The near-term dollar movement continues to be sensitive to changes in US rates. The Federal Reserve delivered the quarter-point hike that was widely anticipated by a unanimous decision, and still the two-year yield rose a little more than eight basis points on the week, with the bulk coming ahead of the weekend, even though the US reported an unexpected decline in August industrial output and manufacturing production. The yield increase was also more than the other high-income countries. The US 10-year yield was more restrained. It was off about six basis points coming into Friday's session, when it rose around seven basis points. The Bank of Japan hiked, as well and the two-year yield rose a little less than a single basis point last week, while the 10-year JGB yield fell by two basis points. The dollar rose by about 2% against the yen last week, its largest advance since October 2025.
With major central bank meeting over (the Swiss National Bank, Sweden and Norway's central banks meet, on September 24, all three are expected to stand pat) and a quieter week of high-frequency data, political events may become more salient. Germany has two state elections on September 20, and another strong showing by the AfD could weigh on the euro as pressure on French finances have seen the French premium over Germany widen beyond 100 bp for the first time since 2012. The Trump-Xi meeting at the end of the week is unlikely to focus on the exchange rate. The clear signal Beijing has sent through the daily fix has allowed the yuan to be among the strongest currencies this year, despite the US 10-year premium over China widening to a record of more than 330 basis points. Trade, rare earths, and Iran seem more salient.
USA
Drivers: The US continues to seem to be among the best positioned to deal with the shocks of higher oil prices and higher yields. The above 5% growth the Atlanta Fed projects for Q3 gives more cushion than others enjoy. The US dollar continues to track US rates. The rolling correlation of changes in the Dollar Index and the US two-year yield is a little above 0.55. It has rarely been above 0.60 over the past three months. With three more rate hikes discounted over the next year, the pendulum of sentiment has swung quite far and without more significant data (e.g., employment and inflation), there may be little scope to swing further.
Data: US data will help solidify expectations for Q3 US GDP. There is a wide divergence between the Atlanta Fed's GDP tracker, which sees growth accelerating to 5.1%, and the Bloomberg survey of economists, where the median forecast is for 2.5%, after the disappointing 1.5% annualized Q2 pace. The preliminary September PMI is the most important of the survey data out, which includes several regional Fed surveys. In August, the composite PMI was at its best level in four years. The manufacturing PMI has been steady at 53.9 for the past three months, and May's 55.1 reading was the best in four years. The services PMI, at 56.4 is at its best level since the end of 2024. The US also reports the Q2 current account deficit. Recall that in first quarter, the US current account deficit was almost $227 bln. Despite talk of "sell America”, the TIC data showed foreign investors bought $275.5 bln worth of US bonds and stocks. The TIC data for Q2 showed foreign investors accumulated another $342.2 bln of US paper assets.
Prices: The Dollar Index reached slightly above 100.55 ahead of the weekend, its best level since late July and the (61.8%) retracement of the decline from the year's high (~101.80 on June 24). It has risen in seven of the last eight sessions. The momentum indicators are constructive; however, the Dollar Index settled above the upper Bollinger Band (~100.35) for the third consecutive session ahead of the weekend. With initial support around 100.00, the next resistance area may be around 101.00.
EMU
Drivers: The derivatives markets are pricing in slightly more aggressive Fed tightening compared with the ECB through the middle of next year. Germany holds two more state elections on September 20. In Berlin, the Left Party and the CDU are in virtual tie, but the Afd is giving the SPD a run for its money in Mecklenburg-Western Pomerania. It may take a while, as we see in Saxony-Anhalt, to cobble together a coalition that will be necessary, though by early October, it will be clearer. Still, the rise of the AfD will affect national politics. The CDU "firewall" strategy appears to have failed, and Chancellor Merz may bear the price.
Data: The preliminary PMI on September 24 is the highlight. The August composite was flat at 52.0. It finished last year at 51.5 and in April and May eased below the 50 boom/bust level before it ended H1 at 50.0. There seemed to be little clue that the eurozone economy would grow 0.6% quarter-over-quarter in Q2, the strongest since Q2 22. Despite paying a premium for energy over the US, the eurozone manufacturing PMI rose to 52.7 in August, a four-year high. It was at 48.8 at the end of 2025. The August services PMI was at 51.6, after it reached a five-month high of 51.7 in July. It ended last year at 52.4 and has not been above 51.9 this year. At the end of the week, the eurozone reports August money supply growth. Previously, the market seemed more sensitive to this report than now. For the record, M3 grew 3.4% year-over-year in July, matching its strongest pace since May 2025.
Prices: The euro was sold through $1.15 in the middle of last week and was unable to reclaim it. A break below $1.1450 targets the $1.1400 area when the trendline connecting the June and July lows can be found. Resistance is seen in the $1.1500-20 area, but it may require a move above $1.1555 to boost confidence that a low is in place.
PRC
Drivers: Even during the recent bout of dollar strength, the PBOC, through the daily dollar fix, signaled willingness to accept a gradually appreciating yuan. The rolling 30-day correlation between changes in the Dollar Index and changes in the dollar against the offshore yuan has eased to about 0.55 from a two-and-a-half month high in early September near 0.75. Some observers claim this is being done purposely ahead of the Trump-Xi meeting on September 24.
Data: Chinese banks set the one- and five-year loan prime rates. Without fresh signals from the PBOC, they are likely to remain at 3.0% and 3.5%, respectively.
Prices: After the high-yielding, Colombian peso (~+18.5%), Brazilian real (~+6.3%), and the Mexican peso (~+4.8%), the Chinese yuan is the strongest emerging market currency (~+4.3%). This still seems like small change given the magnitude of the cost advantage China enjoys and the magnitude of the under-valuation (on various models). The idea that state-owned banks are intervening on behalf of the central bank distracts from the real signal generated by the daily setting of the dollar's reference rate. The dollar was sold through CNH6.70 at the end of last week. It took nearly two months to do so after falling below CNH6.80. The next psychological and technical area of note is CNH6.60, and the dollar has not traded below it since April 2022.
Japan
Drivers: Changes in US rates continue to be more correlated with the changes in the dollar against the yen than Japanese interest rates. That said, the swaps market is discounting a strong chance (~85%) of another hike before the end of the year and another by end of April 2027. Despite rising rates at home, and talk of repatriation, Japanese investors have been buyers of foreign bonds since the intervention in late July. Indeed, in the six weeks of Ministry of Finance data since the end of July, Japanese investors bought JPY2.3 trillion (~$14.6 bln) of foreign bonds compared with net sales of almost JPY1.2 trillion of foreign bonds in the previous six weeks. The rolling 30-day correlation of changes in the dollar-yen and the US two-year yield is near 0.50, the highest since early July. The rolling 30-day correlation of changes in the exchange rate and Japan's two-year yield is around -0.10. The correlation (30-day) between changes in the exchange rate and the two-year interest rate differential is a little above 0.45.
Data: In aftermath of the BOJ rate hike, things turn quiet with Japanese markets closed for the next three sessions. Japanese officials may have put the markets on notice by checking rates before the weekend. Still, the yen was the weakest G10 currency before the weekend and for last week as a whole. The main data point, the preliminary September PMI, does not typically capture the market's attention. Still, the August composite PMI was at 53.5, a six-month high. Yet, the Japanese economy does not appear to be accelerating. In fact, Q1 GDP of 1.9% annualized may be the peak for some time. Growth ticked down to 1.4% in Q2 and is expected to be around 1.1% in H2 26 before slipping below 1% in H1 27. Seemingly helped by demand for AI-related products, Japanese manufacturing PMI has been strong. After finishing last year at 50.0, it rose to 55.1 in April and was at 54.9 in August. New orders, however, rose and were at their highest level since January 2018. Services have not fared as well. The PMI stood at 52.5 in August, its best level since March, and it peaked at 53.8 in February.
Prices: The dollar jumped over 2% against the yen ahead of the weekend and after the Bank of Japan delivered the widely anticipated rate hike before pulling back and settled about 0.50% better. The greenback briefly traded above JPY158 for the first time since September 2 but finished below JPY157, amid heightened anxiety about potential intervention next week. Initial support may be in the JPY156 area.
UK
Drivers: As expected, the Bank of England delivered a hawkish hold. The swaps market as a hike nearly fully discounted (~88%) for the next meeting in early November. Yet, as we have noted before, changes in sterling are inversely correlated with higher UK rates. The rolling 30-day correlation is around -0.07. It has not been positive since early April. The 30-day correlation between the exchange rate and the US two-year yield is near -0.40. Talk about Wales and Scotland seeking independence seems a bit exaggerated, though the cost to England would be great. It would seem to make sense only if they could join the EU, and that requires a unanimous decision. Given the separatist movement in Spain, for example, a Spanish veto would seem highly likely.
Data: The main reports in the coming days are the government finances (August) and the preliminary September PMI. The rise in interest rates boosts debt servicing costs and eats up more of the government's fiscal cushion, which in turn puts more pressure on next month's Fall budget. The UK economy is off to a solid start in Q3. July monthly GDP rose by 0.4% (median forecast in Bloomberg's survey was for no growth). AI-related activity seemed to be an important catalyst. The composite PMI averaged 52.3 in July and August compared with the 50.5 average in Q2. The manufacturing PMI has slowed since peaking at 53.9 in May. It stood at 51.7 in August, a five-month low. Smaller companies reported weaker output, while medium and larger manufacturers were benefiting from the expansion. The services PMI stood at 52.5 in August, though down from the preliminary reading of 52.8, is still the best since April, though new business slipped.
Prices: Sterling looked weak before the recovery in North America ahead of the weekend. It reached new a new session high slightly below $1.34 and stalled in front of Thursday's high (~$1.3405).Initial resistance may be encountered in the $1.3400-10 area. The key breakdown took place in the middle of last week when sterling was sold through the June-July and mid-September trendline. It also settled below the 200-day moving average for the first time since late July. A possible head and shoulders topping pattern may have been completed with sterling sold through the neckline (~$1.3475). The minimum objective is around $1.3275. Sterling's losses have begun stretching the momentum indicators, and for the third consecutive session ahead of the weekend, sterling settled below its lower Bollinger Band (~$1.3360).
Canada
Drivers: President Trump said a trade deal with Canada could be struck "fairly soon", and while trade talks continue, Canada does not seem to be waiting. Prime Minister Carney has a two-prong strategy. One is integrate more with the EU. Canada and the EU struck an agreement in 2017 (Comprehensive Economic and Trade Agreement), but only 17 EU members have ratified it. Second, is a neoliberal domestic agenda (reduce net immigration, a 10% reduction in federal civil service, cuts in capital gains and corporate taxes, and expanding the major investment tax write-off for targeted sectors, including oil and gas pipelines, oil production equipment, mining property, aircraft, fiber optics, computer equipment and infrastructure). Changes in the US dollar against the Canadian dollar remain strongly correlated with changes in the US two-year interest rate difference with Canada (~0.72 for the past 30 sessions, the highest since the end of 2017) compared with ~0.45 correlation with changes in the US two-year yield and around -0.15 correlation between the exchange rate and Canada's two-year yield.
Data: Unlike the US, which reports the establishment and household labor market survey at the same time, Canada separates the two reports. Yet, like the US, the two surveys are not always sending the same signal. In June, the household survey showed a loss of about 18k jobs, while the establishment survey reported a gain of 4.8k jobs. In July, the household survey showed a gain of 75.1k jobs. The establishment survey for July will be reported September 24. In the first six months of the year, the household survey showed a loss of about 6.3k jobs, while the establishment survey showed a 120.6k increase. Canada also reports July retail sales. Retail sales were robust in Q1 (average monthly gain of 0.9%) and in Q2 (average monthly gain of 0.7%). That is the strongest since the H2 24. Consumption rose 3.3% at an annualized rate in Q2 after a 2.4% increase in Q1. However, the risk is that consumption slows over the next several quarters.
Prices: The US dollar has risen against Canadian dollar for eight consecutive sessions, during which time the greenback has appreciated by almost 1.7%. Over the run, the US two-year premium over Canada has widened by about 16 bp. Some of the momentum indicators are getting extended, and the greenback has been trading on both sides of the upper Bollinger Band (~CAD1.40). The next technical target may be around CAD1.4050. Initial support is seen in the CAD1.3965-75 area.
Australia
Drivers: Australia's overnight cash rate target of 4.35% sits atop the G10. The futures market is discounting a 90% chance that the fourth rate hike of the year will be delivered at the end of this month, and another one is priced in for Q1 27. The rolling 30-day correlation of changes in the Australian dollar and the Dollar Index is around -0.68. It has been fairly stable since late June.
Data: Australia reports on August labor market and S&P provides the preliminary estimate of September PMI. Australia's composite PMI warns the economy may be strengthening here in Q3. The average composite reading was 53.0 in July and August. It averaged 49.6 in Q2 and 49.5 in Q1. Despite the three rate hikes in H1 26, Australia's job creation has accelerated this year compared with 2025. In the first eight months of the year, Australia grew an average of 25.4k jobs a month, of which 21.8k were full-time positions. Australia created an average of 11.3 jobs a month in the Jan-Aug 2025, and 7.6k were full-time posts. Yet, the job growth has not kept pace with the increase in the labor force. The unemployment rate was 4.5% in July (4.1% at the end of 2025). The participation rate was 66.9% in July compared with 66.7% at the end of last year.
Prices: The Australian dollar fell last week, and it is the first back-to-back weekly decline in the end of Q2. It fell to about $0.7075 in the middle of last week. The attempt to rally at the end of the week was blocked near $0.7135, which marks the (38.2%) retracement of the decline since the September 9 high (~$0.7240). The momentum indicators are falling but with plenty of room to run. A convincing break of the $0.7075 area targets $0.7045 next, with risk extending toward $0.7000.
Mexico
Drivers: The US dollar tends to rise against the Mexican peso when Mexico's short-term rates rise. The 30-day correlation is around 0.25. The 30-day correlation of change in the dollar against the peso and changes in the US two-year yield is slightly more than twice as much. Still, as we have noted, the peso acts a better proxy for emerging market currencies (e.g., the JP Morgan Emerging Market Currency Index) than the Dollar Index (~-0.80 vs. 0.63)
Data: The highlight of the week is Mexico's central bank meeting on September 24. The central bank has signaled an extended pause, but the swaps market has around a 50% chance of a hike discounted. The Fed’s rate hike may make it a closer call. A few hours before the central bank announces its decision, Mexico will report the IGAE Activity for July, which serves the function of a monthly GDP report. It contracted in May and June, the first back-to-back decline since March-April 2025. Recall that the Mexican economy contracted by 0.3% in Q1 (quarter-over-quarter) but recovered smartly in Q2 (1.4% quarter-over-quarter). At the same time, Mexico's CPI for the first half of September is due. Headline inflation has gradually fallen from above the upper end of the 2-4% target range to near 3% (3.26% in the second half of August). The core rate is stickier. It stood at 3.83% at the end of August, its lowest level since the second half of March 2025. On September 22, Mexico reports July retail sales. They fell in both May and June, for a small net decline over the quarter. Retail sales rose slightly in Q1.
Prices: The dollar's upside correction against the Mexican peso does not look complete. The nearly 1.7% rally last week was the largest dollar advance since early March. The greenback reached almost MXN17.2750. The positioning of the momentum indicators gives it more scope, though the dollar settled above the upper Bollinger Band ahead of the weekend (~MXN17.2350). A move above MXN17.28 targets MXN17.37-MXN17.40 next.
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