Introduced by the Nobel-prize winning economist Paul Samuelson in the late 1930s, "reveal preferences" says to look at what people are actually doing to determine their true preferences rather than what they say. Applying this to the US now suggests the administration is worried about the US Treasury market. Last week's announcement that the Treasury's bond buyback program will at least double starting early next month (to at least $32 bln a quarter) followed other measures to support the bond market. Earlier, the administration adjusted the capital requirement of large banks that will incentivize holding more Treasuries. The Genius Act provided the legal framework for stable coins to invest in US bonds. Reports of last month's intervention, indicating that the Treasury Department intervened to support the yen by selling euros not dollar is thought to be consistent with this too. If Japan did not want to sell US Treasury's, the Federal Reserve already had a facility in place for officials to repo them, and of course, large banks offer similar capabilities. Yet, just as market participants pushed back against the recent intervention yen intervention, the rise in oil prices, the chronic large budget deficits despite solid domestic demand helped lift the US 10-year yield back to the upper end of its recent range, above 4.70%.
As August winds down, the highlight this week is Fed Chair Warsh's speech at the Jackson Hole symposium on Wednesday, though Bessent has put the Treasury in play, too. Even before his taskforces made any recommendation, a new era at the Fed is apparent. And the recently released minutes showed he is seriously considering reducing the number of meetings to six from eight. His speech is likely to be aimed at a very high level and outline his criticism of the evolution of central banking over the last couple of decades. Meanwhile, the US Treasury will sell more than $180 bln of coupons (not including $28 bln two-year floating rate notes) and more than $265 bln of bills. Treasury Secretary Bessent has hinted new initiative to support yields, but it does not appear to include reducing the budget deficit, which is expected to be around 6% of GDP this year, let alone a debt-reduction strategy. There failure of US and Canada trade talks is a shock that will most likely weigh on the Canadian dollar, which has rallied for the past four week and in six of the past seven.
USA
Drivers: The Treasury's announcement that it was doubling its long-bond buyback injected a new dynamic into the mix and sent the greenback reeling. Ahead of Fed Chair Warsh's speech at Jackson Hole, the Fed funds futures have a hike before the end of year almost fully discounted.
Data: The US reports of slew of data but most are unlikely to pose more than headline risk. The PCE deflator, which the Fed had targeted, draws attention but with the CPI and PPI in hand, the market has a good handle on it. Outside of some rounding, it does not typically surprise. It is too early in the quarterly data cycle to have a firm grasp of Q3 GDP. The Atlanta Fed says it is tracking 4.0%, while median forecast in Bloomberg's survey is nearly half of that. Personal consumption, durable goods, and the advanced July goods trade balance may be useful but not decisive. There are several Fed surveys but often the market looks through them. Bloomberg's growth data surprise model is at its lowest level since early March. There are two highlights. The most important thing from the market’s point of view is Fed Chair Warsh's speech at Jackson Hole on August 26. A possible if not likely scenario is for Warsh to lay out his vision, knowing he is on the world stage. He is going against not only the continuity seen under the Bernanke, Yellen, Powell trilogy, but the evolution of modern central banking. It has moved to greater transparency and sharing of reaction functions and views of the economy. Moreover, the Great Financial Crisis and then again during the pandemic, the vast power of central banks became more evident to more people. Moreover, he is not the first head of a central bank that wants to review first principles. Isn't that what Baily did for the Bank of England and the adoption of scenarios, following Bernanke's recommendation? Isn't that what Powell tried with the average inflation rate? William Grieder's book, Secrets of the Temple, was written in 1987 when the Fed did not hold press conferences. It took the Fed another seven years to announce the results of its policy decision. They had to be ferreted out by "Fed Watchers" who poured over the Fed data to determine what it did. While Warsh may sketch his broad views about central banking, it is unreasonable to expect that he addresses the current monetary policy setting. Also, the BLS offers a preliminary estimate of benchmark revisions to nonfarm payrolls. This year's preliminary benchmark is potentially much more consequential than a routine statistical footnote. The monthly CES survey has been telling us one story about employment growth, while other indicators have increasingly suggested something weaker. The September 2025 preliminary benchmark said -911,000. The final number in February was still -862,000 on a non-seasonally-adjusted basis. In other words, the preliminary estimate was not some statistical curiosity that disappeared in the final data. It was telling us something real about the labor market. Ultimately, what will be generated is the March 2026 level error.
Prices: With a push delivered by the US Treasury's effort to suppress bond yields, the Dollar Index took a step lower in the middle of last week and consolidated weakly in the past two sessions. DXY reached 98.55, its lowest level since mid-May and slightly surpassed the (50%) retracement of the rally from the late January low (~95.55). Momentum indicators remain stretched but there appears to have been a fundamental shift, and participants should be attentive to a reversal pattern. The next retracement level is around 98.00.
EMU
Drivers: Over the past 30-sessions, the euro's correlation with changes in the two-year German yield is inverse slightly, which is to say that higher German two-year yields are correlated to a weaker euro. The more intuitive inverse correlation with changes in US two-year yields has slackened since the multiyear high in mid-June and is now near the least in four-months (~-0.48). The correlation between changes in the exchange rate and the 10-year Treasury yield is now around -0.30, compared with -0.70 mid-June. The rolling 30-day correlation of changes in euro and the Germany's 10-year has been inverse most this year. There was an exception for a few weeks in February, but it did not get above 0.15. It reached almost -0.65 in June before turning positive against from mid-July through early August and peaked near 0.22. It slipped back into inversion but ended the past week with an ever so slight positive correlation.
Data: The eurozone reports July M3 money supply growth and lending figures. The time series no longer captures the imagination of market participants. Nor do the EC's sentiment surveys typically move the market.
Prices: The euro is probing the (50%) retracement of the decline from the year's high in January (~$1.2080) found near $1.17. A sustained break of it targets the next retracement (61.8%) and May's high, around $1.18. The five- and 20-day moving averages are trending higher, but the momentum indicators are stretched, and the euro is fraying its upper Bollinger Band (a little above $1.17). The $1.1650 area may offer initial support.
PRC
Drivers: The closely managed US dollar-Chinese yuan has a higher correlation with the broad movement of the dollar (DXY) than US short-term interest rates (two-year yield). Over the past 30 sessions, the correlation with changes in the former is near 0.65 and about 0.40 with the latter. Changes in the dollar against the yuan and China's two-yield is around -0.25, near the most in five months. The offshore yuan closely tracks the JP Morgan Emerging Market Currency Index. Over the past 30 sessions, the inverse correlation has reached beyond -0.75. It was a little more than -0.80 in May and June, the most since early 2021.
Data: Beijing reports July industrial profits early on August 27. Chinese companies appear to rely on what is called "patient capital," bank-lending and in China's case, the banks are state-owned. In other countries, reliance bank capital rather than market capital allows companies to compete for market share rather than profitability. In June, China's industrial profits rose 15.1% year-over-year. In June 2025, industrial profits fell 4.3%.
Prices: Chinese officials are trying to manage the pace of the yuan's changes, but the direction is clear. It is at its best level against the dollar since February 2023. The dollar saw a low then a little below CNH6.70. Against the onshore yuan, the dollar's low then was closer to CNY6.69. The yuan's appreciation is being recorded even as the US 10-year premium over China is hovering around 300 bp, which has not been much larger since early last year when it reached 315 bp, the most in two decades.
Japan
Drivers: The market has changed. The 30-day correlations of changes in the exchange rate and US rates were the better fit that Japanese rates and this remains the case. However, the correlation with US rates has dramatically diminished. The correlation of dollar-yen and change in the US 10-year yield is near 0.20. It was above 0.60 when at the conclusion of the June FOMC meeting and fell to around zero earlier this month, the lowest since early 2023. The 30-day correlation with the US two-year yield is hovering near 0.25, a little above its low since peaking above 0.65 in May. Meanwhile, the exchange rate's correlation with the Dollar Index has trended higher in recent weeks. The weakest since March 2025 was seen in early July (~0.45). It is now near 0.75.
Data: Tokyo's August CPI on August 28 is the most important data point for Japan in the coming days. The headline has risen from 1.4% in March and May to 2.0% in July, the fastest pace of the year. The core measure, which excludes fresh food, has also risen for the past two months and stood at 1.9% in July, the highest since January. Tokyo's CPI is important because it is often a good guide the national figures, which will not be released for several weeks. A rise, especially in the core rate above the national target of 2%, will reinforce expectations for the BOJ hike. Pricing in the swaps markets is consistent with about an 85% chance of a move when the September 17-18 meeting concludes. At the same time, Japan's July jobless rate (2.5% in June) and job-to-applicant (1.18 in June) will be reported. The market will likely be more sensitive to Tokyo's CPI.
Prices: The US Treasury's stepped-up bond buy-back program helped arrest the market's challenge to the central banks' resolve, as the greenback approached JPY159. The market seems to recognize JPY160 as a likely pain threshold for officials. The announcement drove the dollar back to JPY158. Still, when everything was said and done last week, the US dollar was still straddling the JPY159 area ahead of the weekend. In the first two weeks after the intervention, Japanese investors took advantage of the stronger yen to buy more foreign stocks and bonds.
UK
Drivers: Over the past 30 sessions, the sterling is nearly as correlated with changes in the Dollar Index as it is with changes in the euro. The former is inversely correlated by a little more than 0.80 and the latter is positively correlated by about 0.82. The correlation between changes in sterling and the US two-year yield is a little more than -0.40, roughly half of where it bottomed after the June FOMC meeting. However, sterling remains inversely correlated with changes in UK two-year yields, but half of the correlation with US yields. It was positively correlated, mostly below 0.30, in the first two months of the year.
Data: There are no government reports in the week ahead.
Prices: Sterling reached $1.3675 before the weekend, its best level in six months. It rose by about 0.75% last week, its fourth consecutive weekly advance and the seventh in the past eight weeks. It overshot the (61.8%) retracement of the losses from the year's high in late January (~$1.3870). The next target may be in the $1.3700-10 area. The momentum indicators are stretched, and sterling frayed the upper Bollinger Band in the second half of last week. Initial support is seen in the $1.3570-$1.3600 area.
Canada
Drivers: While a trade deal seemed likely between the US and Canada seemed at hand, talks failed late Friday and the US threat of 50% tariffs on around $20 bln of a wide variety of Canadian goods went into effect early on August 22. Canada has threatened to retaliate "dollar for dollar." This unexpected development will likely drag the Canadian dollar lower on Monday. Meanwhile, the surge in the 30-day correlation with the US two-year rate differential has steadied in around 0.70. In mid-June, the correlation had been briefly inverse. The correlation between changes in the exchange rate and the Dollar Index has been edging higher since it bottomed earlier this month, a little below 0.60, its weakest since mid-June. It is now near 0.70. The correlation of changes in the exchange rate and changes in the US two-year yield (~0.35), and the inverse correlation of USD-CAD and the front-month NYM-NYMEX traded contract (~-0.23).
Data: There are two Canadian data highlights in the coming days. The first is a look at the establishment employment survey. Unlike the US, which reports the establishment and household surveys at the same time, Canada separates them. It reports the household survey first, and then with a two-month lag reports the establishment survey. Like in the US, the two surveys are often difficult to reconcile. Through May, the household survey showed an average loss of 4.9k jobs, while the establishment survey found an average monthly gain of almost 19k. The June household survey estimated that 18.2k jobs were created after 87.8k in May. According to the establishment survey, 24.1k more people were on companies' payrolls. Although market's reaction of Canada's household survey is often overwhelmed by the reaction to the US employment report, Canada's establishment survey tends not to elicit a market response. The second data highlight is the first estimate of Q2 GDP. In Q1 26, the monthly estimate was net flat and the Q1 GDP contracted by 0.1% at an annual pace. The April and May monthly GDP prints show a cumulative 0.9% increase. StatCan estimates that the economy expanded by 0.2% in June for 3.4% annualized growth in Q2. The median forecast in Bloomberg's survey is for a more moderate 2.1% expansion.
Prices: The US dollar has trended lower against the Canadian dollar since it peaked in late June near CAD1.4250. It has fallen for the past four weeks and six of the past seven. It reached nearly CAD1.3730 ahead of the weekend, on the back of the broadly weaker US dollar and a little stronger than expected Canadian retail sales. On this pair, too, the momentum indicators are stretched and the Bollinger Band frayed. Given the technical condition and that unexpected collapse of what had looked like a trade deal, the short-term market has been caught wrongfooted. After settling near CAD1.3760 before the weekend, the greenback is likely to jump Monday. In terms of magnitude, we suspect it can rise into the CAD1.3850-CAD1.3900 area.
Australia
Drivers: The Australian dollar's 30-day correlation with the Dollar Index has been fairly stable in the 0.60-0.70 area in recent weeks. The correlation of the exchange rate with changes in the US two-year yield is a little above 0.50, the middle of the range since mid-June. For the past 30 sessions, changes in the exchange rate are around twice as correlated with changes in gold (~0.55) than changes in Australia's two-year yield (~0.27).
Data: Australia's CPI fell in May (-0.7) and June (-0.1%) and fell at an annual rate of 1.2% in Q2. July's CPI is due, but it is unlikely to spur much a market reaction. With the whiff of deflation and last week's July employment report, showing below average jobs growth, the central bank does not appear to be in a hurry to hike rates again after three hikes earlier this year. However, the central bank continues to keep the door open to additional moves. Inflation expectations remain elevated, and household spending remains firm. July household spending is due on August 27. The May-June increase of 2% was the strongest two-month performance since last October and November, i.e., before this year's rate hikes. The average monthly increase in H1 26 was 0.5% compared with 0.4% in H1 25.
Prices: The Australian dollar rose by about 1.3% last week, its biggest weekly advance since April. It was the fourth consecutive weekly gain and the seventh in the past eight weeks. The Aussie reached almost $0.7180 before the weekend, its best level since early June. Nearby resistance is seen in the $0.7185-$0.7200 area. Momentum indicators are overbought, and the Australian dollar settled above its upper Bollinger Band ahead of the weekend (~$0.7160). Initial support may be in the $0.7120-30 area.
Mexico
Drivers: Changes in the dollar-peso exchange rate have been most correlated with changes in the JP Morgan Emerging Market Currency Index. It is around -0.88. It reached the most extreme since late 2020 in mid-March near -0.90. The correlation with the Dollar Index is near 0.50. It reached a six-month low earlier this month, near 0.40. The correlation with changes in the US two-year yield has slackened from above 0.80 in June to almost 0.45 now. The greenback tends to rise against the Mexican peso as oil prices rise. The 30-day correlation reached slightly 0.75 in mid-July and fell to almost 0.40 earlier this month but is back to almost 0.55 now.
Data: Mexico will take another look at Q2 GDP, when its initial estimate pointed to 1.5% quarter-over-quarter growth and 2.2% year-over-year. Recall that the economy contracted by about 0.6% in the first quarter, when the year-over-year pace was about 0.25%. Trade played an important role. Mexico recorded a $10.9 bln trade surplus in Q2 after a deficit of a little more than $1 bln in Q1. It was the largest quarterly surplus since Q4 2020. As we noted previously, with the help of Taiwan companies’ production in Mexico, the electronics and AI-related exports to the US now exceed auto trade. The July trade balance is due om August 27, a few hours before Mexico's central bank will update its economic forecasts in the inflation report. Officials will likely find comfort in the economic recovery and gradual easing of price pressures. At that start of the week, Mexico's inflation for the first half of August will be released. Mexico's July CPI was 3.12%. It peaked in March at 4.59%. The core rate was at 3.95% in July, the first sub-4% reading since April 2025. It peaked in February at 4.5%. The central bank targets 2-4% and aims for the midpoint. The central bank has reduced its overnight rate target twice this year to 6.5% (from 7.0%). The swaps market is pricing the next move as a hike and sees around a 50% chance before the end of the year.
Prices: The Mexican peso rose for the fifth consecutive week, and the dollar broke below MXN17.00 for the first time since the mid-2024 Mexican elections. The greenback made a new low before the weekend, slightly below MXN16.89. The low in 2024 was nearly MXN16.26. Dollar carry trades are fashionable again. The Colombian peso was the strongest emerging market currency last week, rising almost 3% against the greenback. The Colombian peso reached its best level since 2018. The dollar was sold to almost COP3028 on August 20 before consolidating ahead of the weekend. Colombia's policy rate is at 12.0% compared with 14% in Brazil and 6.5% in Mexico.
Reviewed by Marc Chandler
on
August 22, 2026
Rating:
