) for the first time since June 4. Follow-through was limited to about $4527 today before profit-taking set in and pushed the yellow metal to almost $4478. Silver recovered from an eight-day low (~$62.45) to almost $66.85 and posted its highest settlement since June 17. The bullish outside day saw limited follow-through buying today. It reached about $67.30 before pulling back to around $66.50.
• October WTI posted an outside day. While it traded on both sides of Tuesday’s range and settlement (~$84.35) was well within its range. The contract reached almost $85.85 and almost $86.85 today. Last month’s high was slightly above $88. While the average retail price of gasoline is creeping up, it was higher earlier this month. The average retail price of diesel is at its highest level since late May, according to AAA.
Data
• The August Empire manufacturing survey was reported earlier this week, and it jumped to 20.6 (from 15.6), its best level since the end of 2021. Today, the US sees the Philadelphia Fed’s August business outlook. Economists surveyed by Bloomberg expect it to fall, with the median projection at 25.0, down from 41.4 in July. That was its best level since November 2021. July Leading Economic Indicators are due, as well. The flat reading in Q2 was the best quarterly reading since the end of 2021. Still, the market has tended to pay little attention as 1) it simply aggregates selected data already released and 2) it has done a poor job catching movement of the broader economy. Lastly, weekly initial jobless claims for last week will be reported. They had dropped for a couple of weeks late last month to below 200k but have risen for the past three weeks and stood at 209k in the previous week. Continuing claims bottomed in April (1.758 mln) but at nearly 1.78 mln at the end of July suggest hiring is keeping apace.
• Minutes from this month’s Mexico’s central bank meeting typically do not move the markets. Policy has been on hold since the second quarter point rate cut this year was delivered in May. The central bank is expected to be on hold for the next several months, but the swaps market’s bias is that the next move is a hike late this year or early next. We suspect if the strength of the peso persists, it will allow the central bank to stay on the sidelines.
• EMU’s construction spending fell 1.3% and the Mas’s 0.4% gain was cut in half. It is lower year-over-year (-0.7%) for the first time since March. Recall that the ECB estimates the trend growth, or the non-inflationary “speed limited” to be 1.2%-1.3%, which is what the aggregate economy grew last year. The ECB expects growth to slow to 0.8% this year before returning to trend next year.
• Sweden’s Riksbank delivered a hawkish hold. While maintaining the policy rate at 1.75%, the central bank continued to indicate a rate hike later this year may still be needed. However, the swap market continued to pare the chance of more than one hike, and this may have contributed to the krona’s under-performance today. It joins the yen as the only G10 currencies not to have traction against the US dollar today.
• Australia’s labor market remains resilient in the face of the three rates hikes the central bank has delivered. It created a monthly average of 27.2k jobs in Q2 after 26.5k jobs in Q1. It created an average of 10.1k jobs a month in H1 25. It gained 16.3 full-time jobs in July and June’s full-time jobs rose 48.9k rather than the 29.3k of the initial estimate. Still the unemployment rate rose from 4.1% at the end of last year to 4.5% in April before slipping to 4.4% in May and June. It rose back to 4.5% in July. The participation rate hovered between 66.7% and 66.8% this year until jumping to 67% in June. It stood at 66.9% in July.
• Japan’s July trade deficit of almost JPY635 bln was the largest since January. The July 2025 trade shortfall was a little more than JPY156 bln. Despite the extreme undervaluation of the yen on most fair value models, Japan’s ongoing trade deficit means that at least for some countries the linkages between currency valuation and trade are difficult to generalize and vary over time. The war in the Middle East has disrupted Japan’s energy supplies. Tokyo has responded by boosting the value of oil imports from the US dramatically. In value terms (volume and price), Japan’s July imports were a 27.8% above a year ago and exports were up about 23.2%.
• As widely anticipated, Chinese banks kept their one- and five-year loan prime rates steady at 3.0% and 3.5%, respectively. While most countries are wrestling with higher bond yields, China’s benchmark 10-year yield is off 16 bp this year to almost 1.66%, its lowest level since July 2025. The low Chinese rates has seen borrowers swap dollar debt for yuan and Panda bond issuance is strong.
Reviewed by Marc Chandler
on
August 20, 2026
Rating:
