Greenback edges higher

In the relatively quiet conditions that have prevailed this week, the US dollar is trading with a mostly firmer bias. Rising US rates amid the technically oversold short-term market are lending the greenback support.  The dollar remains firm against the yen, even though the Deputy Governor of the BOJ seemed to support speculation of a rate hike next month. US rates seem to fit better with changes in the exchange rate than Japanese rates. 

It appears, unsurprisingly, that Russia and China have formally rejected adhering to the US economic chokehold on Iran.  Without their participation in “Operation Economic Outcast”, the US policy seems to be a way to disengage with making such a declaration.  If it is retreating from the war in Iran, it is threatening to escalate the trade war with Canada. Trade Representative Greer has threatened banning some Canadian imports to the US.  Given the asymmetries, the Canadian dollar has held its own so far this week. It is off about 0.25%, a middling performer in the G10. 

Prices

G10

The euro was sold to a five-day low yesterday near $1.1640. That is about the midpoint of the euro’s rally since the US Treasury announced it would double the bond buyback. It has not traded above $1.1660 today and it has slipped through yesterday’s low in the European morning by a few hundredths of a cent. The 200-day moving average is around $1.1635 and the (61.8%) retracement is near $1.1625.  

The dollar held below Tuesday’s high (~JPY159.50) against the yen yesterday but still posted its highest settlement in six sessions (~JPY159.30).  It is has taken out yesterday's high marginally today in Europe. The five-day moving average crossed above the 20-day moving average for the first time since the last July intervention. We continue to suspect the market wants to challenge the Bank of Japan and the US Treasury despite the increased recognition that the BOJ may hike rates twice before the end of the year.  Higher oil prices an and higher US yields could provide macro cover. The high since the intervention was on August 18 slightly below JPY159.80. 

Sterling fell by about 0.4% yesterday, one of its biggest losses in a month. It reached a five-day low slightly below $1.3585. That nearly met the (61.8%) retracement of the gains since the US Treasury’s announcement about bond buybacks. The losses are being extended today to almost $1.3570. The next technical area of support may be $1.3335-60.  Options for GBP840 mln at $1.3550 expire today. 

The Canadian Dollar remains under pressure since the dramatic escalation in trade tensions with the US. Consistent with our correlation work, the weakening of the Canadian dollar has taken place as Canada’s discount to US two-year rates widened to 128 bp yesterday, the most in nearly three weeks. The US dollar traded to almost CAD1.3895.  It has held below there today, but there is no top in place. We have noted initial resistance near last week’s highs (~CAD1.3910).  Above there, we are looking at the 20-day moving average (~CAD1.3920) and then the CAD1.3950-60 area. US Trade Representative Greer is threatening to ban some Canadian goods as part of the trade conflict. 

The Australian Dollar reached nearly $0.7190 yesterday, its best level since June 1. It stalled, and what appeared intraday profit-taking sent it back to $0.7165. The five-day moving average is there, as well, and the Aussie has not closed below it for two weeks. It is firm as the yesterday’s CPI data and today’s reported household spending boosts expectations of another rate hike. 

EM 

The dollar traded on both sides of Tuesday’s range against the Mexican peso yesterday. Although it settled within the range, the risk still seemed to be on the upside.  The momentum indicators are oversold after falling for the past five consecutive weeks. It is difficult to quantify, but given the US-Canada blow-up, the odds that USMCA does not survive would have had to increate.  The dollar has edged up a little above MXN16.99 today. A move above MXN17.00 runs into last week’s high slightly below MXN17.08. The 20-day moving average is closer to MXN17.10 and the MXN17.1365 area is the (38.2%) retracement of the greenback’s losses since the late July high (~17.54). 

After it settled below CNH6.72 on Tuesday for the first time in 3 ½ years, the dollar recovered and settled firmer against the offshore yuan, near CNH6.7225 yesterday.  It is consolidating quietly today, straddling CNH6.72.  The firmer dollar seemed to incline the PBOC to raise the fix today and it did (CNY6.7840 vs CNY6.7829 yesterday). 

The Indian rupee slipped as the market re-opened from yesterday’s holiday.  Higher oil prices and a broadly firmer US dollar weighed on the rupee.  The rupee’s gain on Tuesday (~0.35%) was the largest in nearly a month. The dollar reached almost INR95.39 on Tuesday and rebounded to INR95.56 today. Last week’s high was a little over INR95.76. 

Other markets

Higher rates and oil seemed to deter US equity investors ahead of Nvidia’s earnings. But its earnings seem to help some tech stocks in a mixed Asia Pacific performance today. South Korea’s Kospi 1.5% gain was notable. It was among the strongest in the region despite the back-to-back rate hikes by the central bank (the base rate is now at 3%). The won barely rose. Europe’s Stoxx 600, light on technology, is off 0.4% in the European morning, which if sustained would be the largest loss in a week.  Nasdaq futures are up around 1%, while the S&P 500 futures are up a little less than half as much. 

Benchmark 10-year yields rose and settled mostly 3-5 bp higher in the US and Europe yesterday. Rates are mostly firmer today.  In Europe, the increase is 1-2 bp, while the 10-year US Treasury yield is up 2 bp and to nearly 6.67%. 

Gold’s five-day rally ended with a bang yesterday, and the yellow metal gave back a little more than the past two days of gains. It fell by 1.3%.  It is trading with a heavier bias today and has fallen to a four-day low, slightly below $4579. If the leg up in gold, like we saw in the currencies began with the US Treasury’s buyback announcement, the first corrective target may be near $4555. It looks like silver hit a brick wall near $70.  It recorded an inside day yesterday but looks vulnerable, though it remains within Tuesday’s range (~$67.45-$69.95). 

October WTI recovered a dip below $80, its first since August 14 to record session a session high near $83.30 around midday in NY.  It has held above $80 today and is hovering near $82 ahead of the North American open. Last week’s high was almost $87.70. 

Data

The US reports the advanced goods trade deficit today, retail and wholesale inventories, weekly jobless claims, and the Kansas City Fed’s August manufacturing survey. Because of the front-running of US tariffs last year, the improvement in the US trade balance is distorted.  Still, in H1 26 the overall US trade deficit was about $534.8 bln compared with $716.6 bln in H1 25 and $558 bln in H1 24.  Price changes also impact these nominal figures.  The inventory data tend not to elicit much of a market reaction, but they are inputs into GDP forecasts as is the real trade balance. Recall that in Q2, net exports subtracted about 1% from GDP and inventories were a 0.7% drag. Weekly initial jobs claims show the continued resilience of the labor market.  The four-week moving average fell five weeks in a row through the end of last month and has risen slightly to stand at 204k in mid-August.  It likely rose again as the dip below 200k in mid-July drops from four-week period. 

Canada reports the results of its June establishment employment survey.  The market seems more responsive to the household survey that is reported in a timelier fashion.  StatCan will provide an estimate of the Q2 current account balance ahead of tomorrow’s first estimate of Q2 GDP.  Canada’s quarterly current account has been in deficit since Q2 22 and looks likely to have swung into surplus in Q2 26.  The economy contracted in Q4 25 (1.0% annualized) and Q1 25 (0.1% annualized).  The economy is expected to have recouped the lost ground in Q2.  The median forecast in Bloomberg’s monthly survey is for 3.2% growth, and the weekly survey produced a median forecast of 3.4%.  Still, the escalating trade war with the US will most likely have a negative impact in Q4.  

Mexico reports its July trade balance today.  Mexico’s trade balance is a notable bright spot for the economy.  The trade surplus in H1 26 was about $9.86 bln compared with a surplus of $1.43 bln in H1 25. Exports have risen by a 10.7% in H1 26 and imports have risen by 7.7%.  Yesterday, the central bank increased this year’s GDP forecast to 1.5% from 1.1% and shaved next year’s CPI projection to 2% from 2.1%.

The eurozone reported M3 money supply rose by 3.4% year-over-year in July from 3.3% in June. It is the fastest growth since June 2025.  Lending to households rose 3.1% year-over-year, up from 3% in June.  Lending to non-financial firms accelerated to 4.4% year-over-year from 4.0%. 

Yesterday’s firmer than expected Australia’s CPI has been followed by news today that higher rates have not deterred Australian household spending. It rose 1.1% in July (vs. the median forecast in Bloomberg’s survey for a 0.3% increase, and the June series was revised to 1.0% from 0.8%). Even though private capex unexpectedly fell in Q2 (-3.6% vs. the median forecast in Bloomberg’s survey for a 0.8% rise), the Q1 increase was revised to 6.9% from 6.5%. rose 0.8% in Q2 after surging 6.5% in Q1.  The takeaway is that the futures market is now discounting about almost a 50% chance of a hike next month compared with slightly more than 10% at the end of last week.  A hike before year-end is fully discounted now.  At the end of last week, pricing was consistent with almost a 60% chance. 

For the first time in three weeks, Japanese investors sold foreign bonds last week.  The JPY1.98 trillion sales were the largest weekly liquidation since early April and the start of the new fiscal year. Japanese investors also sold foreign stocks for the first time in three weeks. The nearly JPY870 bln sales were the most since early June. 

China reported July industrial profit growth slowed to 11.2% year-over-year in July from 15.1% in June. It was the third consecutive month of slowing on a year-over-year basis. The aggregate figures conceal the divergence between the strong performance of the high-tech sector, which accounts for more than half of this year-to-date growth.