Equities bounce back, and the Canadian Dollar recovers from the drop on us threat of 50% tariffs

The US Dollar is mostly softer against the major and emerging market currencies. The yen is an exception, and the market is pushing the dollar closer to the 40-year high recorded at the start of the month near JPY162.85. Oil prices are firm as the de-escalation efforts are proving tricky. Meanwhile, reports that Beijing is supporting the equity market by mobilizing state-backed investors may have encouraged bargain hunting after the tech and chip pullback. 

Late yesterday, the US threatened 50% tariffs on some Canadian goods for actions it claims discriminate against US companies. At first the Canadian dollar extended yesterday’s losses, but it has recovered and is now a little higher on the day. The new UK government’s honeymoon may be short-lived following today’s report that the former government borrowed more than forecast in the first three months of the new fiscal year.

Prices 

G10

True to the recent pattern, the rise in short-term US rates yesterday saw the euro sold to four-day lows slightly above $1.14, where large options expire today and tomorrow. It has stabilized today alongside the US two-year yield. Still, the euro has not gone anywhere. While $1.1400 held, it has not been above $1.1430. Yesterday’s high was about $1.1450 and last week’s high was closer to $1.1485. 

The dollar reached a seven-day high against the yen near JPY162.60 yesterday and crept up to JPY162.70 today. The 40-year high was recorded on July 1 around JPY162.85. Finance Minister Katayama warned last week that officials are prepared to intervene at any time if necessary. Tokyo is keen to come up with ways that will encourage Japanese savers and pension funds to boost domestic investments, though the weekly MOF data suggests this is already taking place. 

Sterling appeared to fall victim to buy the rumor, sell the fact, as Andrew Burnham replaced Keir Starmer as UK Prime Minister. There was little reaction to the appointment John Healey, former defense secretary, as Chancellor of the Exchequer. Sterling extended its pullback after approaching $1.3560 in the middle of last week and fell slightly below $1.3415 yesterday. Soft employment data today has left sterling in about a quarter-of-a-cent range, mostly above $1.3425. 

From the late June low for the year, the Canadian dollar rose by about 1.7% through early yesterday before retreating in North America. It was already falling before the softer than expected June CPI (-0.4%, matching the largest monthly decline since the end of 2022). The combination firmer US two-year yields and softer Canadian rates saw the differential widen by nearly seven basis points, the biggest one day jump in two months weighed on the Loonie. The US dollar recorded a bullish outside up day but trading on both sides of last Friday’s range and settled above Friday’s high. The US has threatened a new 50% tariff on some Canadian products under old Smoot-Hawley legislation, and the greenback initially extended yesterday’s gains to CAD1.4085, but the new levy does not come into effect for 30 days, ostensibly giving negotiators time.  The greenback was sold to about CAD1.4055 in Europe. The intraday momentum indicators leave room for some additional but limited US dollar losses. Nearby support is around CAD1.4040. The latest Commitment of Traders report, which covered the week through last Tuesday, showed non-commercials (speculators) in the CME futures had amassed the largest net short Canadian dollar position since early 2025. 

The Australian dollar posted an outside up day yesterday and pushed a little above of last week’s high near $0.7020 today. The $0.7025 area corresponds to the (38.2%) retracement of the Australian dollar’s downtrend since the year’s high on May 6 (~$0.7280). A move above there may target the $0.7070-90 area. Still, today’s gains have left the intraday momentum indicators over-extended, warning of the risks of chasing it higher in early North American turnover. 

EM

US and Mexico hold the third round of USMCA talks today. Yesterday, the peso fully recouped its pre-weekend loss. The 0.65% gain meant it was the best performing emerging market currency, squeezing ahead of the South Korea won. Latam currencies were four of the top five emerging market currencies yesterday. The greenback peaked near MXN17.5540 yesterday and fell to almost MXN17.41. Follow-through selling today pushed it to about MXN17.3770. Last week’s low was about MXN17.3575. 

The offshore yuan edged higher yesterday and approached last week’s best level. The US dollar reached CNH6.7815 before the weekend and reached CNH6.7660 yesterday. It slipped to CNH6.7635 today, a new low for the month. The three-year low was recorded on June 17 (when the Fed delivered its hawkish hold) near CNH6.7540. The PBOC set the dollar’s reference rate slightly lower after setting it higher for the previous two sessions, (the first back-to-back increase this month). 

The Indian rupee rose by about 0.2% today, its biggest gain in about two weeks. Reports suggest the central bank intervened yesterday, but not today. Steadier oil prices today may have arrested the rupee’s slide, which approached the record low yesterday. The dollar settled near INR96.24 today, compared with about INR96.28 before the weekend. 

Other markets

Equities are firmer today. MSCI’s Asia Pacific Index fell nearly 3.8% last week and slipped further yesterday. The large bourses in the region rallied today but Hong Kong and India. China’s CSI 300 was aided by reports that large state-backed investors, insurers, and asset managers were supporting the equities. It rose by a little more than 3%. The Nikkei 225 rose 3.25%, while South Korea’s Kospi gained 3.5% and Taiwan’s Taiex jumped 4.2%. Europe’s Stoxx 600 eked out less than a 0.1% gain last week before falling 0.3% yesterday. It is up 0.45% in late morning turnover. US index futures are trading higher, with the Nasdaq up around 1.3% and the S&P 500 about 0.5% better. 

Benchmark 10-year yields were firmer yesterday. The 10-year Gilt yield jumped eight basis points as investors balked at the new prime minister’s effort to secure “flexibility” within the existing fiscal rules. The 10-year Gilts yield ended June near 4.75% and reached 5.03% yesterday, its highest level since May 19. It is a little softer today. Most European yields are slightly firmer. The 10-year US Treasury yield rose almost six basis points to poke above 4.60% but is near 4.59% now. 

Gold remains pinned its recent trough, and for the third consecutive session yesterday, it traded on both sides of $4000. It is trading firmer today and reached $4084. Last week’s high was near $4102. Silver recorded the year’s low before the weekend (slightly below $54.80). It traded higher yesterday and reached nearly $57.50. Follow-through buying today lifted silver to almost $59.25. The 20-day moving average is ~$58.75 and silver has not settled above it in two months. 

The escalation and widening of the Middle East war over the weekend sent September WTI to $84.60 early yesterday, its best level since June 11. Talk of a new ceasefire proposal saw oil pare its gains and recorded a low in early North American trading yesterday near $79.60. Still, with the lack of visibility and some general skepticism. It is trading in around $1 on both sides of yesterday’s settlement (~$82.50).

Data

Last week, the -0.2% decline in US June retail sales, excluding auto sales, overshadowed new that the July Philadelphia Fed’s business outlook soared to 41.4 from 10.3. That was its best level since late 2021. Gains in new orders and unfilled orders are promising. Today, the Philly Fed’s July non-manufacturing survey is due. It likely rebounded from the -25.8 reading in June, weakest since May 2025. Friday’s preliminary July PMI (expected to show slight improvement) is the data highlight of the week. 

Mexico reports May retail sales today. It is unlikely to match the 0.8% jump in April, which was the strongest since January. In the first four months of the year, Mexico’s retail sales rose by an average of 0.3% a month. In the Jan-Apr 20025 period, retail sales rose by an average of 0.2% a month. 

Germany’s ZEW investor survey showed a continued recovery in July from the setback seemingly spurred by the Middle East War. Expectations jumped to 59.6 in January from 45.8 in December 2025. That was the highest since July 2021. It had fallen to -17.2, the weakest since the end of 2022 in April. It reached 26.3 in July, up from 10.5 in June, and its best since the Middle East war began. The assessment of current conditions improved in each of the first three months of the year deteriorated in each month in Q2. However, it has begun Q3 with a modest improvement. It rose to -77.6 in July from -81.0 in June, which is also where it finished 2025. 

The UK reported government finances and the provided fresh data on the labor market today. The government finances that the Burnham government is inheriting leaves little room for fresh fiscal initiatives if former Chancellor Reeves’ fiscal rules will be followed. The UK borrowed more than forecast in the first three months of the new fiscal year, and the deficit was GBP2.7 bln more than the Office for Budget Responsibility had forecast in March. The labor update was mixed. Bonus payments saw the average weekly earnings (3-month, year-over-year) slip to 4.3% from 4.4%, but excluding bonuses and private earnings (excluding bonuses) were steady at 3.4% and 2.9%, respectively. The number of employees on payrolls slipped by 4k in June and was the fourth decline in past five months. The ILO measure of unemployment was steady at 4.9%. The claimant count rose by 6.7k in June compared with an average monthly increase of 12.3k through May. In the H1 25, the claimant count fell by an average of 4k a month. The BOE meets next week but the chances of a change in policy are remote. The swaps market has about a 60% chance of a hike discounted at the following meeting in September.