Image Source: Pexels
 

Overview: The dollar is mostly consolidating with a softer bias after the disappointing employment report before the weekend. The derivatives market is pricing in about a 10% chance of a 50 bp Fed cut next week, which still seems exaggerated given the likely uptick in headline CPI this week. The Japanese yen is the only G10 currency that is weaker on heels of the resignation of Prime Minister Ishida who saw the surveys that showed a majority of his party wanted a leadership contest this year as a vote of no-confidence. The policy uncertainty weighed on the long-end of the Japanese interest rate, though the 10-year yield slipped and equities rose. Most emerging market currencies are also firmer against the dollar, including the Chinese yuan, where the PBOC set a new low fix for the dollar since last November. 

The focus is on the French confidence vote today, but French 10-year premium over Germany is a little narrower today. European benchmark yields are little changed, but the UK 10-year Gilt yield is up one basis point, the most in Europe. The 10-year Treasury yield fell over eight basis points at the end of last week, and its three-day drop was near 18 bp. It is trading a basis point higher today to almost 4.09%. Stocks are rallying today. All the large bourses in the Asia Pacific region rose but Australia. Europe's Stoxx 600 is recouping its pre-weekend loss and is up around 0.25%. US index futures are also trading with a firmer bias. Gold is extending its run to record highs and poked above $3617 today. OPEC+ agreed to raise production by 137k barrels a day next month, but actual output is thought to likely be lower as some members may forgo their increase to make up for overproduction previously or may lack spare capacity. Its three-day swoon of more than $3.5 a barrel is being snapped today as the black gold pushes above $63 after settling below $62 before the weekend. 

USD: It took longer than we had imagined, but ahead of the weekend, the Dollar Index settled below the low seen in response to Federal Reserve Chair Powell's speech at Jackson Hole on August 22. It frayed the lower Bollinger Band a little above 97.50. It is trading in about a 50-point range so far today below 97.95. The poor US jobs data fanned speculation of a 50 bp cut at the FOMC that concludes on September 17. More poor news is expected tomorrow when the BLS announces benchmark revision to the establishment survey. Last year, the benchmark revision subtracted 818k jobs. Still, we are concerned that with US rates already at their lowest level in several months, market speculation may be getting ahead of itself, and that the fourth consecutive increase in the headline CPI will dampen speculation of a large rate cut next week. 

EURO: The euro tested the $1.1760 area twice ahead of the weekend. The risk seems to be some backing and filling and the risk may extend toward $1.1680. The euro overcame the disappointed German factory orders (-2.9%) and was bid even before the US jobs data disappointed. The euro recorded its low today, slightly ahead of $1.1690 in early turnover and was already back above $1.1720 when Germany reported stronger than expected industrial output (+1.3%), its first increase since March. At the same time, it reported an unexpected decline in July exports (-0.6%). The market continues to watch is overshadowed by French political machinations. The government does not appear to have the support to win the confidence vote. President Macron will likely choose another prime minister, but he may lose conservative Republican ministers if he appoints a Socialist. Fitch reviews France's AA- credit rating with a negative outlook at the end of the week. Without fiscal progress, the risks are of a downgrade. 

CNY: The dollar was sold slightly through CNH7.1220 after the US jobs report, holding slightly above the week's low set last Monday closer to CNH7.1210. It is trading quietly today between about CNH7.1245 and CNH7.1335. If the greenback's downtrend accelerates it will be difficult for officials to try to steady the yuan, arguably signaled by the setting the dollar's fix higher in four of last week's five sessions. The PBOC set the dollar's reference rate at a marginal new low for the year today CNY7.1029 (CNY7.1064 before the weekend, and CNY7.1072 last Monday). The PBOC reported reserves rose by nearly $30 bln to $3.322 trillion after falling by $25.2 bln in July. Valuation appears to be the key driver. However, it did continue to increase its gold holdings. Separately, it reported that its August trade surplus rose to $102.3 bln (from $98.2 bln in July). Exports slowed to 4.4% year-over-year (7.2% in July), the weakest in six months. Exports to the US are down a third over the past year, while exports to Southeast Asia were up by almost a quarter, as were exports to Africa. Shipments to Europe were up 10%. Imports slow to 1.3% year-over-year (4.1% in July). 

JPY: News that Prime Minister Ishiba will resign weighed on the yen initially early today, and lifted the dollar to almost JPY148.60, slightly above the pre-weekend/pre-US jobs data high) amid the uncertainty. The scramble to replace Ishiba began in earnest and many observers are replaying last year's leadership contest. Long-term Japanese yields rose amid the uncertainty. Still, the yen recovered, and the dollar reached JPY147.50 by early European turnover. The greenback peaked in the middle of last week near JPY149.15, its highest level in over a month, and after consolidating Thursday, it fell to nearly JPY146.80 ahead of the weekend. Note that Japan revised up Q2 GDP from 1.0% at an annualized rate to 2.2%, helped by stronger private consumption and less of a drag from inventories, which more than offset the slower business spending. The July current account balance widened as the strong seasonal pattern suggested (JPY2.68 trillion vs. JPY1.35 trillion), though notably the trade balance swung into deficit (-JPY189 bln vs. JPY470 bln). 

GBP: Sterling reached nearly a three-week high ahead of the weekend near $1.3555 to make a marginal new high for the week. It is like the old adage about the ugly contest in some ways with fiscal pressure mounting and the government seems to be a bit of disarray after the deputy prime minister resigned (and her party role, as well). A cabinet reshuffle is expected in the coming days. This, as the French government is on the precipice, and the dollar was pushed lower as the slowdown in the labor market quickened. The $1.3600-level capped sterling in the third week of July and again in the middle of August. Friday's high may hold. It is trading in about a fifth of the cent around $1.3500 so far today. 

CAD: Canada's disappointing jobs report did it no favors, but the weaker US dollar environment ahead of the weekend, would have weighed on the Canadian dollar in any event. It was the only G10 currency not to have gained on the US dollar. Although the greenback traded on both sides of the previous day's range it settled within Thursday's range. Still the technical tone looks constructive. It is trading between about CAD1.3810 and CAD1.3845 today. A convincing move above CAD1.3860 could spur a move toward CAD1.3900-25 initially. There was little response to Prime Minister Carney's C$5 bln initiative to counter the negative impact of US tariffs. There have been two quick blows to Canada--the sharper than expected contraction in Q2 GDP (-1.6% annualized) and the weaker labor market report (a sharper than expected rise in unemployment to 7.1% and a loss of full-tine positions in August for the second consecutive month). This has boosted speculation for a rate cut later this month to almost 80%. 

AUD: The Australian dollar reached a six-week high ahead of the weekend. It reached nearly $0.6590 and has returned to near there today. The Aussie has traded above $0.6600 only twice this year. It held the five-day moving average (~$0.6545). It and the New Zealand dollar join the Norwegian krone to lead the G10 currencies today. 

MXN: The US dollar traded to a two-week low before the weekend near MXN18.58. But unlike what we saw previously, good dollar buying emerged on the pullback and lifted the greenback above MXN18.73. The dollar is trading in the upper end of the pre-weekend range today (~MXN18.6825-MXN18.7380). Still, the peso does not appear to be going anywhere quickly. It has not traded below MXN18.55 or above MXN18.87 for more than three weeks. 

More By This Author: