The yen’s surge that began in the middle of last week continued today. The greenback fell from above JPY160 to a little below JPY153 today, its lowest level in seven months. There still is no evidence of official intervention. The swaps market continues to price a hike next week and most likely another in December. It has hardly changed since the middle of last week. While the US has strongly advocated tighter Japanese monetary policy, despite US inflation and economy running hotter than Japan’s the Trump administration continues to argue against a Fed hike. President Trump has threatened to halt all trade with countries that the US has a trade deficit unless the Fed cuts rates. Yet clearly the issue that the FOMC faces next week is whether it should hike. None of the officials seem to support a cut. While Trump’s threat is bluster, it shows that even with his appointment of a new Fed chair, the president continues to try to drive monetary policy, and its pressure on Governor Cook as not gone away.
Outside of the yen and the Canadian dollar and Norwegian krone, the US dollar is firmer against the G10 currencies, and most emerging market currencies. New hostilities in the Middle East have lifted oil prices further, and fanned risk-off position adjustments. Canada’s retaliatory tariffs kick-in today, and the US is threatening further action against its trading partner that buys 15% of its exports and is the top destination of goods from 34 US states.
Prices
G10
• The euro was firm yesterday on the back of a broadly weaker dollar led by the continued short squeeze of the yen. The euro approached by held below last Thursday’s high near $1.1640. The cap is holding today and is about the halfway point of the pullback from the August 21 high (~$1.1710). Options for nearly 1.3 bln euro expire today at $1.1650. The euro is trading with a heavier bias and looks set to probe $1.16. Support is seen in the $1.1565-85.
• The powerful short squeeze of the yen continued. The dollar fell through JPY155 and almost to JPY154 yesterday. The losses were extended today about JPY152.90. The greenback recovered to about JPY154.25 in the European morning, where it stalled. While there still is no indication of intervention, some remain on guard for a change in tactics.
• While sterling was firm yesterday, it held below the $1.3550 area that capped it in the last two sessions last week. That area corresponds to the (38.2%) retracement of the losses from the August 21 high (~$1.3675). Although sterling briefly traded above it today, it does not signal a breakout, it was greeted by sellers that pushed it to new session lows near $1.3520. Support is seen in the $1.3475-$1.3500 area. The next retracement is near $1.3575 and then $1.3600.
• President Trump’s threat that the Canadian dollar’s (imbalance with the US is unacceptable” and that “it has been that way for years-but no longer” appears to be part of the escalating trade conflict between the two countries. Canada’s retaliatory tariffs are implemented today. It is true that the according to the OCED’s model of purchasing power parity, the Canadian dollar is the third most under-valued G10 currency against the US dollar (~-18.6%) behind the Japanese yen (~-61%) and the euro (~-28.6%). Canada’s overnight target rate at 2.25% is the lowest compared with the US Fed funds since the mid-1990s, which is partly the result impact of the disruption spurred by the US administration. The holiday in the US and Canada yesterday made for quiet trading and the Canadian dollar consolidated quietly within the pre-weekend range. The US dollar traded between CAD1.3805 and about CAD1.3840. The greenback was sold to almost CAD1.3775 today, and buyers emerged ahead of last week’s low (~CAD1.3765). It recovered to a little above C AD1.3800. Initial resistance may be in the CAD1.3820-40 area.
• The Australian dollar rose for the fourth consecutive session yesterday and reached $0.7225, its best level since mid-May. It stalled today and is consolidating quietly, slightly above $0.7200. It looks vulnerable. Nearby support is seen in the $0.7175-$0.7185 area.
EM
• The greenback recorded a new two-year low against the Mexican peso before the weekend (~MXN16.8575) after the push above the 20-day moving average was rejected in the middle of last week. It consolidated yesterday within the pre-weekend trading range and settled firmly slightly below MXN16.93. Today’s risk-off has lifted the US dollar back to MXN16.99, a three-day high. The 20-day moving average is around MXN16.9780 and the dollar has not settled above it since late July.
• The dollar bled lower against the offshore yuan ahead of the weekend. It fell to nearly CNH6.7050, its lowest level since February 2023. It consolidated quietly yesterday and this has continued today. The greenback held below CNH6.7125. The PBOC fixed the dollar slightly higher at CNY6.7795 (from CNY6.7787 last Friday) and today’s was set at CNY6.7804.
• The Reserve Bank of India continues to intervene in the foreign exchange market. Report suggest is operating the offshore and onshore markets. The large inflows from the central bank’s effort to draw in foreign deposits has boosted its reserves and boosted liquidity in the banking system. Overnight borrowing costs are well below the central bank’s policy rates. The dollar traded between about INR94.3725 and INR94.4915 yesterday. The greenback rose slightly above INR94.89 today, helped by the continued rise in oil prices. The gap created last Thursday’s sharply lower dollar extended to about INR94.8425 was filled today, and the dollar settled above its five-day moving average (~INR94.6565) for the first time in a little better than two weeks.
Other Markets
• Most of the large Asia Pacific equity markets rallied yesterday, led the South Korea’s Kospi’s 4.6% surge. Hong Kong, India, and Singapore were notable exceptions. The MSCI Asia Pacific Index has risen in six of the past seven weeks. Higher oil prices are taking a toll today. All of the large bourses in the region fell today. Europe’s Stoxx 600 eked out the smallest of gains yesterday to record its third consecutive gain. However, it is heavier today and has given back the gains of the past two sessions. US index futures are trading with a heavier bias.
• Benchmark 10-year yields rose mostly 4-5 bp in Europe yesterday. While the 10-year JGB yield was practically flat, the longer end of the curve saw yields increase. The 30- and 40-year yields rose almost two basis points to 4.01% and 4.08%, respectively. These gains have been unwound today. European yields are mostly less than a basis point lower, while the 10-year year Treasury yield is firmer, near 4.80%. The US Treasury’s first bond buyback under the “stepped up” plan announced recently will begin tomorrow for at least $14.5 bln.
• Gold consolidated with a heavier bias yesterday. It straddled the $4400 level. Last week’s low was a little below $4283 and the high was nearly $4511. Gold reached almost $4443 today but is back near $4400 late in the European morning. Chinese reserve figures showed the PBOC continued to accumulate gold last month. For its part, silver traded in a little more than a dollar range between $65.40 and $66.75 yesterday, inside last Friday’s range. It made a marginal new three-day high today, near $67.20 but is around a dollar lower in European turnover.
• October WTI rose nearly 9.7% last week, its largest gain since mid-July and the second-largest weekly gain since mid-March. It reached almost $93.15 last week. Yesterday’s low was recorded in early European turnover slightly below $90.90 and recovered to a new high near $93.30 before European markets closed. Houthi attacks on Saudi vessels lifted October WTI to almost $94.75 today. It pulled back in Europe and is now around $93.65. Support is seen in between $92 and $93.
Data
• The US market has had a long weekend digesting the US jobs data. The focus this week turns to prices with the PPI and CPI late in the week. Today’s report of the NY Fed’s August inflation expectation survey and July consumer credit tend not to be market movers. Still, consumer credit rose by an average of $11.25 bln a month in the first six months of the year. It compares with an average of about $8.6 bln in H1 25 and $6.4 bln in H1 24. The NY Fed’s one-year median inflation rate has been between 3.42% and 3.67% since the war on Iran began. It was near the upper end in July. The three- and five-year expectations were 3.3% and 3.0%, respectively in July.
• Yesterday, the eurozone revised Q2 growth to 0.6% from 0.4%, helped by stronger than expected consumption and capex. However, Germany’s July industrial output disappointed economists, especially after the strong factory orders (3.7% month-over-month in June and 2.5% in July). Adding insult to injury, the June industrial production was revised to flat from 0.2%. Today, Germany and France reported July trade figures. The German trade surplus of 21.3 bln euros (seasonally adjusted) was larger than expected and more than the H1 average (17.3 bln euros) and last July’s 17.7 bln surplus. Still exports fell for the first time since January (-0.8%) and imports plunged 5.7% (vs. -1.0% median forecast in Bloomberg’s survey). France’s July trade deficit of 6.7 bln euros compares with an average shortfall of 5.65 bln euros in H1 and 6.26 bln in July 2025.
• Japan reported labor earnings growth accelerated in July. In nominal terms, cash earnings rose 4.7% year-over-year in July, after June’s 3.4% increase was revised to 4.0% in June. Adjusted for inflation, real cash earnings were 2.4% higher than a year ago, up from the revised 2.2% in June (from 1.6% initially). The BOJ has worked up a time series that uses the same sample base for cash earnings. They slowed to 2.8% from 4.8% (initially 4.4%) and the scheduled full-time pay (with the same sample base) rose 2.7% (2.9% in June). Separately, Japan revised up its estimate of growth in Q2 to 1.4% annualized for 1.1%, on what appears to be less of drag from capex. Lastly, Japan reported its July current account surplus. True to form, it improved. It has not failed to improve in July from June for more than 20 years. Japan reported a current account surplus of JPY2.99trillion up from a JPY92.3 bln deficit. The current account surplus in July 2025 was JPY2.59 trillion. Yet, despite the undervalued yen, Japan reported its second consecutive trade deficit (`JPY400 bln) on a balance-of-payments basis. Still, it reported a trade surplus in H1 26 (JPY742.2 bln) compared with a (JPY1.46 trillion) deficit in H1 25 and (JPY2.02 trillion) deficit H1 24.
• China reported a $119.09 bln August trade surplus after the $112.3 bln in July. Exports are a quarter higher than a year ago (23.9% in July). Imports rose 28.2% year-over-year (27.6% in July) Separately, yesterday, Beijing announced it would inject CNY300 bln (~$45 bln) into its largest banks and insurers. It did so with the Ministry of Finance special bond issue. The ostensible reason for the recapitalization was to help facilitate lending and promote financial stability. It was the largest injection in nearly 20 years. Since early 2025, it brings the total government recapitalization to CNY500 bln. Given the size of the economy, banks, and lending, this still seems like modest amounts.
Reviewed by Marc Chandler
on
September 08, 2026
Rating:
