Firmer US Rates Help the Dollar Steady

[Ben Graham]

Overview: After yesterday's decline following the CPI and jump in weekly jobless claims, the dollar has steadied today, even if the upticks are not so inspiring. US rates have steadied. The 10-year yield frayed the 4% threshold for the first time in five months but settled a little above it. Today it is a couple of basis points firmer around 4.04%. It is flat on the week. In the firmer US dollar environment today, the Canadian dollar is faring best, off less than 0.1%. The yen is the weakest of the G10 currencies, down about 0.5%, and the dollar is knocking on JPY148 (yesterday's high was around JPY148.15). Emerging market currencies are mixed. For the week, the JP Morgan emerging market currency index is up marginally for the first time in three weeks, while the MSCI emerging market currency index is up about 0.35% for its third consecutive weekly advance. 

The S&P 500 and Nasdaq have four-day advances on the line and are at record levels. The index futures are trading slightly softer. In the Asia Pacific region nearly allow the markets but China rallied. The Nikkei is at new highs, while Hong Kong, South Korea, Taiwan, and a couple of smaller markets rallied more than 1% today. However, Europe's Stoxx 600 is nursing a small loss, but it is up about 1% this week, its first weekly advance in three. Benchmark 10-year yields are 2.-4 bp higher in Europe and the rates are setting new highs for the week. A French downgrade by Fitch later today is still a reasonable possibility, though its premium over Germany is little changed on the week after yesterday and today's slight narrowing. Gold pulled back slightly (~0.2%) yesterday but has recovered today. The record-high was set Tuesday near $3675 and it is around $3645 now. October WTI approached last week's low (~$61.45) earlier today but found bids that lifted it back toward $62.85. It settled last week slightly below $62.00. 

USD: The Dollar Index posted a bearish outside down day by trading on both sides of Wednesday's range and settled below its low, but there has been no follow-through selling. It is little changed on the week. Last Friday, after the employment report, DXY settled near 97.77. The busy week ends quietly with the preliminary September University of Michigan survey. Bloomberg's survey expected a small decline in sentiment, but a slight improvement in the assessment of current conditions and expectations. Inflation expectations are expected to have softened. With preliminary benchmark job growth and the PPI and CPI behind us, the focus is squarely on next week's FOMC meeting. The implied year-end effective Fed funds rate has fallen from almost 3.75% before the August jobs report to about 3.60% after yesterday's CPI and the unexpected strong rise in weekly jobless claims to their highest level in four years (distorted, apparently by the Texas flood and perhaps the timing of the Labor Day holiday)  Assuming Miran's nomination is confirmed, there is some speculation that he may dissent in favor of a 50 bp move from what seems to be a consensus for a quarter point cut. It may play on concerns about the Fed's independence especially if the president can secure a majority of the Board of Governors. The Justice Department is seeking an appeals court decision by Monday to stay the decision that is allowing Governor Cook to remain in office while her legal appeal runs its course. There is increased recognition that a majority of governors could also influence the selection of the regional Fed presidents who need to be reconfirmed by next March. Recall that both Governors Waller and Bowman abstained in the board's confirmation of Chicago Fed President Goolsebee. 

EURO: The euro posted a bullish outside up day yesterday. It edged a couple of hundredths of a cent higher today to almost $1.1750 before sellers emerged and pushed it back below last week's settlement slightly below $1.1715. If it closes above there today, it will be the fifth weekly advance in the past six weeks. Although the French 10-year premium over Germany is virtually unchanged compared with the end of last week and the week before (~ <80 bp), there is risk that Fitch will downgrade France later today from its current AA- status. Fitch is also reviewing Portugal's A- rating, but it has a positive outlook. S&P upgraded Portugal last month. Hardly a surprise, the ECB maintained a steady policy yesterday. If its easing cycle is not done, it is one cut away. The swaps market has about 10 bp or about a 40% chance of another cut next year discounted. The staff forecast adjusted lifted this year and next year's inflation forecasts and shaved 2027 projection. This year's CPI is now seen at 2.1% (from 2.0%). Next year, it is projected to be 1.7% (from 1.6%). The CPI forecast for 2027 was shaved to 1.9% (from 2.0%). This year's growth was revised to 1.2% from 0.9%, which seems optimistic, while next year's GDP forecast was pared to 1% (1.1% previously. The 2027 GDP was left unchanged at 1.3%. 

CNY: The dollar had forged a near-term shelf near CNH7.1135. The broad setback in the dollar yesterday pushed the greenback marginally lower to CNH7.1120 almost after it reached the CNH7.1260 area. It is trading inside yesterday's range today. The PBOC has continued to guide the dollar lower. On a weekly basis, the fix has only risen in three weeks since mid-May. The PBOC set the dollar fix at CNY7.1019 (CNY7.1034 yesterday). Some observers believe the PBOC is gradually moving toward 7.0%. While that is the direction, the target seems to be a matter of speculation rather than a signal from officials. Separately, from May's low, the CSI 300 rallied almost 30%. August lending figures were released and new yuan loans and aggregate financing improved sequentially, In the year-to-date, through August aggregate financing is up about 21% from August 2024. 

JPY: The dollar reversed lower against the yen yesterday. It first rose to a three-day, slightly above JPY148.15. It reversed lower to straddle the JPY147 area in the North American afternoon, which coincides with the (61.8%) retracement of the rally from Tuesday's low around JPY146.30. The dollar recovered today and has returned to the JPY148 area. Since August 1, the dollar has not settled below JPY146.90 or above JPY148.80. Japan reported its final July industrial output earlier today, trimming the initial 1.6% decline to -1.2% which reversed most a little more than half of the 2.1% gain in June. On average, it rose by 0.2% a month in the Jan-July period. In the first seven months of last year, it averaged a 0.3% decline. Next week, Japan reports August trade balance. It is likely to be in deficit for the fifth month this year. It also reports August CPI, but the signal from the Tokyo figures out a few weeks ago points to a softening toward 2.8% (from 3.1%), which would be lowest since last October. The BOJ meets next week but it is highly unlikely to do anything. The swaps market has about 15.5 bp of a hike discounted for this year, up roughly 3.5 bp this week but still slightly less than at the end of August. 

GBP: Sterling posted an outside upside yesterday. It initially slipped to a three-day low near $1.3495 but was lifted by the broad dollar sell-off to almost $1.3585. Tuesday's high was about $1.3590, and the high from the second half of July and again near mid-August was almost $1.3600. Barring a settlement above there today, it will be the fifth consecutive week that sterling finished with a $1.35-handle. Sterling has not traded above $1.3600 since mid-July. The UK's economy stagnated in July after growing by 0.4% in June. Industrial tumbled an expected 0.9% while services eked out a 0.1% gain. Construction surprisingly rose 0.2% but the trade deficit unexpectedly rose. Weak growth exacerbates Chancellor Reeve's fiscal challenges. Before the Bank of England meets on September 18, the UK will provide an update of the labor market, which has been slowing, and August CPI. The UK has the highest consumer inflation in the G10 at 3.8% in July. There is practically no chance of a change in policy by the BOE. The swaps market has a little less than 40% chance of cut discounted for the end of the year. Back in late April/early May, the swaps market implied a year-end rate about 3.50%. Now it is slightly above 3.87%. 

CAD: The greenback rose to CAD1.3890 yesterday, its best level since August 22 and Powell's speech at Jackson Hole. It reversed and was sold to almost CAD1.3825. This met the (38.2%) retracement of the rally from the August 29 low near CAD1.3725. The US dollar did not close below Wednesday's low (~CAD1.3830), which may minimize the damage for technical purists. It settled at CAD1.3830 last week. The greenback is firmed but holding below CAD1.3850 so far today. Canada’s July building permits and Q2 capacity utilization rate on tap for today are hardly the stuff that moves the exchange rate. The key is still the overall US dollar direction. The Bank of Canada meets a few hours before the FOMC meets and it will likely deliver another 25 bp rate cut. It cut twice in Q1 but has been steady since with its overnight lending rate at 2.75%. Disappointing Q2 GDP and August jobs data spurred the speculation of a rate cut. The August CPI will be reported the day before the Bank of Canada meets. The swaps market has about a 65% chance of another cut before the end of the year. 

AUD: The Australian dollar extended its advance to a new high for the year near $0.6665 yesterday and edged a little higher to almost $0.6670 today before steadying. It has risen by about 3.7% since before Fed Chair Powell spoke at Jackson Hole on August 22. It is the strongest currency in the G10 over this period. It also outperformed all of the emerging market currencies as well. Some might link it to the strong rally in Chinese equities. The rolling 30-day correlation of differences is near 0.40 now up from less than 0.10 on August 21 and there was an inverse correlation from late May through late June. Initial support is seen around $0.6625. This is the third consecutive weekly gain for the Aussie, its long streak since April-May. Next week's data highlight is the August jobs report on September 18. The 60.5k increase in full-time jobs was the most since February 2024 and since then implied year-end rate in the futures market has risen by around a dozen basis points to 3.30%. 

MXN: Mexico's industrial output tumbled by 1.2% in July (median forecast in Bloomberg's survey was for a 0.2% decline) and adding insult to injury, June's 0.1% decline was revised to -0.3%. This would seem to boost confidence that Banxico will cut rates again at the end of the month. The weaker dollar, however, was a more important driver of the exchange rate and it was sold to a new low for the year near MXN18.4525. A convincing break could see MXN18.40 next. The greenback steadied today but met resistance slightly above MXN18.50. 

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