Oil Higher, Yen Consolidates, US To Reveal Bond Buyback Plans

There are two main developments today. The first is the escalation of the Middle East war has lifted oil prices. October WTI rose 9.7% last week, and with today’s gains, is a little more than 4% this week. This has helped lift bond yields.  The second is the short squeeze of the Japanese yen. Since the middle of last week, the yen has surged about 4.7%.  Although US Treasury Secretary Bessent appears to take credit for it, recall that initially after the intervention drove the dollar to JPY155, it had recovered to almost JPY160.40 last Wednesday.  Many observers are concerned that the short yen positions funded the purchase of higher yielding or more volatile assets.  However, it appears that some have shifted from yen funding to dollar funding, and we note that the Swiss franc may also replace the yen on the margins.  The franc is near the year’s low against the euro. 

Separately, the US trade conflict with Canada continues.  The US has moved to block imports of some goods and has threatened to impose more tariffs on others.  President Trump has threatened to bar Canadian companies from selling to US contractors. The import banks on some dairy products and alcohol will take effect in three weeks, while new tariffs will be in place in a week and these new tariffs will be stacked on top of the industry-specific levies that have already been implemented. Canada and the EU are expected to soon announce a comprehensive agreement. Canada appears prepared to do everything but join the EU itself. Next week Canada’s PM Carney will meet with EC President von de Leyen.   

Prices 

G10

• The euro mostly mirrored Monday’s range yesterday. While every day last week, the euro spent some time below $1.16, it held above it for the past two sessions. Options for 1.3 bn euros that expire today are struck there. The euro reached an eight-day high today near $1.1650, which is slightly above the (50%) retracement of the leg down from the August 21 high (~$1.1710) and above the 200-day moving average (~$1.1635). However, it has been under pressure since early European trading and has retreated back to the $1.1625 area.  Initial support is seen in the $1.1620 area. 

• The ongoing short squeeze lifted the yen to a new high early yesterday before reversing lower. The dollar briefly traded below JPY153 and approached JPY154.45 in Europe and North America. The greenback settled firmly around JPY154. It retested the JPY153 area in late Asia Pacifici trading.  It has been capped near JPY153.70 in Europe. Although estimates suggest US intervention in late July was small (~500 mln euros), US Treasury Secretary Bessent boast that he “is the house”.

• Sterling rose to a seven-day high today, slightly below $1.3570. It has not been able to sustain the upward momentum. It has slipped back toward session lows in the European morning, near $1.3535.  Options for almost GBP600 mln at $1.3550 and GBP560 mln at $1.3525 expire today. Meanwhile, euro is trading in the upper end of the two-month trading range against sterling. It held GBP0.8550 at the end of August and pushed above GBP0.8600 on an intraday basis last week, its best level since July 1. It recovered from yesterday’s four-day low (~GBP0.8570) and reached GBP0.8590 today. 

• The US is very dismissive of Canada, but the market is not so much.  Yesterday, the Canadian dollar return to where it settled before the trade talks collapsed.  The US dollar closed at CAD1.3760 on August 21, and that was also yesterday’s low.  It is consolidating quietly between about CAD1.3765 and CAD1.3790 today. The three-month low recorded that day before the talks failed was almost CAD1.3730. According to the pricing in the swaps market, the Bank of Canada will hike by about 84 bp by the end of H1 27, while the Fed will hike rates by around 62 bp. This suggests the market is pricing peak policy gap differential. The 150 bp current differential is the widest since the late 1990s. 

• The Australian dollar traded above $0.7230 yesterday for the first time in almost four months. It edged a little higher today and reached nearly $0.7240 before it returned to session lows (~$0.7215). Options for A$730 mln at $0.7200 expire tomorrow. The daily momentum indicators are stretched but has been the case for several weeks.  There is little on the charts ahead of the four-year high recorded in May near $0.7280.  That said, a break of the $0.7175 area may warn that the pull of the momentum indicators may finally have the upper hand. 

EM 

• The Mexican peso recovered from a three-day low yesterday. The US dollar was initially bought to almost MXN17.00 before surrendering its gains and returning to test MXN16.91. The price action, such as settlement being nearer session lows than highs in four of the past five sessions, suggests there continues to be peso demand. The greenback is in a narrow range so far today between almost MXN16.89 and MXN16.92.  

• The dollar consolidated inside Monday’s range against the offshore yuan yesterday, when it recorded a new low near CNH6.7050. It made a marginal new low of almost CNH6.7030 today. It is difficult to talk about meaningful support when the dollar is trading at levels not seen in a little more than 3 ½ years. Back in Q1 23, the dollar bottomed slightly below CNH6.70. We had thought it was possible that the PBOC would slow the pace of yuan gains.  On one hand, the dollar’s fix has fallen for the past four weeks and has only risen in two weeks since the end of H1. On the other hand, the pace has moderated. Consider that on a monthly basis, the dollar’s fix fell by 0.1% in August after it declined by a little more than 1% over the previous three months. Consider that the one-month historic volatility (actual) is near 1.3%, while at the end of July it was slightly below 2%. The dollar’s reference rate was set at CNY6.7769 today (CNY6.7804 yesterday). 

• After falling a little more than a third of one percent yesterday, its largest decline since mid-July, the Indian rupee was sold further today.  The dollar rose to about INR95.2275, its best level this month and approached the 20-day moving average (~INR95.2645). The rise in oil prices does the rupee few favors.  The central bank used short-term currency swaps to absorb bank liquidity today. Under the arrangement, the RBI sold dollars to banks for rupees and agreed to buy back the dollars later.  

Other Markets

• Asia Pacific equities fell yesterday and the MSCI regional index fell for the first time in four sessions and on the second time in past 11 sessions.  The signal from the US was muted as both the S&P and Nasdaq Composite settled a little below opening levels and appear to remain mired in trading ranges. The US index futures are around 0.25%-0.40% lower. The large bourses in Asia Pacific were mixed today, and Europe’s Stoxx 600 is off about 1%, which if sustained would be the largest loss in over a month. 

• Benchmark 10-year yields are mostly 3-4 bp higher in Europe, lifting rates to new highs. The 10-year US Treasury yield is up almost two basis points to near 4.81%. 

• Gold settled poorly yesterday after falling through last Friday’s low (~$4365) late in the North American session. It made a marginal new low, slightly below $4342, before catching a bid and recovering to session highs, near $4413. It stalled but found new bids ahead of $4385 in Europe. Silver traded a bit firmer, but it also remained in last Friday’s range (~$64.75-$67.20). It also settled near session lows recorded late yesterday. It is trading within yesterday’s range today. 

• Although October WTI stalled yesterday, near $94.75, it did post a record-high settlement (~$94.30) that was also near where it had opened. The ongoing heightened conflict lifted it to almost $95.60 today and it is still bid ahead of the US open. 

Data

• The US Treasury is expected to announce details of the bond buyback options ahead of tomorrow’s operation to repurchase 10–20-year bonds.  Most estimates seem to be around $6-$10 bln for of the seven remaining buyback operations scheduled for this year. Treasury Secretary Bessent says this is for liquidity purposes, but the market is skeptical.  The administration has introduced other measures seemingly aimed to boost demand for US Treasuries from banks and the Genius Act, which established the framework for stable coins backed by the US dollar (Treasuries). The Congressional Budget Office projects a deficit of 5.8% of GDP this fiscal year and exceeding 5.6% of GDP through the 2036 forecasting window. The US is selling $39 bln 10-year notes today and $22 bln 30-year bonds tomorrow. 

• Mexico reports August CPI today. The headline rate is projected to rise to 3.30% from 3.12% in July. If so, it would be the first increase since March, when it peaked at almost 4.60%. It was 3.57% in August 2025. The core rate, which has been stickier, may have slipped for seventh consecutive month.  It peaked at 4.52% in January, and the median forecast in Bloomberg’s survey is for a small decline to 3.92% (from 3.95% in July). The central bank meets on September 24.  The swaps market is discounting about a 50% chance of a hike, which we think is exaggerated. 

• Earlier this week, Germany reported an unexpected 1.1% drop in July industrial output. Today, it was France’s turn to disappoint. Economists surveyed by Bloomberg expected a 0.2% increase in industrial production. Instead, it fell by 0.4%, and the June series was revised to a 0.1% decline from a 0.1% increase. 

• Chinese inflation ticked up last month. The PPI rose 3.8% year-over-year (3.5% in July). The pace peaked in June at 4.1%. Recall that producer prices fell from October 2022 through February this year. The disruption from the war in the Middle East and China’s efforts to curb what it calls “involution” (excess capacity) seem to be key factors. China’s consumer prices flirted with deflation but that ended in Q3 25 and since then China’s consumer prices have risen. From February through June, the CPI rose between 1.0% and 1.3% year-over-year. The increase slowed to 0.5% in July and accelerated to 0.8% in August. The core rate (excludes food and energy) has risen between 0.8% and 1.8% year-over-year since July 2025. It was slightly firmer last month (1.0% vs. 0.9% in July).