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Overview: The dollar settled last week on a soft note, and follow-through selling today pushed it lower against nearly all the G10 and emerging market currencies today. Just as some observers were talking about a resumption of the yen carry-trades, the yen has popped up. The yen has a little more than 2.2% against the dollar Friday and today. Unlike previous yen surge, the Antipodeans (candidates for the long leg of the carry trades) have traded well. Both the Australian and New Zealand dollars are up more than 1% over these two sessions. The Canadian dollar is weakest performer over this period, up a little more than a third of one percent. It often lags on the crosses in a softer US dollar environment. 

The yen's surge seemed to weigh on Japanese stocks, where the Nikkei fell nearly 1.8%, but most other large bourses in the region but South Kore advanced. Recall that last week, the MSCI Asia Pacific Index rose by 4.25% to snap a four-week slide. Europe's Stoxx 600 is slightly firmer. It is a four-day advance in tow coming into today. It rose nearly 2.5% last week. US index futures are struggling today after last week's advance (5.3% for the Nasdaq and ~4% for the S&P 500). Benchmark 10-year yield are softer today, even in China, where Beijing it trying to resist lower bond yields. European yields are 2-3 bp lower and the 10-year US Treasury yield is near 3.87%, off a little more than a basis point. A weaker dollar and softer yields helped lift gold to a marginal new record high of almost $2510 today before consolidating. October WTI is trading about 1% lower, near last week's low set before the weekend (~$74.50). 
 

Asia Pacific

The Japanese economy grew 3.1% at an annualized pace in Q2 after contracting 2.3% in Q1. Still, it ended the quarter on a weak note. Industrial output slumped by 4.2% in June and the tertiary activities index (reported before the weekend) contracted by 1.3% in June. The median forecast in Bloomberg's survey was for 0.3% growth. May's 0.4% decline was revised away and now reportedly grew by 0.6%. Earlier today, Japan reported a 2.1% increase in June core machinery orders (0.9% expected), after falling 3.2% in May. Note that BOJ Governor Ueda will discuss the July rate hike before the Diet at the end of the week. Minutes from the recent Reserve Bank of Australia meeting are due first thing tomorrow, but Governor Bullock's comments to a parliament panel before the weekend likely revealed the general thrust: It is too early to contemplate a rate cut. While the futures market shaved the chances of a rate cut this year, near 88%, it is still fairly confident. Chinese banks set the loan prime rates tomorrow and are expected to be held steady. Meanwhile, the changes in the offshore yuan and Japanese yen on a rolling 100-day basis is the highest in more than a decade (~0.70+). The yuan is nearly flat this year against the dollar. It is off about 0.6% year-to-date against the dollar, and that means that most countries have experienced an appreciation of the yuan so far this year. 

Just as some observers were talking about the return to carry trade strategies, the yen rallied more than 1% before the weekend to post its biggest gain in nearly two weeks. The US dollar was sold after it had nearly met the minimum (38.2%) retracement of its sharp decline from the multiyear high in the first part of June. The retracement objective was about JPY149.45 and the greenback stalled in front of JPY149.40. The dollar settled on its session lows near JPY147.65 before the weekend and follow-through selling today sent it to JPY145.20, which gives back about half of its bounce off the August 5 low (~JPY141.70). The 30-day correlation of the changes in the exchange rate and the US 10-year yield a little above 0.60, which is the upper end of a five-month range. The latest CFTC report shows speculators (non-commercials) with the first net long yen position in the week through August 13 since March 2021. The greenback has stabilized in the European morning and is straddling the JPY146.00 area. The Australian dollar reached a four-week high near $0.6670 ahead of the weekend, overcoming resistance near $0.6640-45 area that had threatened to stymie the Aussie's recovery. Follow-through buying saw the Aussie approach $0.6700 today. Some of the buying may have been related to options for A$865 mln at $0.6675 that expire today. Note that Thursday, there are A$1.7 bln in options struck between $0.6630 and $0.6650 area expire. The momentum indicators are getting extended, but there may be near-term potential toward $0.6700-25. The recovery of the yen coincided with the recovery of the offshore yuan before the weekend, and today, the offshore yuan rose to two-week highs. The dollar slipped below CNH7.13, but like its performance against the yen, it has stabilized. It is trading near CNH7.14 in the European morning. The PBOC set the dollar's reference rate at CNY7.1415 (last week's range of fixings:  CNY7.1399-CNY7.1479). 
 

Europe

The only high-frequency economic data point of interest this week is the flash PMI for the eurozone and UK. Economic impulses from the eurozone remain faint and modest deterioration would not be surprising. The UK is faring better, but after last week's labor market update, July CPI, June GDP and July retail sales, the PMI is unlikely to have significant impact on expectations for next month's Bank of England meeting. The swaps market has about a 1-in-3 chance of a cut in September. A cut is fully discounted for the November meeting, and the swaps pricing is consistent with about a 70% chance of a another cut in December, the least since August 1. 

The euro finished last week slightly above $1.1025 to post its best settlement since January 1, according to Bloomberg. The euro rose 1% last week. It was the third consecutive weekly advance. It was more a case of a weaker dollar than positive impulses from the euro area. There are 765 mln euros in options that expire at $1.1090 today. The momentum indicators are getting stretched, but the upside may not have been exhausted. Still, the option strike may be too far away. The single currency pushed against $1.1050 in early European turnover before stalling. Initial support is seen in the $1.1020-30 area. Sterling settled last week at $1.2945, the highest close since the year's high was recorded on July 17 (~$1.3045). It had been encountered resistance around $1.2870 and the broad dollar weakness help overcome it. That area may act as support now. It reached $1.2975 in early European turnover. The momentum indicators are trending higher, but not as extended as the euro's. It has potential to reach a new high for the year shortly. Nearby support is support is seen around $1.2940-50. Speculators in the futures market cut sterling longs for the third week for cumulative liquidation of ~95k contracts (~$7.6 bln notional value). 
 

America

The July Leading Economic Indicator Index is kicks off what is a quiet US data week. Wednesday's preliminary revisions to the nonfarm payroll data touted by those who believe the US is already in a recession. The NBER post-dates recessions but does not stick to the two-consecutive quarterly contractions rule-of-thumb definition. So theoretically, with Sahm's rule violated (by her reckoning) and the contraction in industrial output, it is possible. However, with the economy seemingly growing at or above what the Federal Reserve estimate is trend growth (non-inflationary pace 1.8%), it is difficult to see the broad contraction that is associated with a recession. Note that after the weaker than expected housing starts data before the weekend the Atlanta Fed's GDP tracker was revised to 2.0%. The resilience of the US consumer, (better expected retail sales) and the five-week low in weekly jobless claims point to the extension of that period between the end of the business cycle and a recession, a soft-landing in the vernacular. In his Jackson Hole speech (10 am ET, Friday, August 23), Fed Chair Powell is likely to play cast the coming rate cut not as an easing of monetary policy but a less restrictive stance as the economy is no longer overheating. He previously swatted away questions about stagflation, opining that neither element of the description was valid. Price pressures are moderating, and the economy is not stagnant. Canada's highlight this week is the July CPI report. Both the headline and underlying measures are expected to soften. The report will underscore expectations of another rate cut at the September 6 Bank of Canada meeting. After it, there are two meeting in the remainder of the year, and the swaps market expects a cut at both. However, with the Fed most likely beginning its easing cycle next month, peak divergence may be passed. Mexico reports June retail sales tomorrow. The data are typically not market-movers, and it may be doubly true now with Q2 GDP already out. The most important report this week is the CPI for the first half of August. The monthly headline measure has been rising but the core is still easing, though at a slower pace. 

The US dollar fell to almost CAD1.3675 before the weekend, its lowest level in about a month. It tested support near CAD1.3660 today, but the key to the medium-term outlook is CAD1.3600. Recall that after the soft June US CPI on July 11, the greenback slipped below there but it proved a false break. Subsequently, US dollar rebounded to new highs for the year. The momentum indicators are moving into oversold territory, which warns that the CAD1.3600 area is likely to hold. Meanwhile, the US dollar slipped to a marginal new two-week low against the Mexican peso near MXN18.60, which is also the (38.2%) retracement of the rally from the July 12 low (~MXN17.60). It is largely confined to the pre-weekend range so far today. The momentum indicators suggest there is still some downside potential. Initially, the MXN18.40-50 area may offer support. In the futures market, the speculative net long peso position is at its smallest for the year (~50k contracts, ~$1.35 bln notional value). 

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