All eyes on Warsh

The G10 currencies have been in a relatively narrow range this week and this persists ahead of the new Fed chair’s speech at Jackson Hole today. Warsh is an awkward position. First, the main thrust of his brief tenure that the evolution of central banking in the past couple of decades has been misguided, and that the emphasis on forward guidance and transparency has distorted the signal from the millions of market participants.  Second, he has to contend now with the Treasury Secretary seemingly pushing in the other direction. Bessent is doubling down the bill issuance and bond buybacks that he was critical of Yellen and Biden for previously. He claims to know better than the market where long-term yields ought to trade. 

The escalating trade war between the US and Canada weighed on the Canadian dollar this week. It is off about 0.65%, the heaviest of the G10 currencies this week. The Australian dollar is the strongest, up about 0.40% encouraged by the swing in sentiment toward another rate hike this year. Despite Japanese data that has seen the odds of a BOJ hike rise for next month and in Q4, the yen has been unable to find traction. It is off a little almost 0.5% this week, ahead of the North American session and is approaching its worst level since the intervention.  

Prices

G10

The euro has slowly bled lower this week. It has taken out the previous session’s low in the first four sessions of the week after stalling near $1.1710 following the US Treasury’s bond buyback announcement last week. The euro is trading marginally heavier today, but yesterday’s low remains intact (slightly below $1.1640). The euro held the 200-day moving average (~$1.1635) and steep trendline off the late July lows. Still, it looks vulnerable as the daily momentum indicators are only turning down. 

The dollar traded gingerly against the yen yesterday. Buying interest dried up after pushing above JPY159.50. It held above JPY159.25 in the NY afternoon. The greenback recovered, despite the firm Tokyo CPI, unexpected decline in the unemployment rate, and slightly higher odds in the swaps market for a hike next month. The US dollar rose to JPY159.70 in Europe. The post-intervention high was recorded last week near JPY159.80. 

Sterling recovered from a six-day low near $1.3570 as North American markets were beginning to open to reach a new session high slightly above $1.36 before European markets closed. It settled back within Wednesday’s range. It is trading uninspiringly in about a 20-tick range below $1.3600 today. It, too, looks vulnerable, as we head into next week, with the daily momentum indicators turning down in overbought territory. 

Despite the reported absence of talks between the US and Canada, and the US escalation threat (not just to tariff but to ban some Canadian goods), the Canadian dollar enjoyed a slightly firmer tone. The greenback held slightly below Wednesday’s high and settled near CAD1.3860. It is in a particularly narrow trading range today of a little more than 10-ticks. The US dollar slipped briefly below CAD1.3850 late in the Asia Pacific session but caught a better bid in Europe and recovered back to CAD1.3860. Options for a little more than $400 mln at CAD1.3875 expire today. Recall, the greenback settled around CAD1.3760 last Friday and opened in Asia Pacific on Monday near CAD1.3785. 

As the market sees a greater likelihood of another rate hike by the Reserve Bank of Australia, as early as next month, the Australian dollar’s uptrend since the end of June (~$0.6865) extend to slightly above $0.7200 today and traded at its best level since mid-May. The roughly four-year high was recorded in early May slightly shy of $0.7280. The Australian dollar is the only G10 currency that has risen against the US dollar this week. It has appreciated by about 0.35%. It is the fifth consecutive weekly gain and the 8th in the past nine weeks. 

EM 

The dollar traded firmly but quietly against the Mexican peso yesterday. It reached a six-day high near MXN16.9965, holding just below the MXN17.00 level. The greenback has edged higher each session this week after falling for the past five consecutive weeks. It is consolidating within yesterday’s range so far today. It is trading quietly between about MXN16.9590 and MXN16.9825. 

The dollar continues to grind in a narrow range against the Chinese yuan. This week it traded between about CNH6.7130 and CNH6.7265. The dollar settled near CNH7.7210 last week. Recall, it traded a narrow range around CNH6.75 for most of the first half of August. The PBOC set the dollar’s fix at its lowest level of the week today (CNY6.7811 vs. CNY6.7829 yesterday and CNY6.7817 last Friday). 

The dollar traded on both sides of yesterday’s range against the Indian rupee today and posted its lowest settlement in two weeks, near INR95.3850. It is the first advancing week for the rupee in three weeks and is slightly higher here in August, headed into the last session of the month on Monday. 

Other markets

Equities traded higher in the Asia Pacific region today, perhaps encouraged by the Nasdaq composite, which gapped higher yesterday after Nvidia’s earnings and solid close. It entered but did not close the gap created with the sharply lower opening on August 18. That gap extends to ~26626. The S&P 500 has a similar gap and the top of it is almost 7745. The S&P and Nasdaq futures are trading with a heavier bias. China and South Korea were notable exceptions among the large bourses in the Asia Pacific region and failed to participate in today’s advance. Europe’s Stoxx 600 is up a little more than 0.5%, which if sustained would be the largest gain this week. 

Benchmark 10-year yields mostly edged higher in Europe yesterday and the US Treasury yield rose 3 bp. Yields are higher today. The firm Tokyo CPI and lackluster two-year bond auction today saw the 10-year yield rise a little more than four basis points. It was practically flat on the week coming into today. European yields are 1-3 bp higher on the day and week. The 10-year US Treasury is slightly firmer but is down a little more than a basis point on the week. 

Gold recovered from a four-day low, slightly below $4566 yesterday. It bounced by about $50 before stalling. It consolidated in the NY afternoon above $4600. It is trading inside yesterday’s range. Gold settled near $4603 last week, and a higher close this week would be the fourth consecutive weekly advance. It would match the longest streak of the year. Silver is pushing above $70. It reached almost $71, its best level since June 17. It settled near $69 last week, and barring a reversal, is extending its recovery for the fourth consecutive week, as well. 

October WTI spent yesterday inside Wednesday’s range. It recorded the session high, near $83.25 in late NY turnover. It is consolidating quietly today, between about $82.55 and $83.80. It settled slightly above $87 at the end of last week.  

Data

As Fed Chair Warsh begins speaking at Jackson Hole today (10:00 am ET), preliminary benchmark revisions of the level of jobs in March 2026 will be announced and the University of Michigan’s final August consumer confidence will be reported. It seems unreasonable to expect the Warsh to be any more forthcoming about the outlook for Fed policy than he was at his first two press conferences. He is not waiting for the taskforces to complete their work before shifting gears. Warsh, however, is in an unenviable position of likely explaining to his colleagues and central bankers from all over the world that they have been moving in the wrong direction for the better part of the last couple of decades. The evolution has been toward greater transparency and visibility. Note, also the seeming contradiction between Warsh and Bessent. The Fed chair argues that the market’s signal, if it were focused on economic forces instead of the central banks’ reaction function, it would generate a more useful signal. The Treasury Secretary says he knows better than the market the “right” level of long-term interest rates and oil. 

Canada is expected to report a strong rebound in growth in Q2 after contracting in the previous two quarters. The median forecast in Bloomberg’s survey is for 3.4% growth at an annualized pace. The economy contracted by about 1% in Q4 25 and by a little more than 0.1% in Q1 26. If it is reported as expected, it will be the strongest growth since Q1 23. However, the escalating trade war can be a serious headwind, even with stepped up government support for the targeted sectors. The swap market has slashed the odds of a Bank of Canada rate hike this year from almost 85% at the end of last week to slightly less than 50% now. 

Japan machine tool orders continue to surge. The surge began last September and no month this year has seen less than 24% increase year-over-year. The final July reading was confirmed at 50.4%. Domestic and foreign orders rose by a little more than 50%. However, both slipped last month. After jumping 28% in June, domestic orders pulled back 8.2% in July. Foreign orders rose 10.4% in June and slipped 3.8% in July. Japan also reported that the unemployment rate unexpected slipped to 2.4% in July from 2.5%. However, with an eye toward next month’s Bank of Japan meeting, Tokyo’s August CPI was the most important data point today. August CPI ticked up but needs to be placed in the context of the previously announced downward revisions to the July series. The headline pace stands at 1.9%. June’s 2.0% rate was revised to 1.8%. The core rate is at 1.8% after June’s 1.7% (revised from 1.9%). The swaps market is discounting about an 85% chance of a hike next month, up a little on the week and more than double the chances since the end of last month. About 16 bp of a Q4 hike is discounted, which is also up slightly on the week, and compares with almost 4 bp at the end of last month.