The US dollar is consolidating its pre-weekend surge spurred by the hawkish commentary that Fed Chair Warsh delivered at Jackson Hole. The last time the US two-year and the Dollar Index rose as much as in response to the hawkish hold delivered in the first FOMC meeting Warsh chaired in the middle of June. With the August nonfarm payroll report at the end of this week and the end of next week, we are not yet persuaded a FOMC hike at the conclusion of the next meeting on September 16 is a done deal by any stretch of the imagination. Meanwhile, the first Spanish, French and German CPI underscore expectations for an ECB hike. At the same time, the joint intervention and firm data, including today’s retail sales and industrial production point to a BOJ hike on September 18.
New hostilities in the Middle East have lifted oil prices by around $3 a barrel today. Meanwhile, the US Defense Department’s Office of Strategic Capital reported plans to structure an investment through penny warrants, which will allow the US government to take an equity stake (~35% passive stake in Alejandro Betancourt’s North American Blue Energy Partners) without a significant capital investment that gives is rights to buy 20% of the companies oil production in Venezuela at cost (reported reserves of 65 mln barrels). The significance of this is a major talking point today.
Prices
G10
• The euro finished last week with a seven-day low. It was its first weekly loss in five weeks. The daily momentum indicators have turned down. It returned to around where it was before US Treasury Secretary Bessent’s “at least doubling of US Treasury purchases”. The euro held above Friday’s low today and poked a little above $1.1605. The $1.1610 area corresponds to a (38.2%) of last Friday’s losses. There are options for almost 2.2 bln euros at $1.1600 that expire today. The consolidation does not change our bearish outlook. The next technical target looks to be around $1.1530,
• Firmer Japanese rates failed to lend the yen much support. The yen fell every session last week--something that has not happened in three months. The rise in US rates and broad gains carried the greenback back above JPY160 for the first time since the intervention in late July. The pre-weekend high of JPY160.20 held today and the dollar was pushed to slightly below JPY159.50. Options for about $780 mln at JPY159.65 expire today. It appears that cautiousness about the risk of intervention offset the negative yen impact of the jump in oil prices. The JPY160.60 area corresponds with the (61.8%) of the dollar’s intervention-inspired losses and the July 31 high was almost JPY160.90.
• Sterling fell last week for the first time in five weeks. It settled at an eight-day low. The momentum indicators are turning down from overbought territory. It is stabilized today and is in about a $.3530-$1.3555 range. Our bearish outlook warns of near-term potential toward the $1.3440-70 area.
• The Canadian dollar also looks vulnerable. The greenback rose to CAD1.3910 and traded on both sides of the previous day’s range. It settled above that range, forming an ostensibly bullish US dollar pattern. Follow-through US dollar buying was limited to a couple of ticks today. Support was found near CAD1.3890. The trade conflict with the US may escalate, and the USMCA framework itself is thrown into doubt. A move above CAD1.3930 could spur a move back toward CAD1.4000.
• The Australian dollar traded above $0.7200 ahead of the weekend for the first time since the end of May. However, with the greenback turned better bid on Warsh, and the Aussie reversed and was pushed below the previous day’s low (~$0.7165). The momentum indicators are poised to turn lower. It is consolidating quietly in between about $0.7155 and $0.7170 so far today. We look for $0.7100 in the coming days and possibly $0.7065, and possibly $0.7000 in the slightly longer term.
EM
• The dollar’s surge in response to Fed Chair Warsh saw it rise to MXN17.0645, its best level against the Mexican peso in seven sessions. It stopped near the 20-day moving average (~MXN17.0660). It frayed the 20-day moving average today, which for the first time this month. Yet, it, too, is consolidating today and the greenback has held above MXN17.00. We suspect there is scope for additional dollar gains. It could rise toward MXN17.13-MXN17.15.
• The dollar rose to a new high for the week against the offshore yuan in response to Fed Chair Warsh’s comments and the hawkish market interpretation. The dollar edged a little higher today and reached CNH6.7320, its best level since August 19 before settling back into the pre-weekend range. Following the greenback’s broad gains, it is hardly surprising that the PBOC lifted the dollar’s fix to CNY6.7828 (CNY6.7811 previously).
• The dollar fell to INR95.1140 today, its lowest level in a little more than three weeks against the Indian rupee. The central bank reportedly sold dollars in the offshore and onshore markets. The dollar settled slightly below INR95.18 compared with INR95.2925 at the end of July.
Other Markets
• US equities fared better than one might have expected ahead of the weekend in the face of a jump in US yields. Still, the main indices settled below opening levels and the futures are off around 0.15% ahead of the North American session. Asia Pacific equities are mixed today, and Europe’s Stoxx 600 is nursing a small loss.
• Benchmark 10-year yields are mostly 2-3 bp higher in Europe today, though UK Gilts are nearly flat. The 10-year JGB was unchanged, and the 10-year US Treasury yield is slightly softer, near 4.71%. Yields rose 2-4 basis points in Europe and nearly five basis points in the US before the weekend. The 10-year Treasury yield settled a little above 4.70% for the first time last week. The high earlier this month was about 4.75%. The 30-year yield has a built a floor near 5.15% and finished last week near 5.21%. It is slightly firmer today. The high earlier this month was a little below 5.35%.
• Gold peaked early last week, a little shy of $4700 and finished the week with a sharp drop to about $4445. With the daily momentum indicators turning down, a deeper correction should be anticipated. It was sold a little below $4400 today but has recovered to about $4450. The $4300 seems reasonable. Silver rose above $70 ahead of the weekend for the first time since mid-June and sellers emerged and drove it to a new low for the week, a little below $66.40. A key downside reversal was formed. It was sold slightly below $65.60 today before recovering in the European morning back above $67. Technical risk may extend toward $62.
• October WTI was largely sidelined ahead of the weekend. It traded in about a $1.25 range, the smallest in a little more than a week. It settled a little below the middle of the two-week range. (~$$79.60-$87.70). The increased hostilities saw the contract gap higher today and it has trended higher through the European morning to reach almost $86.65.
Data
• German states reported their August CPI, and the national figures will be out shortly. The EU-harmonized measure appears poised to push above 3% for the first time since January 2024. Recall that Spain reported its preliminary estimate at the end of last week. It rose by 0.8% on the month for a 4.6% year-over-year increase, the largest rise since February 2023. France reported its EU harmonized measure of CPI rose to 2.7% from 2.4%. Even before the Spanish and French data, the swaps market had an ECB hike next month nearly fully discounted and a nearly 70% chance of another hike in Q4.
• The firmness of Australian inflation expectations and the resilience of private sector credit growth pushed the market in the direction it was already moving. The Melbourne Institute’s inflation gauge rose to 4.8% from 4.0% and private sector credit rose by 0.6% last month. The market has become more confident that the central bank will hike rates again before the end of the year. Before last week’s CPI and household spending, the futures market had about a 10% chance of a quarter point hike discounted for next month. It is now nearly 50%. The market had almost 15 bp higher rates before year-end priced in and now almost 27 bp.
• Japan reported stronger July retail sales but weaker industrial output. Although Japanese household spending tumbled 3.3% year-over-year in June, retail sales rose 0.6%. On a month-over-month basis, Japanese retail sales tumbled 3.9% in June, the most since the pandemic-induced slump. They rose 2.4% in July. Industrial output surged 1.9% in June, the largest increase since January and edged up 0.1% in July. The median forecast in Bloomberg’s survey was for a 0.7% decline in July. The swaps market is discounting about a 90% chance of a hike next month.
• China’s August PMI readings remained below the 50 boom/bust threshold. The manufacturing PMI edged up to 49.8 (from 49.2), and the non-manufacturing PMI was flat at 49.0. The composite PMI stands at 49.5 (from 49.3).
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