The Dollar Remains Firm and the RBA Delivered its Fourth Hike of the Year, though Sounded Less Hawkish

The US dollar continues to trade with a firmer bias.  We are still struck by the over-bought technical momentum indicators, arguably encouraged by the aggressive pricing of the trajectory of Fed policy. In the Fed funds futures, the odds of an October hike six days ahead of the midterm election. In recent years, there is some precedent for a move six days before a national election (e.g., 2008, 2018, and 2022). The market is pricing in almost 100 bp of hikes over the next 12 months.  Sentiment seems vulnerable to any disappointment with the economic data in the coming days.  

Throughout the North American session today, no fewer than six Fed officials speak today.  Most has spoken recently and it seems clear, as the dot plot indicated, many are prepared to hike rates again this year.  The question is when. However, also recall that the dot plot less than two weeks old showed the median projection was for no hikes next year.  That said, it is possible the under new management, the Summary of Economic Projections are dropped next year. 

Prices 

G10

• The euro slipped below $1.1355 yesterday to match the late July low. It remains under pressure today, having been sold below $1.1335. The low for the year was recorded in late June, near $1.1325. A convincing break of $1.1300 could warn of scope for another two-cent decline.

•     More verbal intervention by Japanese officials to support the yen saw the dollar drop      yesterday from about JPY157.50 to JPY156.50. It recovered to trade near JPY157.60 toward the end of the European session and spent the North American afternoon mostly chopping mostly between JPY157.00 and JPY157.50. It is trading quietly today between about JPY157.20 and JPY157.70. Options for almost $500 mln at JPY157.50 expire today. 

• Sterling did reasonably well yesterday.  Its low (~$1.3220) was higher than the low of the past two sessions. It recorded a three-day high (~$1.3280) near midday in New York but settled below last Friday’s high (~$1.3265). It is trading with a heavier bias inside yesterday’s range.  A break of $1.3200 signals a test on the late June lows near $1.3140. 

• The Canadian dollar’s drop continues. It fell for the sixth consecutive session yesterday and 13 of the past 14 sessions. It is a little softer today. The US two-year premium over Canada also continued to widen. It has risen for the past ten sessions. At 154 bp, it has not been wider since mid-February 2025, when peaked near 160 bp.  The greenback peaked in early March 2025 and fell by nearly 7% through mid-June 2025. The US dollar reached nearly CAD1.4180 yesterday and settled above last week’s highs. It is probing the CAD1.4200 area late in the European morning. The high for the year was recorded in late June, near CAD1.4250. 

• The Australian dollar traded inside last Friday’s range yesterday (~$0.7005-$0.7045). The central bank’s rate hike was seen less than hawkish, and the Aussie has taken another leg down today.  It has been sold slightly through $0.6980. The next chart area is around $0.6950. 

EM 

• After falling by more than 4% over the past two weeks, the Mexican peso continued to be pulled lower yesterday by rising US rates and a broadly stronger dollar.  The greenback breached the MXN18.00 level for the first time since that end of March. It settled for the fourth consecutive session above its upper Bollinger Band (found near MXN17.9350 today). It reached a little above MXN18.02 today. The MXN18.04 area corresponds to the (61.8%) retracement of the US dollar’s decline from last November (~MXN18.77) to the two-year low set earlier this month (~MXN16.8575). Above there is little until the late March/early April highs (~MXN18.1650). We suspect the unwinding of the yen carry trade was not as disruptive because the trade was switched into dollar-funded, but now with the surge in US rates and dollar, a large unwind is taking place. The JP Morgan Emerging Market Currency Index is off about 1.5% in the past month. It is off a little more than 1.8% this year. 

• The dollar posted a potential key reversal against the offshore yuan yesterday. It first traded above the recent highs to reach almost CNH6.7265 before reversing and settlings slightly below the pre-weekend low (~CNH6.7135). The dollar has fallen to a four-day low near CNH6.7045 today. The cyclical low was set on September 21 around CNH6.6910. After seemingly cautioning the market against thinking the yuan is a one-way market, the PBOC confusingly lowered the dollar’s fix yesterday by the most since April.  Today’s fix was at CNY6.7411 (CNY6.7399 yesterday). 

• The Indian rupee fell to two-month lows today despite reports that the Reserve Bank of India sold dollars in the onshore market. The dollar reached almost INR96.1540 today but settled slightly below INR96.00. 

Other Markets

• US equity indices opened lower yesterday and extended their sell-off.  However, with the pullback in yields, equities stabilized, though the major US indices settled below opening levels.  US index futures are narrowly mixed.  Most Asia Pacific bourses were weaker today. China and Australia were notable exceptions. Europe’s Stoxx 600 was flat yesterday but is up around 0.45% today. 

• Benchmark 10-year yields have steadied today after yesterday’s surge in the US and Europe.  The 10-year JGB yield was slightly softer, while most yields are around a basis point lower in Europe. The US 10-year yield reached 5.27% before settling near 5.23%. It is slightly firmer today. The two-year yield reached 4.95% and settled near 4.92%. It is nearly 4.94% now.  Given the context of the Atlanta Fed’s GDPNow tracker pointing to 5% growth, US CPI at 3.4%, the Fed funds futures implying an end of 2027 overnight rate of about 4.80%, and no serious progress to rein in the deficit (supply), a 5.25% 10-year yield does not seem extreme. 

• Gold was nearly 3.8% less precious at the close yesterday than it was before the weekend. Yesterday’s loss was the largest since June 10.  It had traded to around $4510 earlier this month, and yesterday’s losses took it to $4111. It settled well below the lower Bollinger Band and has been unable to re-enter it today (~$4157 today), though it is trading with a firmer bias.  Silver was tarnished by yesterday’s slide that took it to nearly $60.75. It also settled below its lower Bollinger Band (~$61 today) and is struggling to re-enter it. A break of $60 brings the year’s low (~$54.80) into view. 

• Conflicting signals about the outlook of the war, US-Iran talks, and the extent oil is making its way of the Middle East saw the November WTI contract swing within the range established last Thursday (~$91.25-$96.80). It is little changed in the European morning and has been confined to yesterday’s range.  

Data

• With the PCE deflator tomorrow and US jobs data on Friday, July US house prices and the Conference Board’s consumer confidence survey are unlikely to have much impact.  While consumer confidence is weak, consumers continue to demonstrate resiliency. The August JOLTS is seen pointing to a steady labor market. 

• Canada is expected to report a flat July GDP after a 0.3% increase in activity in June. StatCan is also expected to provide an advance estimate for August GDP.  The Canadian economy grew by 3.3% (annualized) in Q2 and is expected to have slowed to about half that pace in Q3. Still, the swaps market has a little better than a 50% chance of a hike at next month’s Bank of Canada meeting. 

• The EC’s September confidence surveys were released today. They were mixed, but the market impact seemed negligible. Separately, Spain reported firm September inflation. The EU harmonized measure rose 0.6% for a 5.0% year-over-year rate, up from 4.6% in August. It also reported a 1.1% year-over-year drop in August retail sales (-0.3% in July). Germany reports its September CPI tomorrow.  The EU harmonized measure is expected to rise by about 0.5%, which would lift the year-over-year rate to 3.2% from 2.9%. Separately, civil servants are striking in France ahead of the government’s budget bill later this week. 

• The UK reported August consumer credit figures. Consumer credit was a little stronger than expected and it has risen 9.6% year-over-year (9.3% in July). Mortgage approvals slowed a little but net lending increased. 

• The Reserve Bank of Australia hiked its overnight cash rate target for the fourth time this year.  The key rate now stands at 4.60%, the top in the G10. It is the highest in about 15 years. Australia also reported that household spending was flat in August, which defied expectations for a modest increase. Australia reports August CPI tomorrow.  The median forecast in Bloomberg’s survey is for a 0.5% increase, which would raise the year-over-year rate to 4.1% from 3.5%.  Yesterday, the futures market was discounting almost a 65% chance of another hike before the end of the year and after less than hawkish comments by Governor Bullock, the odds have been pared to a little less than 60%. 

• China revised slightly lower its estimate of the Q2 current account surplus to $193.7 bln from $195.1 bln.  That follows the $184.3 bln surplus in Q1.  The Q2 25 current account surplus was $128.7 bln.  China’s trade surplus is larger, but it reports a $37.6 bln deficit on primary income. Primary income includes interest on bonds and loans, dividends on shares, and profits from businesses owned abroad. It also includes pay earned when a worker is resident in one country but works and is paid by an employer from a different country. Separately, the Beijing indicated that it will move “with greater urgency” to provide support for the economy, promising to introduce a package of “practical and effective additional policies”.  In yesterday’s statement, the State Council (~China’s cabinet) recognized that “emerging issues” in the economy required the government to “step up counter-cyclical adjustments”. China’s September PMIs will be released first thing tomorrow. 

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