The G20 and Shanghai Cooperation Council held their respective summits. The American agenda was to convince countries to take a harder stand against Chinese exports while still threatening some members with sanctions due to trade or facilitating trade with Iran, including airlines. The G20 failed to agree on a statement. Media accounts blamed China. Yet, in 2025, when the US boycotted the G20 meeting, it was still able to produce a statement. For their part, the Shanghai Cooperation Council statement expressed solidarity with Iran. At the very least, the statement suggests that Washington's "Operation Economic Outcast" may not be the economic chokehold advertised. October WTI rose 9.2% last week and settled above $90 a barrel. November Brent rose 8.5% and settled above $95. Despite the jump in oil prices, benchmark 10-year bond yields stabilized with the G7 rates +/- 1.5-2.0 bp.
In the foreign exchange market, the dramatic short-covering rally in the yen looks like large pools of capital, perhaps even pension funds, adjusting positions rather than intervention per se. Three times now (after the April/May intervention, then after the late July operations, and again last week) the dollar held JPY155. The highlight next week includes the reaction to the German state election that could possibly see the AfD secure a majority, which could send reverberations through the German political establishment. The European Central Bank meets, and the market is confident it will deliver another rate hike and keep the door open to additional tightening. At the end of the week, the US reports August CPI. A firm or even steady pace could boost speculation of a Fed hike on September 16.
USA
Drivers: The rolling 30-day correlation between the changes in the Dollar Index and the two-year note yield is near 0.52. It peaked near 0.80 around the mid-June FOMC. Despite the outsized increase in August nonfarm payrolls, and the initial surge in the US two-year yield, as the pre-weekend session extended, the yield pulled back toward the middle of the range and the Dollar Index surrendered most of its initial gains. When everything was said and done, the Fed funds futures has slightly more than 15 bp of tightening discounted this month. It finished with a little more than 14 bp after Fed Chair Warsh's Jackson Hole speech.
Data: The most important data ahead of the September 15-16 FOMC meeting is the inflation gauges at the end of the upcoming week. Some Fed officials, whose June dot suggested they thought a hike would be necessary this year have set the bar. Several have said they want to see a decline in inflation to hold their hand. The year-over-year CPI rate has slowed for the last two months and looks to have slowed a little further in August. Given the base effect, a 0.2% increase last month would see the year-over-year rate slip to 3.3% (from 3.4%). It peaked in May at 4.2%. The same is generally true of the core rate. The year-over-year rate has fallen in the past two months from 2.9% to 2.5%. A 0.2% increase in the core rate, which is its average this year, would allow the year-over-year rate to slip to 2.4%. It has not been lower than that in more than five years.
Prices: Our bullish outlook for the Dollar Index looked good in the first half of last week when DXY reached a little above 99.85, a two-and-a-half-week high. However, with a dramatic short squeeze of the yen, the greenback set a new low for the week on Thursday (~98.85). And despite the stronger than expected job growth, the Dollar Index was unable to rise above Thursday's high (~99.60). Broad consolidation may be the most likely scenario, given Monday's US-Canada holiday, Thursday's ECB meeting (hike) and Friday's US CPI.
EMU
Drivers: Two considerations stand out. First, the results of the Germany state election in Saxony Anhalt can see the populist AfD win its first state election. The key is that it has to win sufficiently to secure majority. In other states, the firewall around the AfD that has effectively blocked it, has forced sometime unstable coalition governments. This is taking place as Le Pen is ahead in the polls in a run-off with the Mélenchon. Chancellor Merz, who had often been critical of Merkel from the right, tried to steer the CDU to the right, but the further he went the further the AfD seemed to go. His tenure as Chancellor could be impacted by the election. Second, there is little doubt but that the ECB will deliver a quarter-point to 2.50% and recognize that inflation risks are on the upside. The swaps market is pricing in a strong chance of a hike and possibly another in Q1 27.
Data: The key data is the ECB meeting on September 10. It is nearly a forgone conclusion that it will hike its key rates by 25 bp, which would lift the deposit rate to 2.50%. We assume that the ECB officials as a whole are not persuaded by the American example of withdrawing forward guidance and being less transparent about its reaction function. Given the strong chance (70%+) of another hike before the end of the year, the market is giving officials a free option. Given that the staff may have to revise up its forecasts for 2027 and 2028 CPI forecasts (2.3% and 2.0%, respectively), ECB President Lagarde could simply suggest that the central bank's work may not be done.
Prices: With the midweek losses the exception, the euro spent last week largely confined to the range set on August 28, the day Fed Chair Warsh spoke at Jackson Hole. That range was roughly $1.1580-$1.1660. The midweek low was almost $1.1565. The euro's resilience in the face of stronger-than-expected US jobs growth was notable. The $1.1575 area corresponds to the (38.2%) retracement of the euro's rally from the late July low (~$1.1355) to the August 20 high (~$1.1710). Still, with the momentum indicators still falling, the consolidative/correction phase may not be over.
PRC
Drivers: Beijing's currency management of the market forces has produced an incredibly stable exchange rate. The actual historic volatility over the past month has been about less than 1.4% and about 1.7% in the past three months. Still, within that, officials have allowed the yuan to rise a little more than 4% this year; it is the sixth strongest emerging market currency this year, and only two G10 currencies have outperformed it (Norwegian krone +8.4% and the Australian dollar +7.9%).
Data: This week's data are closely watched. The most important of these are the August trade figures and the CPI. Since China has been finding other channels to recycle the current account surplus, including sovereign wealth funds, as well as portfolio and direct investment, the monthly reserve figures do not capture the attention of the market the way they once did. Europe and America seemed particularly troubled by China's growing trade surplus. Many emerging market economies are on the other side. They are selling commodities and raw materials to China. Its imports in July were about 27.5% higher year-over-year. Exports, mostly of manufactured goods at both ends of the value chain, were up nearly 24% year-over-year, and therein lies the challenge. The US's increasing tariffs and blockage of Chinese goods add to the pressure for Europe (and others) to do the same. China's August CPI and PPI will be reported early on September 9. The general picture will not change. China's measured consumer prices are hardly rising. The headline has risen by about 0.5% year-over-year, and while some disinflation reflects weak demand, the decline in food prices has also been an important driver. The core rate is hovering around 1.0%. China's producer prices were gradually moving out of deflation, and the war in Iran helped accelerate the process.
Prices: The dollar fell to almost CNH6.7050 ahead of the weekend. That is the lowest level since January 2023, when it traded at CNH6.6975. The median forecast in Bloomberg's survey is for the dollar to finish the year at CNH6.70. This seems too conservative. Subjectively, we suspect it may be closer to CNH6.65, and maybe a little lower.
Japan
Drivers: It does not always hold but it seems fair to say that markets respond more to surprises than to as-expected developments. The market has come around to the view that a BOJ rate hike later this month is about as done of a deal as these things get. Moreover, the pricing in the swaps market implies hawkish guidance toward another hike before the end of the year. Another consideration, of course, is intervention. Indicative pricing in the options market is consistent with the talk of long dollar positions being protected by long put structures, which would cushion the blow of intervention.
Data: The BOJ meeting that concludes on September 18 and a rate hike has become sufficiently discounted to make its absence more unsettling than its delivery. This saps the interest from most of the economic data. Still, the July labor earnings and trade figures may draw interest. In June, real cash earnings rose by a revised 2.2% (up from 1.6%) year-over-year. However, higher real wages have not translated into stronger consumption. At the same time that the earnings data will be reported on September 8, Q2 GDP revisions will be announced, but in the first estimate, private consumption was flat. The other data point of note is the July current account. Of note, despite the undervalued yen, Japan continues to report a trade deficit, though in the current estimate of GDP, net exports contributed about half of Japan's growth.
Prices: The JPY155 level is key on the dollar's downside. Japan's intervention in April/May and the joint intervention in late July did not drive the greenback below it. Similarly, in last week's yen surge, the JPY155 held again. We suspect the upside may be limited to the JPY157.00-JPY157.25 area.
UK
Drivers: Sterling remains sensitive to the US dollar's broad direction. The changes in sterling and the Dollar Index are inversely correlated between about -0.80 and -0.83 for the past 30, 60, and 100 sessions. The correlation between changes in sterling and changes in the euro is a little lower but also fairly stable (~0.65-0.75). Relative to short-term interest rates, sterling is inversely correlated with changes in US two-year yields (~-0.25 for 30 days, -0.48 for 60 days, and -0.60 for 100 days). Sterling is less correlated with changes in short-term UK rates, but the correlation is also inverse. The correlation between changes in the exchange rate and the two-year rate differential is less inverse than US or UK rate changes.
Data: The UK reports July GDP and details on September 11. The World Cup and the heat wave is thought to have boosted UK June GDP by 0.3%. The economy appears to have cooled. After growing by 0.4% quarter-over-quarter in Q2, the median forecast in Bloomberg's survey is for a meager 0.1% expansion in Q3. The swaps market sees only a slight change (~10%) in the probability of a rate hike at the September 17 Bank of England meeting. That said, the market has a hike fully discounted by the year and another one by the end of Q1 27.
Prices: Sterling's retreat from the $1.3675 high on August 21 extended to $1.3475 in the middle of last week. It forged a possible base there. It must re-establish a foothold above the $1.3550 area to lift the tone, and even then, the $1.3575-$1.3600 area may be more important, technically. The momentum indicators are still falling, and the trendline connecting the June and July lows will come in around $1.3550 at the end of next week.
Canada
Drivers: A hawkish hold by the Bank of Canada helped fuel a dramatic recovery in the Canadian dollar in the middle of last week. The Bank of Canada's overnight target rate is below the Federal Reserve's by the most since the late 1990s. The US dollar's movement against the Canadian dollar is more correlated with the two-year rate differential, as theory would suggest, than US or Canadian rates separately. Over the past 30 sessions, changes in the USD vs. CAD and US two-year yields have a correlation of a little less than 0.35, and a little below 0.37 for the past 60 sessions. The correlation with Canada's two-year yield is about -0.38 over the past 30 sessions and about -0.25 for the past 60 sessions. The correlation between the exchange rate and changes in the two-year differential is slightly above 0.70 for both the past 30 and 60 sessions.
Data: There are no government economic reports in the week ahead. The Bank of Canada met last week and left its overnight target rate at 2.25%. Despite the trade shock, the market continues to anticipate the next move is a hike, and the market has two hikes fully discounted in the next eight months.
Prices: The diverging employment reports favored the Canadian dollar in early August, but the divergence ahead of the weekend weighed on it. The Canadian dollar was the weakest of the G10 currencies before the weekend. It lost a little more than a third of one percent. The Canadian dollar rallied Wednesday and Thursday last week, encouraged by the hawkish hold of the Bank of Canada and the broadly weaker US dollar. The greenback's low last week was about CAD1.3765. Recall that it settled at CAD1.3760 before the US-Canadian trade talks collapsed. The pre-weekend US dollar bounce saw it recover slightly above CAD1.3870, which met the (61.8%) retracement of the Wed-Thurs slump. The CAD1.39 area offers initial resistance and last week's high was around CAD1.3940. A move above there targets CAD1.40 next.
Australia
Drivers: Over the past 30 sessions, changes in the Australian dollar are more inversely correlated with the Dollar Index (-0.65) than correlated with changes in the US two-year yield (~-0.32) or Australia's two-year yield (~0.32). The 30-day correlation of changes in the exchange rate and the two-year yield differential is near 0.45, while the correlation with gold is almost 0.57.
Data: Australian data is limited to a couple of banks' confidence surveys and the Melbourne Institute's Consumer Expectation survey. The central bank meets September 29. The recent string of data (including stronger than expected Q2 GDP on the heels of somewhat hotter than expected inflation and strong private sector credit growth) and official comments have encouraged the market to boost the chances of a rate hike to around 66% from a little less than 50% at the end of the previous week and about a 12% chance as recently as August 25. A hike to 4.60% is fully discounted by the end of the year in the futures market.
Prices: The Australian dollar fell to about $0.7120 in the middle of last week. Although it was the lowest it had been since August 21, it still managed to hold above the 20-day moving average. The Aussie rose to $0.7215 before the weekend, a new high since mid-May. The Australian dollar posted an outside-up week. It traded on both sides of the previous week's range and settled above it higher. Initial resistance may be around $0.7250, but the big target is the four-year high from May (~$0.7280).
Mexico
Drivers: Changes in the US dollar against the Mexican peso continue to be more correlated with changes in the JP Morgan Emerging Market Currency Index (~-0.80) than the Dollar Index (~0.65) for the past 30 days. The exchange rate is more correlated with changes in the US two-year yield (~0.45) than changes in Mexico's two-year yield (~0.30).
Data: Mexico reports August vehicle production and exports at the start of the week and industrial production at the end of the week. However, the most important high-frequency data point is August CPI in the middle of the week. The headline rate on a year-over-year basis may rise for the first time since March. It approached the middle of the 2-4% target range in July (3.12%, the lowest since the pandemic). The core rate has been a little stickier, and in July it slipped below 4% for the first time since last April. It has fallen moderately since the January peak, to slightly above 4.50%. It may have slipped marginally.
Data: Mexico reports August vehicle production and exports at the start of the week and industrial production at the end of the week. However, the most important high-frequency data point is August CPI in the middle of the week. The headline rate on a year-over-year basis may rise for the first time since March. It approached the middle of the 2-4% target range in July (3.12%, the lowest since the pandemic). The core rate has been a little stickier, and in July it slipped below 4% for the first time since last April. It has fallen moderately since the January peak, slightly above 4.50%. It may have slipped marginally.
Prices: The US dollar bounce we expected stalled in the MXN17.05-MXN17.07 area. It posted a bearish outside down day on September 3, and follow-through selling ahead of the weekend took it to MXN16.8625. That is a new low since the mid-2024 run-up to the presidential election. The price action reinforced the cap that has formed over the past three weeks. On a weekly basis, the greenback has recorded lower highs for the eighth consecutive week. On a net basis, the US dollar has risen once in the past seven weeks. It is difficult to find meaningful chart support near current levels, but we suspect that there may be scope toward MXN16.80 next.
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