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Overview: A broadly stronger US dollar greets the returning North American participants from the long holiday weekend. The greenback has risen by 0.7% or more against most of the G10 currencies. The Norwegian krone and Canadian dollar have fared best and are off less than 0.2%. Sterling is bearing the brunt. It is off nearly 1.15%. The yen is down more than 1% amid a rise in the US (and European yields) and the resignation by the leaders of the LDP, leaving Prime Minister Ishiba even more isolated. Most emerging market currencies are also weaker. with the central European currencies down most. 

The pressure appears to be emanating from the bond market. Benchmark 10-year yields are mostly 3-5 bp higher in Europe. The 10-year US yield, which has fallen by almost nine basis points over the past two weeks, is up around 5.5 bp to a little above 4.28%. The 30-year bond yields are also jumping 4-5 bp in Europe and the US. The jump in yields also appears to be taking a toll on equities. In the Asia Pacific region, among the large markets, only Japan, South Korea, and Singapore managed to rise. Europe's Stoxx 600 is off 0.65%-0.70%, while US index futures are trading 0.35%-0.60% weaker. Gold reached a record high (~$3508.75) in Asia Pacific turnover before pulling back to almost $3470 in early European activity. October WTI rose by about 0.5% last week and soared by almost 3% today to nearly $66, its best level since August 4. OPEC+ meets this coming weekend, but most expect it to hold production steady. 

USD: The Dollar Index slipped through the August low (~97.55) yesterday, recording the third consecutive session with lower, higher, and lower lows. It rallied back and reached a four-session high near 98.40. Although intraday momentum indicators are stretched, the dollar squeeze may not be over. The 98.60 area corresponds to the (38.2%) retracement of last month's decline. The focus this week is on the labor market, where the recent weakness is going to spur the Fed to begin adjusting monetary policy again. Yet, at 2.6%, the PCE deflator is unchanged from what it finished last year. As Fed Chair Powell noted recently, even if the tariffs boost price is a one-time event, the tariffs are being rolled out and implemented continuously. And now the legal authority that the president has been claiming to implement most of the tariffs has been called into question by two separate courts. Meanwhile, the decision on Governor Cook's case may be handed down today or tomorrow. Today's data includes the final August manufacturing PMI, which runs hotter than the ISM manufacturing that is also due, alongside July construction spending. There may be headline risk but the legal developments and Friday's jobs report more important. 

EURO: Yesterday, the euro extended its recovery seen in into the end of August and reached $1.1735. Last month's high was almost $1.1745. It is snapping a three-day rally with a setback that has extended to $1.1635 so far today. Nearby support is seen in the $1.600-10 area. Initial resistance is new pegged around $1.1655-60. After the four large members of the EMU reported August CPI figures at the end of last week, the preliminary aggregate estimate was no surprise. Prices rose by 0.2% in August after a flat reading in July. At an annualized rate, eurozone CPI has risen by about 2.0% over the past three months. Due to the base effect, the year-over-year rate edged up to at 2.1% (from 2.0%), while the core rate was unchanged at 2.3%. The ECB meets next week, and the economic projections will be updated. Meanwhile, the French government looks poised to fall after next week's confidence vote. President Macron will either try the same (failed) strategy under a new prime minister or call new parliamentary elections, a gamble two years ago for which he (and France) is still paying the prices. France now pays around 18 bp more than Greece to borrow for two year and 11 bp more to borrow for 10-year. 

CNY:  After falling to a new low for the year end of last week against the offshore yuan (~CNH7.1160), the dollar bounced yesterday to CNH7.1325. The gains have been extended to almost CNH7.15 today. The CNH7.1530-70 may offer resistance. Over the weekend, China reported that is August PMI ticked up slightly. Manufacturing remained below the 50 boom/bust level while non-manufacturing holds a little above. The Caixin PMI has been rebranded as "RatingDog" and its manufacturing PMI ticked up to resurface above 50 after dipping to 49.5 in July. The PBOC has been actively lowering the dollar's reference rate and allowing the yuan to strengthen. Last week, the reference rate fell by about 0.40%, the largest weekly decline in late September 2024. It increased yesterday (CNY7.1072 vs. CNY7.1030 at the end of last week), and a little more today: CNY7.1089. While many observers bemoan the under-valued yuan for the aid it ostensibly gives exports, we suspect they will be even more unhappy if the yuan is allowed to strengthen and allows Chinese companies foreign direct investment push more advantageous. 

JPY: After being confined to narrow ranges of the past few sessions, the dollar surged today. It has reached almost JPY148.80, its highest level since August 1. It approached the 200-day moving average (~JPY148.90). There are two drivers. The first is the one we are accustomed to, namely a jump in US rates. The 10-year Treasury yield is up five basis points. That Japan long-end rates are firm does not matter so much in the first instance. Second, senior LDP leaders have resigned. This includes Prime Minister Ishiba's ally, LDP Secretary General Moriyama. The LDP policy chief Onodera and general counsel Suzuki also stepped down. It adds to the pressure on Ishiba to resign as well. Separately, at the end of last week, it was reported that Tokyo's headline and core inflation have moderated for three consecutive months. We also learned last week, the retail sales (1.6% month-over-month compared with -0.2% expected in Bloomberg's survey) and industrial output (-1.6% too compared with a median forecast of a 1.1% decline) disappointed in July. Yesterday, Japan reported that in Q2, on the back of a 0.8% year-over-year increase in sales, profits rose by 0.2%. The final manufacturing August PMI was slipped from the 49.9 preliminary estimate to 49.7, but the market pays little attention to the Japan's PMI. For the past three months, the swaps market has ranged from discounting around eight basis points to cut to 24 bp. It has fallen back to about 15 bp today from around 18 bp yesterday. 

GBP: Sterling edged higher on the back of the weaker dollar yesterday and extended last week's advance to $1.3550. Despite a reshuffling of Prime Minister Starmer's economic advisors, sterling has been sold sharply today, even as Gilt yields jump. Sterling has been pushed though $1.3400 to almost $1.3375 today, its lowest since August 7. It has nearly retraced half of last month's advance (~$1.3370). The next retracement (61.8%) is around $1.3315. The market showed little reaction yesterday to the July consumer credit and mortgage data, and the final August manufacturing PMI was softer at 47.0 from 47.3 (confirming the decline from 48.0 in July). The final services and composite PMI are due tomorrow. The highlight of the week is the July retail sale report on Friday. Fiscal worries continue to build. In August, the 10-year Gilt yield rose by nearly 12 bp, the most in the G10 after France, where the 10-year yield rose by 15 bp. However, the implied year-end rate also rose 12 bp in the UK but only 3-4 bp in the eurozone. 

CAD: Canada was also on holiday yesterday, and the greenback did not venture far. It was confined to about CAD1.3735-CAD1.3760. Amid the broader US dollar gains today, it has risen to almost CAD1.3785. There may be scope for additional gains toward CAD1.3800 initially. The market is still digesting the disappointing GDP report at the end of last week. The economic contraction was more than twice the 0.7% decline anticipated by the median forecast in Bloomberg's survey. The deterioration of the trade balance and decline in investment in nonresidential structures and capital equipment offset the increase in consumption and inventory accumulation. The market understood the magnitude of that the contraction increased the chances of a cut at next week's meeting. The odds now stand around 50%, up from about 37% a week ago. There are two important data points ahead of the meeting. The first is Friday's employment report, and a modest recovery is expected after Canada shed 40.8k jobs in July (51k full-time positions), but it is probably not sufficient to prevent another rise in the unemployment rate back to May high of 7.0%, the highest since the pandemic impact was unwinding. The day before the Bank of Canada meets (September 17) the August CPI will be reported. Given that last August, the CPI fell by 0.2%, the base effect warns of a firmer year-over-year rate and sticky underlying core rates. 

AUD: The Australian dollar reached $0.6560 yesterday, its best level since the August high was recorded near $0.6570 on August 14. However, it has come under strong pressure today and tested support near $0.6500 and frayed the 20-day moving average. A convincing break of the $0.6500 targets the $0.6470-80 area next. Earlier today, Australia reported that is Q2 current account deficit narrowed to A$13.7 bln from A$14.1 bln in Q1 (initially A$14.7 bln). Q2 GDP due tomorrow. The economy is thought to have accelerated from 0.2% in Q1 to 0.5% in Q2. Quarterly GDP rose by an average of 0.4% last year and almost as much in 2023 and nearly double that in 2022. After cutting rates in August, the bar to a back-to-back cut seemed high and the data will fall short. The RBA is on hold this month, but another rate cut is expected in one of the two meetings in Q4, and the market favors the November meeting. The cash target rate is at 3.60% and the market expects a terminal rate near 3.0%. 

MXN: The dollar held above MXN18.60 yesterday and recovered to little changed levels in thin dealings to settle near MXN18.6650. Today, the greenback approached last week's high (~MXN18.7980) amid the general risk off mood. Mexico's most interesting data of the week was arguably reported yesterday. The August manufacturing PMI rose above 50 in August for the first time since June 2024 (50.2 vs 49.1 in July). The IMEF surveys (similar to PMI) did not confirm the optimism of the PMI. The manufacturing IMEF firmed to 45.6 in August from a revised 45.3 in July. (initially 45.5). The non-manufacturing IMEF rose to 49.9 from a revised 49.3 (initially 49.1). Worker remittances, the largest source of foreign currency, appear to be slowing. The rolling 12-month moving average peaked last November. March was the last month that the 2025 remittances exceeded the 2024 remittances. At $5.33 bln in July, they were 4.7% lower than July 2024. In H1 25, worker remittances totaled about $29.6 bln, down from 31.3 bln in H1 24, the lowest first half inflow since 2022. 

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