The US dollar is narrowly mixed against the G10 currencies. The dollar bloc, Japanese yen, and Swiss franc are sporting slightly softer profiles, while the European currencies enjoy a firmer today. There is more than 3 bln euro in options struck at $1.10 that expire today that still seem to be in play. And there is a large option at GBP1.30 that expires Monday. The ECB's rate decision and President Lagarde's press conference are the highlights from the remainder of the session. Meanwhile, the US PPI will help economists finalize forecast for the PCE deflator, and the US Treasury will sell $22 bln of 30-year bonds after strong demand yesterday's 10-year note sale and Tuesday's three-year note offering. The market has continued to pare speculation of a 50 bp Fed cut next week. 

Yesterday's strong US equity market gains helped lift Asia Pacific bourses today. Japanese, South Korean, and Taiwanese indices rallied more than 2% today, while Australia, New Zealand, and India up more than 1%. Chinese markets were the notable exception extended their recent losses. Europe's Stoxx 600 is up almost 1%, which if sustained, would be the largest gain in almost a month. US index futures are firmer. Benchmark 10-year yields are 1-2 bp higher in Europe, while the 10-year US yield is up for a second day after falling for the previous seven session. It is near 3.68% after finishing last week slightly below 3.71%. The two-year yield is about 3.67% a couple basis points higher on the week. Gold is trading quietly in a $2511-$2522 range. After falling to almost $65 a barrel on Tuesday, the low for the year, October WTI steadied yesterday and is firmer today, pushing back above $68. Initial resistance is seen in the $69-$70 area. 

Asia Pacific

Many observers have been anticipating higher rates in Japan and/or the BOJ's intervention to support the yen would prompt Japanese investors to repatriate funds. Some even suggested that the intervention was successful because Japanese institutions were doing the same thing as the BOJ, i.e., buy yen. Yet, to the contrary, the weekly data suggests Japanese investors bought about JPY6.6 trillion (~$45 bln) of foreign bonds last month. This appears to be a record for a four-week period. The weekly report covering last week suggests the appetite for foreign bonds may wane into the end of the fiscal year that ends in a few weeks. However, last week the demand for foreign equity outstripped the small sales of foreign bonds. Separately, Japan reported its first decline in the year-over-year rate of producer prices. They rose 2.5% in the year through August, down from 3.0% in July. There is little policy implication. 

The dollar recovered from the JPY140.70 low set yesterday's local session, a new low for the year. It returned to session highs near JPY142.50 after slightly larger rise in the core CPI (0.3% vs. 0.2%) encouraged the market to pare the chances of a 50 bp Fed rate cut next week for fourth time in five sessions, and to the lowest since late July. The US 10-year yield rose for the first time this month. The dollar settled slightly above Tuesday's low (~JPY142.20). Follow-through buying today lifted the greenback to JPY143.00. A close above JPY144 is needed to boost the confidence that a bottom is being forged, Also, the yen's strength did not spur the consternation and market disruption experienced in July and early August. The Australia dollar rose for example, as did the Mexican peso. US stocks rose. Also, as you would imagine, yen vol remains elevated, with the three-month benchmark near 11.8%. The 100-day average is a little below 10% and the 200-day average is closer to 9.5%. Yesterday's range in the Australian dollar was largely set during a few hours in the North American morning. The high near $0.6675 was set in early turnover and the low was set around $0.6620) about 90 minutes after the US CPI, a new low since August 16. It proceeded to rebound smartly and made it back to almost to the highs in late yesterday and Bloomberg says it made a new high by 1/100 of a cent. The was impressive but it stalled ahead of yesterday's high (slightly above $0.6675). A close above it would have been a more compelling technical signal. The Aussie reached a four-day high today of $0.6695 but has stalled and is hovering near $0.6675 in the European morning. The dollar snapped a three-day advance against the offshore yuan yesterday. After falling to CNH7.1075 in the local session yesterday, the greenback rose to CNH7.1325 before consolidating for the remainder of the session. It is trading quietly today in a CNH7.1220-CNH7.1325 range. The PBOC set the dollar's reference rate at CNY7.1214 (CNY7.1182 yesterday). Itis the highest fix in a couple of weeks but tight against expectations. 

Europe

The European Central Bank is front and center today. It will do three things. First, it will cut rates for the second time in the cycle. The deposit rate, the bottom of the policy corridor, will stand at 3.50% at the end of the day. Second, is a technical move. The ECB will reduce the spread between the floor and the main refinancing rate, which is currently 50 bp. At the end of the day, it will be 15 bp. Third, the staff will update its economic projections. Recall that in June, the ECB forecast 0.9% growth this year, 1.4% next year, and 1.6% in 2026. The forecast for 2025 and 2026 may be reduced. In June, the ECB saw CPI at 2.5% at the end of the year. In August, the CPI had risen 2.2% year-over-year. The temptation would be to reduce the forecast, but in the last four months of 2023, the eurozone's CPI was flat. This will make for a difficult comparison this year. In June, the ECB had CPI falling to 2.2% next year and 1.9% in 2026. 

The euro came within a couple hundredths of a cent of $1.10 yesterday, where 3.3 bln euros in options expire today shortly after President Lagarde's press conference concludes. The $1.0990 level corresponds to the (50%) retracement of last month's rally. The next retracement (61.8%) is near $1.0940. The euro is holding within roughly a $1.1005-$1.1025 range today. The momentum indicators are still falling, and the US-German two-year interest rate differential appears to have begun finding support. The takeaway:  Speculators in the futures market have amassed their largest net long euro position in January. The buying spree leaves the euros in weak hands. There is scope for additional losses, but the pullback is getting mature, and the risk-reward may change on the next leg down. For its part, sterling posted an outside down day by trading on both sides of Tuesday's range and settling below its low. That might not be surprising given the news that the economy unexpectedly stalled for the second consecutive month in July. However, sterling trade was trading higher on the day before the US CPI, and after which it fell the better part of a cent to comes within a couple hundredths of a cent of $1.30. Options for GBP1.25 bln expire there on Monday. It recovered to $1.3050 by late in the North American session. Sterling is in a narrow range today, mostly between $1.3035 and $1.3055. The five-day moving average slipped below the 20-day moving average for the first time in nearly a month. A break of $1.30 could spur a quick move toward $1.2965, the halfway mark of last month's rally and toward the next retracement (61.8%) is slightly below $1.29. 

America

Following yesterday's CPI, the US reports August PPI today, and with it in hand, economists will fine-tune forecasts for the PCE deflator, the inflation measure the Fed targets. The weekly jobless claims report may draw some attention even though the national employment reported was out last week and it is next week's claims that that cover the same week that the survey is conducted for the next nonfarm payroll and household surveys. Still, the four-week moving average has fallen for four weeks and at 230k, it is the lowest since early June. The US also reports the August federal budget deficit. Through July, nine months into the fiscal year, the US deficit is running slightly below last year's at $1.13 trillion (vs. ~$1.19 trillion). Yet, the difference is minor, and the improvement may be fleeting. The median forecast in Bloomberg's survey is for a $276 bln deficit in August (a surplus of about $89.3 bln was recorded in August 2023). 

The US dollar reached CAD1.3625 yesterday, its highest level since August 21 and the (61.8%) retracement of the losses from the August 15 high (~CAD1.3740) to the late August lows (~CAD1.3440). Sellers greeted it and the greenback fell to near CAD1.3565, which is holding so far today. A break of CAD1.3550 would have been a more convincing technical signal. Some pressure may have come from positioning around expiration of $1.3 bln of options at CAD1.3590 today. The session high was set in the Asia Pacific session near CAD1.3585 earlier today. Despite Mexico's Senate approving the judicial reform measure, the Mexican peso rallied 1.40%, the most in two-and-a-half weeks and that followed the peso's lowest settlement since last May on Tuesday. The dollar fell a little below MXN19.75 yesterday. The greenback's losses have been extended to a little below MXN19.72. There are options for almost $390 mln that expire today at MXN19.70. A break could spur a move toward MXN19.58 initially. Some narratives tried to link the peso's gains to the US debate, while it is possible, it ought not be exaggerated. The peso was sold for a couple of hours after the debate ended. US rates fell and rose, as did stocks on Wednesday and the US CPI spurred market gyrations as well. Latam currencies were three of the four top EM performers yesterday. 

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