Consolidation Persists In The FX Market

The US dollar is enjoying a slightly firmer tone against most of the G10 currencies. However, for the most part, ranges tend to be narrow, and the consolidative one seen this week persists. Oil prices have extended their pullback amid reports that Iran and Oman are discussing an “interim framework” to re-open the Strait of Hormuz. The US is reportedly preparing for its diplomats to return to embassies in the region, which is seen as a sign that the administration does not anticipate renewed full-scale hostilities. 

The US has threatened more retaliation against Canada as the trade war broke out when trade talks failed has pushed the Canadian dollar to a new low for the week. The US dollar is trading near CAD1.3870 after it settled last week near CAD1.3760. More broadly speaking, backed by firmer US rates, we see scope for additional dollar gains in North America. 

Prices 

G10

• The euro traded in about a 30-pip range above $1.1650 yesterday. It reached the four-day low early and settled near session highs recorded in the NY afternoon. The euro is trading with a heavier bias today. It held below $1.1680 and so far, has not traded below $1.1660. Options for about 1 bln euros at $1.1675 expire today. 

• US interest rates softened yesterday, and Japanese rates rose on Tuesday, but the yen remained weak. The dollar spent yesterday above the 20-day moving average (~JPY158.75 today) for the first time since before last month’s intervention. Last week’s post-intervention high was about JPY159.80. The greenback is trading a little heavier today and is hovering in a narrow range around JPY159 where options for around $985 mln expire today.

• Sterling remained firm yesterday and consolidated within Monday’s ~$1.3620-55 trading range, which is taking place within the range set last Friday (~$1.3620-$1.3675). It is heavier today and has frayed $1.3620. A convincing break could see $1.3580-$1.3600. Options for ~GBP525 mln at $1.3625 roll off today. 

• The Canadian dollar steadied yesterday. Its trade-war-inspired losses on Monday were initially extended, but the Canadian recovered in North America. However, the Canadian dollar is again on the defensive, and the greenback is trading a new high for the week as it pushes CAD1.3870 in the European morning. Nearby resistance is seen around last week’s highs, slightly above CAD1.39, and the 20-day moving average is near CAD1.3920. Recall that at the end of last week, when a trade deal, we were told was in hand, the US dollar settled around CAD1.3760 and began this week after the talks collapsed near CAD1.3785. 

• The Australian dollar continued to consolidate in the upper half of last Friday’s range (~$0.7110-$0.7180). Yesterday, it recovered from a brief dip below $0.7140 to set new session highs in North American turnover around $0.7165. Follow-through buying, inspired arguably by the firmer July CPI, has lifted the Aussie to ~$0.7185. It has not traded above $0.7200 since the end of May.  

EM 

• The dollar consolidated in a narrow range against the Mexican peso yesterday. Its roughly MXN16.9250-MXN16.9660 range was in the upper end of Monday’s range. It is trading quietly today, mostly in yesterday’s range, though the low has frayed a little. Monday’s low near MXN16.8875 was a new low since the run-up to the mid-2024 presidential election. The Mexican peso has appreciated by about 2.4% this month, putting it atop the other regional currencies. 

• The dollar rose to the upper end of -day range against the offshore yuan before reversing lower and settled below CNH6.72 for the first time since February 2023. The dollar is in about a CNH6.7150-CNH6.7210 range today. The softer greenback seemed to give the PBOC little choice but to weaken the dollar’s fix and it lowered it for the first time in four sessions (CNY6.7829 vs. CNY6.7852)

• A national holiday in India today has shut the banks and foreign exchange market, but the equity market was open and slipped lower. The rupee had its best day in a month yesterday when it gained about 0.35% against the US dollar. The pullback in oil prices, ongoing central bank intervention, and the approaching end of the special facility for overseas deposits (August 31). 

Other Markets

• The decline in interest in Europe and the US, the continued pullback in oil prices may be helping lift equities today. The large bourses in the Asia Pacific region but Australia, India, and Singapore rose. Europe’s Stoxx 600 is edging higher today extending the recovery from a seven-day slide for the fourth consecutive session today. The major US indices settled higher on the day but slightly below opening levels. They are narrowly mixed now. Nvidia will report earnings later today, and that is drawing much attention. 

• Benchmark 10-year yields in the Asia Pacific region played catch-up today after the strong bond rally in Europe and the US yesterday. The 10-year JGB yield slipped a single basis point, but South Korea and New Zealand yields fell by a little more than four basis points. European yields fell mostly between five and seven basis points yesterday and are up less than one today. bp higher today. The 10-year US yield finished near 4.63% yesterday and is near 4.65% now. 

• Gold appears to have forged a near-term base near $4600. Although it did not sustain the upside momentum that carried it to almost $4700, a three-month high, in the upper end of Monday’s range. It is trading heavier today. A break of $.4600 would see $4555 next. Silver, too, recovered. It bounced off a three-day low (~$67.45) and traded above $69. It continues to knock the recent high near $70. It is consolidating today inside yesterday’s range. 

• October WTI butted against the $87.70 area at the end of last week and with today’s decline to about $79.60, it has fallen $8. It has retraced a little more than half of the run-up from the month’s low on August 5 (~$73.10). The next retracement target is near $79.65. 

Data

• The US economic diary is busy today and it all takes place at 8:30 ET. Personal consumption expenditures may have eked out a 0.1% gain, which would be the smallest increase since the outright decline (-0.3%) in January 2025. When adjusted for inflation, consumption looks flat. Income growth may be stable at 0.2%. Savings may have ticked up. The release of the US CPI and PPI removes much of the guess work from the PCE deflators. The headline is expected to rise by 0.1%, which given the base effect, may allow the year-over-year rate to slow to 3.6% from 3.7%. The expected 0.2% rise in the core rate will keep the year-over-year rate steady at 3.3%. Q2 GDP may be subject to revision from 1.5% July durable goods orders look steady at 0.5%. 

• Mexico’s central bank releases its inflation report late in the North American session today. It has used this quarterly report to update its macroeconomic forecasts. 

• Australia reported July’s CPI rose by 1.0%, the first increase since April. Still, the year-over-year rate slowed to 3.5% (from 3.8%), the slowest pace since last November. The trimmed mean was flat at 3.6% year-over-year. Expectations for next month’s central bank meeting were unchanged in the futures market at slightly less than 10%. After falling in the previous three months gasoline and diesel prices jumped (~7.5%). The partial unwinding of the fuel excise discounts helped lift prices. 

• Japan’s leading economic indicators elicit little market reaction, which is also the case for department store sales that were reported today. The July PPI service prices rose 3.6%, up from a revised 3.4% rise in June (initially 3.2%). The swaps market continues to discount about an 85% chance of a Bank of Japan rate hike next month. The BOJ hiked twice last year and once so far this year. Japan’s two-year yield has risen by about 18 bp this month. It is not clear that a 25 bp hike in September will help strengthen the yen. The short-dated (30-day) and longer-date (100-day) correlations between changes in the exchange rate and Japan’s two-year yield are low. Consider that the 100-day correlation reached a four-year high near 0.15 in late July and is now below 0.05. The 30-day correlation is slightly inverse.