US Dollar Jumps On Fed Expectations

The combination of heightened expectations for the Federal Reserve to lift rates late this week coupled with the high oil prices have helped lift the US dollar broadly today. Yet, the PBOC set the dollar's reference rate at a new 3 1/2-year low today.  Among the G10 currencies, the Swedish krona has been the hardest hit. It is off around 0.8% as the weekend election is too close to call and the late vote and ballots from overseas means the results may not be known for a couple more days.  Meanwhile, President Trump says the war with Iran may end around the midterm elections.  He also says that a trade deal with Canada may be struck “fairly soon”.  

Often the market participants seem to be fascinated with trilemmas. We suggest one has unfolded.  There cannot be the continued war in the Middle East, a cap on 10-year yields, and floor under the yen at the same time.  Saudi oil production has plunged, and at the same time, China has reportedly re-entered the market and ostensibly is rebuilding inventories.  The Trump administration calls on Ukraine to stop attacking Russian refinery capacity, which has been a factor driving up diesel prices, critical for long-haul trucking, freight trains, and farm equipment. 

Prices 

G10

• Although the euro made a new low for the week before the weekend, it recovered from about $1.1570 to hover around $1.1600 after European market closed. Between the US PPI and CPI, the odds of a Fed hike later this week rose to almost 87% from about 60%. The euro has been sold to about $1.1535 today, its lowest level since mid-August, and has approached the halfway mark of the rally from late July (~$1.1355). The next retracement target is near $1.1490. Still, the intraday momentum indicators are stretched. Initial resistance may be in the $1.1560-70 area. 

• The sharp downside momentum seen in the dollar against the Japanese yen earlier this month eased in the past three sessions. The greenback traded broadly sideways, even if choppily, between roughly JPY152.90 and JPY154.65. It has approached the upper end of that range today. A BOJ rate hike this week is nearly fully discounted, as is another before the end of the year. The intraday momentum indicators are stretched, and the JPY154 area offers initial support. The JPY155 area, which had offered the greenback support previously now is important resistance.  A move above it targets the JPY155.75-JPY156.25 area. 

• Sterling recovered from a new low for the week (~$1.3480) and reached the session high in the North American morning before the weekend near $1.3535. It is recording an outside day, though the close is important. A trendline from the late June and July lows is found near the 200-day moving average (~$1.3455). A break may target the $1.3350 area. 

• The Canadian dollar under-performed ahead of the weekend. Its 0.25% loss was only exceeded by the Swiss franc, which fell by about 0.50%. The greenback rose to a new seven-day high near CAD1.3885. It has a three-day advance in tow, which matches the longest such streak since June. The gains have been extended to a little above CAD1.39 today. The high set earlier this month, and high since the breakdown in trade talks was CAD1.3940. 

• The Australian dollar recovered from $0.7150, a marginal new low for the week, and recorded the session high before European markets closed for the week, slightly shy of $0.7190. It has taken a new leg down today and reached $0.7125 in the European morning, slightly above the low for the month. This area represents the (38.2%) retracement of the rally since late July. A break targets the $0.7080 area next. 

EM 

• The Mexican peso consolidated ahead of the weekend within the range set the previous session. The consolidation is morphing into a correction. The greenback reached MXN17.0865 today, its best level since August 12. The next nearby target is MXN17.1175-MXN17.1200.  

• The dollar is pinned near three-year lows against the offshore yuan.  The greenback is holding slightly above CNH6.70. The dollar has not traded above the 20-day moving average for two months. It is near CNH6.7185 now. Despite the firmer greenback on September 10, the PBOC set the dollar’s reference rate lower ahead of the weekend.  Today the dollar’s fix was set below CNY6.70 for the first time in several years (CNY6.7698 vs. CNY6.7743 before the weekend). It is the fourth consecutive day of a lower dollar fix.  

• Indian markets are closed today for a national holiday. 

Other Markets

• News from Microsoft and Oracle, coupled with the pullback in the still elevated oil prices, support US equities before the weekend, and this spilled over to help Asia Pacific equities today. Last week, the MSCI Asia Pacific Index fell for the first time in four weeks. Europe’s Stoxx 600 fell 1.65% last week, its largest loss in two months. AI fears are taking a toll today. Even though Asia Pacific bourses were mixed today, the China, Taiwan, South Korea markets fell. The Stoxx 600 is off around 0.2%, while US index futures point to sharply lower openings. The Nasdaq composite futures are off 1.6% and the S&P futures are around 0.70% lower. 

• Benchmark 10-year yields mostly pulled back in Europe and North America ahead of the weekend after spiking higher in the previous session.  There are several drivers of the higher rates and the pullback in oil prices before the weekend may have helped yields stabilize.  The rolling 30-day correlation of changes in WTI and the US 10-year yield is around 0.80, the highest in five years. The 10-year JGB yield edged a little higher to stay near but below 3%. European rates are mostly 1-3 bp higher, and the peripheral premiums are widening. The 10-year US Treasury yield is hovering near 4.96%. 

• Gold recovered from a seven-day low (~$4293.50) before the weekend to briefly poke above $4400 in North American turnover.  The momentum stalled and the yellow metal pulled back around $50-$55 before consolidating. It is trading heavier today and fell to a new low since early August, a little below $4279. Chart support is seen near $4200. Silver was sold to its lowest level in nearly four weeks ahead of the weekend (slightly below $63). It rebounded to almost $65.30 and consolidated in the North American afternoon. It also is under pressure today. It has been sold to about $62.35, which is also its lowest level since early August. There appears to be little chart support ahead of $60.  

• October WTI reached a new contract high, almost $104.50, before the weekend. It was recorded in early in the Asia Pacific sessions and retreated to a still elevated $98.50 in the North American morning. It still settled above $100 a barrel. It is consolidating today in the upper end of last week’s highs.  

Data

• Canada reports August CPI today.  The risk is on the upside given the new US tariffs (August 22 implemented) and the disruption from the Middle East war.  Last August’s 0.1% decline will drop out of the year-over-year measure.  Still, with the underlying core rates near 2.0%, the Bank of Canada appears in no hurry to change policy, especially given the new risks.  The swaps market has about a 40% chance of a hike discounted at the next meeting in late October.  This seems on the high side to us.  Still, a hike is nearly fully priced in by the swaps market at the last meeting of the year in December. 

• Japan’s preliminary estimate that July industrial output rose by 0.1% was revised today to show a 0.2% decline. Initially the median forecast in Bloomberg’s survey was for a 0.7% decline. It followed a 1.9% jump in June. The Industry Ministry projects a dramatic 6.4% surge in August followed by a 4.2% decline in September. Although household spending disappointed, stronger labor earnings and the upward revision to Q2 GDP (1.4% vs. 1.1%) adds the conviction that the Bank of Japan will hike rates later this week and then again at the December meeting. Since the end of July intervention, the yield on Japan’s two-year bond has risen about 35 bp to 1.85%.  

• China’s August lending figures disappointed today. Weaker demand from businesses and households offset government borrowing. Once a month, China reports high-frequency real sector data and house prices. Tomorrow is the day.  Regardless of the data, the Chinese economy lacks forward momentum and besides the recent bank/insurance recapitalization, officials still seem reluctant to prove meaningful stimulus. At the same time that China’s 10-year discount to the US is slightly more than 325 bp, an apparent modern record, Beijing has accepted a modest appreciation of the yuan (4.15%) this year. The yuan is at its strongest level against the dollar since January 2023.