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Overview: The US dollar is trading with a softer bias against nearly all the G10 currencies. Yesterday's losses have been extended. The exception is the Norwegian krone, which is hovering around unchanged levels. The greenback is softer against most emerging market currencies. Despite Britain and France sending aircraft to help protect Polish airspace after more drone incursions, and Warsaw denying China's request to re-open the border with Belarus (a key conduit for Chinese goods into Europe), central European currencies, including the zloty are firmer. The Chinese yuan is at a new high for the year. 

After new record highs by the S&P 500 and Nasdaq yesterday, most bourses in the Asia Pacific region rose. Taiwan and South Korea's markets led the rally of the large bourses with more than 1% gain. Only Hong Kong and China's CSI 300 failed to advance. European equities are lower. The Stoxx 600 is paring yesterday's gains and central European indices are lower, too. US index futures are firmer. European benchmark 10-year yields are a little more than one basis point higher, with the 10-year Gilt yield up two basis points after the employment report. The 10-year US Treasury yield is little changed near 4.04%. After a bullish outside day yesterday, gold reached a new high to near $3698. October WTI is trading quietly inside yesterday's range, which was inside last Friday's range. It is straddling the $63-area.  

USD: The Dollar Index posted its lowest settlement since late July yesterday and is being pushed below 97.00 in late European morning turnover. The break signals a test on the multi-year low recorded on July 1 slightly below 96.40. As the two-day FOMC meeting gets underway, which it appears both Miran and Cook will attend, the US reports retail sales, import/export prices, and industrial production. Despite slower vehicle sales (2.1% month-over-month) retail sales look firm, with the measure that excludes autos, gasoline, food services, and building materials expected to rise by 0.4%. It averaged 0.3% in the first seven months of the year, the same as the Jan-July 2024 period. Import price may have eased by 0.2%. If so, it would be the third drop in four months. However, this reflects lower oil prices. Excluding petroleum, import prices expected to have edged up by 0.1%, leaving them almost flat over the four-month stretch. Export prices may have eased by 0.1%, offsetting the July gain. Industrial output looks soft, and dragged down by weaker manufacturing, looks likely to have fallen for the second consecutive month for the first time this year. The Atlanta Fed's GDP tracker is at 3.1% for this quarter and will be updated later today. The median forecast in Bloomberg's survey is for half that pace. 

EURO: The euro has traded above $1.18 for the first time in two months today. Options for 1.6 bln euros expire there today. It is poised to challenge the multi-year high was posted on July 1 near $1.1830. The euro gains reflect the broadly weaker US dollar, the lack of negative fallout from Fitch's downgrade of France, and the grind lower in the US two-year premium over Germany. The US premium has fallen about 30 bp since Fed Chair Powell spoke at Jackson Hole, and near 151 bp, it is the lowest since last September. The eurozone's aggregate industrial production rose by 0.3% to recoup part of June's revised 0.6% (initially -1.3%). The 0.7% average monthly contraction in industrial output in Q2 followed the 1.3% rise in Q1. The latter was likely flattered by attempt to get ahead of US tariffs and was the best 2020. The former was the weakest since Q3 23. Separately, ZEW reported that Germans' assessment of the current economy deteriorated in September for the second consecutive month for the first time this year (and at -76.4 is the lowest since May), On the other hand, expectations improved to 37.3 from 34.7,  recouping a small part of August's decline (July's four-year high of 52.7). 

CNY: The dollar is consolidating in its recent trough against the Chinese yuan. It recorded the low for the year last week near CNH7.1120 and slipped through it today to almost CNH7.1090. The PBOC set the dollar's reference rate last Tuesday at CNY7.1008, the lowest for the year. The pace at which the PBOC is moving the dollar's fix has slowed over the past couple of weeks but is still a multiple of what was seen earlier this year. It set the dollar's fix at CNY7.1027 today (CNY7.1056 yesterday). Despite the reference rate being below CNY7.11, the six banks that reported that estimate of today's fix were all above there today, and four of the six were above CNY7.1150. What is the point? 

JPY: The dollar has broken lower from last Thursday's range (~JPY147.00-JPY148.15) which confined the exchange rate Friday and yesterday. It reached JPY146.70 so far today. The broader range so far this month has been around JPY146.30 to JPY149.15. Last month's range was about JPY146.20 to JPY150.90. The BOJ meeting is at the end of last week. Although Governor Ueda has often said if the economy evolves as officials expected, the BOJ can still raise rates this year. The swaps market is pricing in about 15 bp of tightening before the end of the year. At the end of August almost 17 bp were discounted, and at the end of July nearly 18 bp were priced into the swaps market.

GBP: Sterling pushed above $1.3600 for the first time since July 10 and settled 1/100 of a cent below it yesterday. The gains have been extended today to nearly $1.3650. The next immediate objective is around $1.3680, and the multiyear high set July 1 was almost $1.3790. The UK has a full slate of economic reports this week, and the Bank of England meets Thursday. Earlier today, the UK report firm July average weekly earnings (3-month year-over-year) of 4.7% (4.6% in June), though slightly softer excluding bonus payments (4.8% vs. 5.0%). The ILO measure of unemployment was steady at 4.7%. Yet for the seventh consecutive month, the number of payrolled employments fell (8k vs an average of -17.5k average in the previous six months. The UK reports August CPI tomorrow. It is seen rising by 0.3%, which given the base effect, will leave the year-over-year rate steady at 3.8%. and at the top of the G10. Still, the core and services measures are expected to moderate by 0.2% to 3.6% and 3.8%, respectively. The swaps market has about 33% of a cut discounted over the remainder of the year and practically no chance this week. The BOE is under pressure to reduce its outright Gilt sales at this week's meeting. 

CAD: The US dollar slipped to a six-day low yesterday slightly below CAD1.3770 and extended the losses marginally to almost CAD1.3760 today. The nearby target is around CAD1.3740 and the late August low near CAD1.3725. StatsCan reports August CPI today ahead of tomorrow's Bank of Canada meeting. The headline measure is expected to rise by 0.1%, but the base effect means that the year-over-year rate may have ticked up to 2.0% from 1.7%. The underlying core rates look steady (3.0%-3.1%). The reason the swaps market is confident of a rate cut this week, as with the US is more of the economy’s performance (and outlook) rather than current inflation readings. The 2-10-year Canadian yield curve is around 67 bp, which is the lower end of a three-month range. The similar US curve is about 50 bp, the lower end of a six-week range.

AUD: The Australian dollar rose to a new high for the year near $0.6675. A move above could spur gains into the $0.6700-15 area. The Aussie's high from last October was near $0.6940 and this may be a reasonable target in the fourth quarter. The data highlight of the week for Australia is Thursday's employment report. Australia created 60.5k full-time jobs in July, the most since last February. RBA Governor Bullock cautioned that continued firm demand may force reconsideration of the central bank's trajectory. The swaps market is pricing in two more rate cuts in the cycle, down from a little more than three months ago.

MXN: With softer market rates, and the Fed poised to resume its easing cycle this week, short dollar carry trades are popular, with several Latam currencies on the other side. The Mexican peso, Brazilian real, and the Colombian peso rose to new highs for the year yesterday. The dollar fell to almost MXN18.33 and is consolidating in a narrow range in yesterday's trough. Recall that until late last week, MXN18.51 held back steeper dollar losses. Our next target is the MXN18.18-20 area. The dollar broke below BRL5.38 at the end of last week and slipped below BRL5.31 yesterday. A convincing break may target the BRL5.18-BRL5.20 area. The greenback was sold through COP3900 in the second half of last week and reached almost COP3884 yesterday before it rebounded. It settled slightly above COP3900. In the spot market, this year through yesterday, the Brazilian real is up about 16.1% this year, the Mexican peso is up about 13.4%, and the Colombian peso has appreciated by about 12.8%. When the carry for dollar-based investors is included, the returns are closer to 27.5%, 20.9% and 20.3%, respectively. 

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