Dollar's Losses Extended, But Stabilizing Ahead Of The North American Session

The US dollar continues to trade heavily after the series of softer than expected data since the loss of US jobs in July.  The stabilization of price pressures and the decline in retail sales have seen the market downgrade the chances of a rate hike next month.  At the end of July, the market was discounted a little more than a 70% chance of a hike and now it is about 30%.  In the current environment, changes in the short-term US rates appear to be the key to the greenback’s broad performance.  Yet, we note that technically, the dollar’s momentum indicators are oversold.  Perhaps the price action is setting up for a “turn-around Tuesday”.

Japan and China reported disappointing data. Japanese private consumption was flat in Q2 and capex fell by 1.2% (-1.0% in Q1 26). The build of inventories and exports appeared to account for the growth in the world’s third largest economy.  China’s July macro data were weaker than expected following the disappointing Q2 growth.  Meanwhile, Canadian negotiators have about 36 hours to strike a deal with the US to avoid a 50% tariff on around $20 bln of goods shipped to the US.   

Prices 

G10

• The decline in US retail sales reported before the weekend followed softer inflation gauges and the unexpected loss of jobs in July.  The euro reached $1.1585 ahead of the weekend.  However, after closing firmly after the disappointing US jobs data there was no follow-through euro buying until the retail sales report. And further buying emerging in Asia today, lifting the euro to almost $1.1615 in early European turnover. The momentum indicators are stretched, and we suspect the euro may peak ahead of the $1.1630-50 area. 

• Before the weekend, the dollar tested the mid-week low against the yen, near JPY158.60. It held and the dollar recovered and closed a little above JPY159.25. The Japanese demand for foreign assets in the first week after the intervention, the most in a couple of years. The dollar rose last week, its second weekly advance after the intervention in late July, and this took place despite the swap market doubling the odds of a BOJ rate hike next month (from ~40% at the end of July to a little more than 80% at the end of last week). After today’s disappointing Q2 GDP, the odds of the September hike slipped slightly, while the greenback has been confined ~JPY158.85=JPY159.40, inside last Friday’s range. Options for $2 bln expire at JPY159 today. 

• Sterling pushed a little above $1.3560 ahead of the weekend, a three-month high and posted its highest close since May 11. It has advanced to $1.3570 today. Resistance near $1.3600 may be sufficient to cap sterling in the North American session.   It is a big week for UK data, starting tomorrow with labor market update, CPI on Wednesday, government finances on Thursday, and retail sales on Friday. 

• At the end of last week, after the disappointing US retail sales report, the Canadian dollar rose to its best level in two-and-a-half months.  The greenback was sold to ~CAD1.3865. Earlier in the week, it had support near CAD1.39.  The 200-day moving average is near CAD1.3850, which it has approached today, and the next retracement objective (to the rally from the May low ~CAD1.3550) is found near CAD1.38.  Ahead of the weekend, the greenback settled below slightly below the lower Bollinger Band (~CAD1.3850 today), and the momentum indicators are stretched.  US 50% tariffs on ~$20 bln of Canadian goods take effect first thing Wednesday and negotiators apparently have their worked cut, according to reports, if they are to be avoided. 

• The Australian dollar reached almost $0.7100 before the weekend, a two-month high and posted its highest settlement since June 4.  Follow-through buying lifted it to almost $0.7130 today. The next chart of note is around $0.7170, but the momentum indicators are stretched after the Aussie advanced for six of the past seven weeks.  

EM 

• The Mexican peso’s rally, which saw it reached its best level since June 2024 ahead of the weekend may have stalled. The dollar reached MXN16.9775 but turned higher and settled slightly higher on the day.  It made a marginal new low today near MXN16.9765. The first confirmation may be a push above the five-day moving average (~MXN17.04), which has not happened this month.  

• For nine sessions coming into today, the dollar settled on the CNH6.74 handle.  The one-month implied yuan volatility reached almost 1.6%, the lowest since 2015, when China adjusted its currency policy, devalued the yuan by almost 2% and ostensibly gave the market more sway. The dollar fell to marginal new low today, near CNH6.7375. The PBOC set the dollar’s reference rate at CNY6.7873 today, a new low since February 2 (CNY6.7878 before the weekend and CNY6.7894 at the end of July). 

• The broad US dollar weakness did not carry over to the Indian rupee today. Despite reports of intervention, the dollar rose to INR95.62, a new high for the month.  Unexpectedly, the central bank announced it would end the special facility to attract foreign currency deposits a month ahead of schedule. Last week, it seemed to indicate that the program, which reported drew ~$52.3 bln as of August 13, would not end prematurely.  

Other Markets

• US equities finished last week on a soft note and the Nasdaq Composite’s modest loss offset the gain it enjoyed coming the pre-weekend session. The Dow Industrials fell 0.6% last week, its biggest loss in four weeks.  S&P and Nasdaq futures are trading firmly. Asia Pacific equities were mixed.  The Nikkei rose but the Topix fell.  China, Hong Kong, Taiwan and South Korean markets advanced.  Most of the other large ones fell. The MSCI regional index rose 2.6% last week, the fourth consecutive weekly rise.  Europe’s Stoxx 600 is trying to snap a three-day decline. Last week, it fell for the first time in five weeks. 

• Benchmark 10-year yields jumped before the weekend.  They rose mostly 7-10 bp in Europe and the 10-year US Treasury yield rose more than five basis points to 4.70%.  That said, the US benchmark yield eased a single basis point last week, while European and Japanese benchmark yields rose.  The 30-year French yield reached the highest since 2008, and Germany’s 30-year bond reached the highest since 2011. The US 30-year yield reached 5.27% before the weekend, its highest level since 2007.  Despite the disappointing Japanese GDP, 10-year yields jumped 5.5 bp today to almost 2.91%.  European benchmark yields are narrowly mixed, and the 10-year US Treasury yield is slightly softer, a hair below 4.70%. 

• The jump in yields did not prevent gold from recovering after initial pre-weekend loss that saw it approach $4311. It set new session highs in the North American morning slightly below $4400. It reached a little above $4416 today but has pulled back and slipped below $4400 in late European morning turnover. Silver recovered from a four-day low near $63.50 and set the session high around $65.70 before European trading ended. It found support near $64.70 in the North American afternoon. Silver rebounded today a little above $66.20. Last week’s high was closer to $66.80. 

• October WTI traded firmer ahead of the weekend. It rose to almost $82. Recall that a five-day rally ended last Thursday, when the contract was set back by 2.1%.  It recovered almost 1.2% before the weekend. It settled the week with a 5.55% gain after dropping nearly 5.35% the previous week.  It is firm today, and new session highs (~$82.40) ahead of the US open. Last week’s high was near $83.35. 

Data

• The US reports June portfolio flows (Treasury’s International Capital or TIC data) today. Since the US runs a large chronic current account deficit, we never bought into the “sell America” meme.  Indeed, the TIC data showed a net inflow of $1.39 trillion in 2025, improving on the $1.22 trillion in 2024 and $840 bln in 2023.  The issue, as we argue, is what assets are bought (more equity these days) and at what prices.  The data is reported as the equity market closes and tends not to have much market impact. 

• Canada’s July CPI will be released today.  It is expected to have reversed the 0.4% decline reported for June.  Given the base effect, the year-over-year rate may firm to 2.9% from 2.8%. Inflation in H1 26 rose at an annual pace of 4.8%, though a slower in Q2 than Q1.  The central bank puts more emphasis on the underling core rate, which averaged 1.85% in June. The Bank of Canada meets on September 2, and the swaps market is discounting practically no chance of a change in policy, though it leans toward a hike before the end of the year (69%).  

• Japan reported its first estimate of Q2 GDP today. While the 0.3% increase in output disappointed expected.  The annualized pace slowed to 1.1% from 1.9%, and defied expectations for a 2.0% pace. Consumption was flat after the first quarter’s 0.3% increase was revised to 0.5%. Capex fell by 1.2% (+0.5% expected) and Q1’s contraction was revised to 1% from 0.7%.  Final demand was even softer.  Inventory accumulation contributed 0.3% (-0.1% in Q1) and net exports contributed 0.5% (0.3% in Q1). 

• China’s data were poor.  Retail sales year-over-year slowed to 0.6% from 1.0%. Industrial output slowed to 4.5% from 5.3%.  Capex deepened its contraction, falling 6.7% (year-over-year, year-to-date) after -5.7% in June. Property investment fell 19.2% (year-to-date, year-over-year) from -18.0%. The collapse in residential property sales moderated to -13.2% from -13.7%.