The Greenback Struggles to Find Traction, including Against the Swedish Krona Despite Surprise Rate Cut by the Riksbank

[Ben Graham]

Overview: The dollar's rally beginning during the Federal Reserve's press conference last week stalled yesterday, and the greenback is mostly heavier today. Despite Sweden's unexpected rate cut, the krona is leading the G10 currencies higher. The flash September PMIs mostly softened but the impact has been minimal. Fed Chair Powell speaks shortly after noon ET today and this could be a catalyst. The dollar has been sold through the technical retracements of last week's recovery. The greenback is more mixed against emerging market currencies, with central European currencies generally outperforming Asia Pacific currencies. 

Tokyo markets were closed for the national holiday today, and outside of China and Hong Kong, most of the other large bourses advanced, led by Taiwan's 1.4% rally. Europe's Stoxx 600 is up more than 0.5% and is recouping in full losses from the past two sessions. US index futures are little changed. Bonds are mostly firmer. Benchmark 10-year yields are slightly softer, the 10-year UK Gilt yield is off a couple of basis points. Similarly, the 10-year US Treasury yield is two basis points lower near 4.13%. Gold extended its rally to $3791 in Europe but is pulling back ahead of the North American open. Given surge, the first area of support maybe near $3760. November WTI is consolidating quietly in a $61.85-$62.60 range. 

USD: After rallying about 1.65% after the FOMC statement last week, the Dollar Index consolidated lower yesterday. It neared 97.30. It eased to about 97.20 today. The 97.00 area is about the (50%) retracement of last week's post-Fed bounce. A move above 97.60 could stabilize the technical tone. Quietly but surely the US is moving toward a government shutdown at the end of the month. Both parties blocked the other's effort for a short-term extension. Both the Senate and House are on recess now making for a cliff-hanger next week. The preliminary September PMI poses headline risk. The composite is expected to have slowed for the second consecutive month. Fed Governor Bowman, and Atlanta Fed President Bostic (a non-voter this year) will speak before Chair Powell's speech on the economy at 12:35 EST.

EURO: The euro poked a little above $1.1800 in late North American dealings yesterday. This met the (38.2%) retracement of the pullback that bottomed early yesterday near $1.1725. The euro recorded a bullish outside up day by trading on both sides of Friday's range and settling above it high. After reaching $1.1820, it was sold to $1.1780 after the PMI and recovered back above $1.1800. The next retracement objectives are around $1.1825 and $1.1845. The flash September PMI was little changed. Manufacturing slipped back into contraction (49.5 vs. 50.7), but services were stronger (51.4 vs. 50.5). The composite output measure stands edged up to 51.2 (vs.51.0). It averaged 50.4 in both Q1 and Q2. German manufacturing slowed slightly, but services expanded, and the composite rose to 52.4 from 50.5. French manufacturing and services slowed, and the composite fell to 48.4 (from 49.8). Elsewhere, Sweden's Riksbank unexpected delivered a quarter-point cut that brought its key rates to 1.75%. It was the third cut this year after 150 bp in cuts last year. Headline CPI is 1.1%. The krona is firmer against the greenback but a little softer against euro. 

CNY: The dollar consolidated in quiet turnover against the yuan yesterday and remains in last Friday's range today (CNH7.1060-CNH7.1200). It is in a narrow CNH7.1130-90 range today. The 20-day moving average is near CNH7.1250. The US dollar has not settled above it for little more than a month. Ahead of China's national holiday in the first part of October, the PBOC is injecting extra funds into the banking system. The dollar's fix was set at CNY7.1057, down from CNY7.1106 yesterday.

JPY: The dollar continued to consolidate in the upper end of last week's range when it reached almost JPY148.30. The greenback eased to almost JPY147.65 in North America yesterday and settled below the down trendline from the August 1 and September 3 highs is found slightly above JPY148.00 today. The five- and 20-day moving averages converge near JPY147.50, which has been tested today. It held below JPY147.90 in quiet turnover. The local markets were closed today for the equinox holiday. Japan sees its preliminary PMI the first thing tomorrow and the LDP leadership contest is underway, with the vote on October 4.

GBP: Sterling looked miserable. It dropped nearly 2% from the middle of last week's high. Buyers emerged yesterday after a marginal new low was recorded slightly below $1.3455. Sterling stalled around $1.3520 yesterday but edged slightly above it today to fray the 20-day moving average (~$1.3525). Above here, the $1.3550-60 area may cap it. The UK's flash September PMI softened, and the manufacturing reading remained below the 50 boom/bust level as it has since September 2024 (46.2 vs. 47.0), and services slowed (51.9 vs. 54.2). The composite eased to 51.0 from 53.5 in August, which was the highest since April 2024. The composite averaged 50.9 in Q1, 50.3 in Q2, and 52.0 in Q3. Yet growth is seen slowing this quarter to 0.2% from 0.3%, according to the median forecast in Bloomberg's survey. 

CAD: The greenback traded firmly yesterday rose above last Friday's high (~CAD1.3825) to approach a band of resistance that extends toward CAD1.3850. It is holding so far today. A move above CAD1.3865 could spur a retest on the CAD1.3900 area. Bank of Canada Governor Macklem speaks on trade and capital flows at 2:30 PM ET today. Otherwise, Canada's news stream is light until the end of the week's July GDP. Recall that the Canadian economy contracted in the previous three months (-0.1% a month) and the economy shrank by 1.6% at an annualized rate in Q2 as exports to the US were a significant drag. The swaps market is discounting another rate cut in Q4, which would bring the target rate to 2.25%. The market sees that as the likely terminal rate cut but has about a 40% chance of a cut in the first part of next year.

AUD: The Australian dollar briefly traded above $0.6600 yesterday but spent most of the session consolidating in a narrow $0.6580-$0.6600 range. It is straddling the $0.6600 area. The next hurdle is the $0.6615-$0.6625 band. Australia's preliminary September PMI softened. It is one of the few countries that the manufacturing PMI continues to hold above 50; it has not been below this year. It is at 51.6 (vs. 53.0 in August). The composite averaged 51.0 in Q1 and 51.1 in Q2. If the September estimate is confirmed at 52.1, it will average about 53.8 in Q3. Reserve Bank Governor Bullock has indicated that a bar to a rate cut is high. There is practically no chance of a cut next week, and the odds of cut at the following meeting in November are around 80%. While still high, it has not been lower since late August.

MXN: The dollar consolidated in the upper end of last week's range in quiet uneventful turnover yesterday. It slipped through yesterday's low near MXN18.34. Nearby support is seen around MXN18.30. Today, Mexico reports July retail sales, which may have ticked up after a 0.4% decline in June. Mexico also reports the IGAE economic activity survey, which is almost like a monthly GDP. It is expected to fall by 0.45 after rising by 0.22 in June. Ahead of Thursday's Banxico meeting, Mexico will also see first half of September's CPI on Wednesday. Another firm reading is expected, but with policy restrictive, the central bank is more concerned about growth, and barring a dramatic shock, a 25 bp rate cut is expected, which would bring the overnight target rate to 7.50%. 

   

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