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Overview:  After falling following the US jobs report before the weekend, US interest rates have come back firmer, helping the give the dollar a boost. A downward revision to Japan's Q2 GDP, reflecting weaker consumption, business investment, and a little more inflation, has helped the greenback retrace the pre-weekend losses against the yen. Softer-than-expected price gauges, the setback of the yen, and the rise in US rates have seen the offshore yuan fall by the most in three weeks. The US dollar is firmer against all the G10 currencies but the Canadian dollar. Most emerging market currencies are also softer than the Mexican peso. 

After falling by 2.4% last week, the MSCI Asia Pacific has begun the new week on the defensive. All the large markets in the region fell except India. China, Hong Kong, and Taiwan lost more than 1%. Europe's Stoxx 600 is snapping a five-day drop. It is up nearly 0.75% in late morning turnover. US index futures are recovering from the pre-weekend slide. The S&P 500 is up around 0.7% and the Nasdaq is about 0.90%. Yields are broadly higher. The 10-year JGB yield rose nearly 5 bp (to ~0.89%). European benchmark yields are 4-6 bp higher. Gold is flat and consolidating at the lower end of last Friday's range. It has been confined to a roughly $2485-$2500 range so far today. October WTI fell almost 8% last week, its fourth consecutive weekly loss, and to its lowest level of the year (~$67.15). It is trading quietly today (~$68.00-$68.85). 

Asia Pacific

China's consumer disinflation is ending, and it is not because consumer demand has improved. Unfavorable weather and a low base for pork prices appear to be the driver. At the same time, China's intense domestic competition--which is the closely related to the surplus capacity issue, also serves to weigh on price. China's August CPI is 0.6% higher year-over-year, slightly higher than the 0.5% in July. The core rate, which excludes food and energy rose 0.3% year-over-year, the slowest of the year. Consumer goods prices rose 0.7% over the past 12-months, the fastest of the year, while service priced edged up 0.5%, the least of the year. Producer prices deteriorated for the first time since March. After finishing 2023 at -2.7%, Chinese producer prices rose to -0.8% in June and July before falling to -1.8% in August. The output price index as China's PMI fell to 42.0 in August (46.3 in July). It is the lowest since May 2023. The weakness in producer prices suggest profits will remain under pressure. We note that China reported that reserves rose by almost $31.85 bln in August to $3.29 trillion, the highest since the end of 2015. It appears to be largely accounted for by the valuation adjustments (decline in the dollar and interest rates). Meanwhile, revisions to Japan's Q2 GDP were minor and the focus is on inflation and Q3 data. The 3.1% growth in Q2 was revised to 2.9% as consumption and capex were revised lower. The growth was partly a payback for the 3.2% contraction. Growth this quarter looks to be 1.5%-2.0% at an annualized clip. The deflator was revised to 3.2% from 3.0%. Japan also reported its July current account. True to the seasonal pattern, it widened from June (JPY3.19 trillion vs. JPY1.53 trillion) as it has done without failure since 2002. It did so, however, even though the trade balance deteriorated. The JPY483 bln deficit compares with a JPY556 bln in June, and JPY107 bln in July 2023. 

The dollar entered today with a four-day slide against the yen in tow and after a wobble at the start of the session it recovered. The yen's rise does not appear to be the critical driver that it was in late July into early August. Through last Tuesday, speculators in the CME futures grew their net long yen position by 15.2k contracts to 41.1k. This was a function of new longs being established and shorts covered in roughly equal measures. Ahead of the weekend, the dollar posted its lowest close since early January slightly below JPY142.50, where $1.75 bln in option are to expire Wednesday. It slipped briefly below JPY142 and recovered toward JPY143.65, holding so far below the pre-weekend high (~JPY144). The greenback's gains have been supported by a recovery in US yields (5-6 bp). The Australian dollar is weak from the technical perspective after the big outside down day before the weekend. The pre-weekend low was near $0.6660, and the losses have been marginally extended today to slightly below $0.6655. A possible head and shoulders topping pattern projects to a little below $0.6600. The five-day moving average is crossing below the 20-day moving average. The position adjustment around today's expiry of almost A$315 mln options at $0.6700 may have contributed to the Aussie selling before the weekend. Still, the stretched intraday momentum indicators suggest it can recover toward $0.6670-80 area. The rise in US rates and the pullback in the yen put the yuan on its backfoot. The greenback, which tested the CNH7.0735 at the end of last week, reached a five-day high near CNH7.1245 today, near the 20-day moving average. Moreover, the offshore yuan is weaker than the onshore yuan, suggesting the near-term directional bias. Near-term potential appears to extend to CNH7.15. Last week’s less than 0.1% gain was sufficient for the dollar to snap a six-week drop against onshore yuan. The reference rate was set at CNY7.0989 (CNY7.0925 at the end of last week). 

Europe

The eurozone highlight of the week is Thursday's ECB meeting. The swaps market is fully discounting a 25 bp cut that will bring the deposit rate to 3.50%. It may also make a technical adjustment to narrow the spread between the deposit rate and main refinancing rate to 15 bp from 50 bp. The staff will update its forecasts. The swaps market another cut fully discount this year (two meetings left) and almost a 50% chance of another. The Bank of England meets on September 19 and the swaps market has about a 25% chance of cut. Assuming that is correct, there are about 45 bp in cuts discounting for the last two meetings of the year. Tomorrow's employment data may have more sway that the July GDP data and details on Wednesday. 

The euro did not sustain the upside momentum that carried it to $1.1155 ahead of the weekend. It reversed to fall through Thursday's low (~$1.1075), but the settlement was inside Thursday's range. Follow-through selling today pushed it near $1.1045. A close below $1.1075 may boost the likelihood that the euro's downside correction is intact. Last week's low was near $1.1025. The next target is the $1.0990-$1.1000, but initially in North America, gains toward $1.1080 are reasonable given the positioning of the intraday momentum indicators. Sterling posted a bearish outside down day. Unlike the euro, it settled below Thursday's low after taking out its high earlier. It has slipped through last week's low (~$1.3090) and the next target is around $1.3035 on the way to maybe $1.2965. Still, the intraday momentum indicators suggest a bounce in the early North American turnover is likely. Initial resistance is seen around $1.3120. 

America

The US employment was sufficiently mixed, especially if the 142k jobs growth is discounted by the average revision, and the Fed-speak sufficiently ambiguous as to encourage the market not bet too heavily on 50 bp rate cuts. Officials signaled a series of rate cuts. No one shied away from that. The issue is pace. The underlying signal seems to be that the base case is for a 25 bp cut this month but officials seem open to quicker moves if the labor market continues to weaken. One of the implications is that Wednesday's CPI may not play a significant role in the Fed's reaction function. Some are still critical of Fed and believe it should have cut rates in July. Maybe. Two mitigating factors. First, given the lag times, a few weeks one way or the other is unlikely to make much of a difference. Second, it is not as if the market has stood still. In a little more than four months, the US 2-year yield has fallen by 140 bp. The average 30-year mortgage rate has fallen by around 75 bp to 6.75%, the lowest in around 18 months. For its part, Mexico will report its August CPI, today, a couple of days ahead of the US. The headline and core rates are expected to have moderated. The central bank meets on September 26 and a Fed rate cut could help persuade Banxico to cut as well. 

The US dollar posted a large outside up day against the Canadian dollar. After initially falling to a new low for the week near CAD1.3465, the greenback reversed course to rally to CAD1.3580. The US dollar's 0.5% gain ahead of the weekend was the largest advance in three months. It approached the 200-day moving average (~CAD1.3585). There has been no follow-through US dollar buying today and the greenback is consolidating in a narrow range above CAD1.3550. The range may be extended to the downside in North America, but consolidation is the most likely scenario. The US dollar settled at its highest level against the Mexican peso since October 2022 (~MXN19.97) ahead of the weekend. Still the greenback has not settled above MN20.00 despite trading above it on an intraday basis. There are about $490 mln in options struck at MXN20.00 that expire today. Given the cost of being short the peso (interest rate differential), once it becomes clear that the momentum is stalling (and the momentum indicators are stretched), peso shorts will feel the pressure to cover. It, too, is consolidating today.  

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