Renewed pressure in European bonds has sent the euro back below $1.12, nearly a cent off yesterday’s high. Its loss of about 0.6% today leads the G10 currency complex lower. The greenback is also firmer against most emerging market currencies. French, Italian, and Greek bonds yields are up 11-13 bp. British, Spanish, and Portuguese 10-year benchmark yields are up more than 7 bp, while Germany, who reported much stronger than expected industrial output figures is seeing less than a three basis point increase. The 10-year US Treasury yield is up four basis points to 5.32%, a new high.
The risk-off impulse from the rising yields is weighing on equities and precious metals. November WTI is hovering around $90. The Reserve Bank of India hiked its repo rate, as widely expected, and its forward guidance indicated more tightening was likely, but like we have seen several times last month, with the exception of the Federal Reserve, the currency, in this case, the rupee, sold off. With the French government threatening to use its constitutional powers to push through a budget without parliament’s support, sets a danger precedent with Le Pen running ahead in the polls for next year’s presidential election. It is difficult at this juncture to see a near-term path toward resolution.
Prices
G10
• The euro reached slightly above $1.1275 in early North American trading to record the session high yesterday. The roughly 0.20% gain was the euro’s best showing in a little more than a month. However, new pressure on French bonds has dragged the euro back to about $1.1180 today. The 30-day correlation of changes in the euro and the German French 10-year spread is around 0.40, the highest since early June. Monday’s euro low was closer to $1.1160. The (50%) retracement of the euro’s gains from the February 2025 low (~$1.0140) is found slightly above $1.1100.
• The dollar was confined to about a half of a yen range yesterday below JPY158.25. It was the narrowest range since late August. The greenback held its own despite the decline in US yields. Last week’s dollar high and the 200-day moving average are around JPY158.50, which is where it peaked so far today.
• Sterling reached a four-day high yesterday, slightly below $1.3285. Last week’s high was about $1.3310. There has been no follow-through sterling buying. It has pulled back to around $1.3230. In the past four sessions, sterling appears to have forged a shelf in the $1.3180-$1.3200 area. The same does not look true for the euro against sterling. It settled lower yesterday for the eighth consecutive session, and today the euro has fallen to a marginal new low for the year slightly below GBP0.8450. A convincing break could spur a move toward GBP0.8400 next.
• Despite the PQ win in Quebec, the Canadian dollar posted its best session yesterday in nearly a month. True to the pattern, Canada’s two-year discount to the US eased slightly. A break of CAD1.42 could be the first indication that the greenback may have peaked. If that is the case, an initial retracement target may be in the CAD1.4070-CAD1.4100 area. However, CAD1.42 is holding and the wider two-year interest rate differential could lift the greenback to the CAD1.4240-60 area before challenging Monday’s high for the year (~CAD1.43).
• The Australian dollar reached a four-day high yesterday, near $0.6990. A move above $0.7000 targets the $0.7030-35 area, which holds the (38.2%) retracement of the leg lower from the Sept 9 high (~$0.7240) and 200-day moving average. The Aussie is consolidating inside yesterday’s range, but it looks vulnerable on a break of $0.6960. Last week’s low was almost $0.6900.
EM
• The dollar fell for the third consecutive session against the Mexican peso. It is the longest slide since late August/early September. The greenback peaked on October 1, near MXN18.4320 and yesterday, recorded a five-day low near MXN17.9110. The peso was the strongest currency in the region yesterday, with around a 0.60% gain. Follow-through buying of the Brazilian real was limited after Monday’s post-election surge. It mostly consolidated yesterday. After jumping nearly 3.5% in the previous two sessions, the Colombian peso pulled back by around 0.80% yesterday. However, the tone is less constructive today and the greenback is higher against most emerging market currencies today. The dollar has risen to MXN18.07. A move above MXN18.11 could signal a move toward MXN18.17-MXN18.25.
• The dollar traded quietly against the offshore yuan yesterday. It stayed between about CNH6.6995 and CNH6.7060. It is trading quietly today between about CNH6.70 and CNH6.7075. Mainland markets re-open tomorrow. When it closed for the extended holiday, the dollar was at CNY6.7060 and against the offshore yuan, it was about CNH6.7085.
• The Reserve Bank of India hiked its repo rate today for the first time in four years and signal additional hikes will be considered given the currencies weakness and the risk of rising inflation. It lifted its projection for CPI in the year ending March 2027 and upgraded growth to 7.1% from 6.7%. Yet, it was insufficient to underpin the rupee. The US dollar rose to INR96.85, its best level since May 20, when it reached a record high (~INR96.9650).
Other Markets
• The S&P 500 and Nasdaq Composite gapped higher yesterday and new all-time highs were record. However, the mood in the equity market is more somber today. Leaving aside a few small markets in the Asia Pacific area, it was a sea of red, led by the Kospi’s nearly 2% decline and the 1.6% fall in Singapore. Europe’s Stoxx 600 is poised to snap a three-day advance and is off a little more than 0.5% in late morning turnover. US index futures are off around around 0.2%-0.4%.
• The French 10-year yield fell 10 bp yesterday. It was the third consecutive decline and the largest since late May. Italy’s 10-year yield fell by almost 10 bp yesterday, which is also the largest drop since late May. However, tensions have returned today. The French government is threatening to use its constitutional powers to circumvent parliament to push through the 2027 budget. This will antagonize its critics, could further support the political extremes that a running ahead in the polls for next April’s presidential election. The 10-year French benchmark bond yield is up 14 bp today and is approached the recent high of 4.91%. Italian and Greek bond yields are also jumping by nearly as much. The 10-year Germany Bund yield is up two basis points, and the yield of the 10-year Gilt is up eight. The 10-year UYS Treasury yield is up almost five basis points to nearly 5.33%, a new high.
• Gold traded on both sides of Monday’s range yesterday. After being sold to a new two-month low yesterday, slightly below $4105, it recovered to almost $4180. However, it was unable to settle above Monday’s high (~$4170.50). Rising rates and a firmer dollar appear to be dragging it lower today. It is setting session lows in European morning turnover near $4115. It has not traded below $4100 since early August. Silver traded in a roughly $59.70-$62.10 range before the weekend and has remained in that range. However, it looks set to challenge the lows, and a break could signal a move to the $56.50 area next.
• November WTI fell to almost $86.85 yesterday, its lowest level in a month. Reports of higher Mideast flows, and the success of Saudi-led forces against the Houthis appeared to be the main factors. However, Nov WTI recovered to about $89 in the North American morning before stalling. It reached $90.60 earlier today but is struggling to sustain the momentum and is straddling the $90 area.
Data
• There are two US highlights today. First, is the August consumer credit. Wage growth has trailed CPI for the past five months, but spending remains robust. Part of this is due to consumer credit. Consumer credit extension has averaged almost $12.5 bln a month this year up from about $8.4 bln average in the first seven months of 2025. Home equity withdrawals rose by about 9.4% year-over-year in Q2 and there appears to be a withdrawal from investment accounts. Second, the FOMC minutes from the September 16 meeting that resulted in a unanimous decision to hike rates. The Fed funds now imply about a 20% chance of another hike later this month. Still, a hike at the December meeting is fully discounted and the market has 84 bp of tightening priced in before the end of 2027, down about 12 bp from the peak in late September.
• Germany’s August industrial production rose 2.0% after falling 1.2% in July (initially -1.1%). The median forecast in Bloomberg’s survey was for a 0.5% rise. With today’s report, German industrial output has risen by an average of about 0.1% a month this year after it declined by an average -0.1% a month in the first eight months of 2025. Separately, note that the AfD secured sufficient representation in Saxony Anhalt that with support of a small local party to name the speaker of the state’s parliament. The secret ballot gave the AfD four more votes, which may have come from the CDU. It will take a few weeks to form the next government, but the AfD appears to be in a strong position.
• Labor earnings growth slowed in Japan in August. Cash earnings slowed to a 3.8% year-over-year pace, down from a revised 4.3% pace in July (initially 4.7%). When adjusted for inflation, the real cash earnings slowed to 1.5% from a revised 2.0% in July (2.4% originally). On the other hand, the cash earnings, using the same sample base, were flat at 2.8%. Household spending is due later this week, and despite the better labor earnings, it has not risen on a year-over-over year basis this year.
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