USD is Trading Mostly Firmer, but Yen and Swiss Franc Show Resilience

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Marc Chandler
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Overview: The US dollar is mostly firmer, though consolidating against most of the G10 currencies. The Japanese yen and Swiss franc are the strongest, while the Scandis and Antipodean currencies are the heaviest. Among emerging market currencies, a handful of Asian currencies, including the Chinese yuan are higher, but central European currencies, the South African rand, and the Mexican peso are softer.

The news stream is light but the threat of the escalation of the Middle East war has extended the rally in crude oil. October WTI traded below $72 in the middle of last week and is now pushing near $76. Global equities are mixed. Japan and South Korea fell in the Asia Pacific session, but most large markets advanced. Europe's Stoxx 600 is flat after advancing in 12 of the past 15 sessions. US index futures enjoy a firmer tone. European 10-year bond yields are mostly about two basis points higher. UK Gilts are outperforming, and the 10-year yield is flat. The 10-year US Treasury yield, which has risen in five sessions over the past month is a couple basis points softer today near 3.78%. Last week's low was closer to 3.76% and the low during the market turmoil earlier this month was near 3.66%. Gold remains firm. The record high in the cash market set last week was almost $2532. It is trading near $2525 in the European morning. 

Asia Pacific

As widely anticipated the China's one-year Medium-Term Lending Facility rate unchanged 2.30%. Anything else would have confused the signal that the significance of this previous benchmark is getting downgraded. The PBOC lent CNY300 bln at the MLF, which was about CNY100 bln less than maturing. July industrial profits will be reported tomorrow. At around 3.6% year-over-year are superior to the 2.15% the is earned by lending the money to the government. Is it worth it on a risk-adjustment basis? Australia's July CPI is reported near the end of week and a small decline (3.6% from 3.8%) is expected, while the trimmed mean by slip below 4.0%. It is unlikely to sway RBA Governor Bullock who is struggling to convince the market that it will not cut rates soon. Japan's market moving data comes at the end of the week. Last week's national July CPI contained little new information, in part because it tracks the Tokyo report and August Tokyo CPI is due and is expected to show a small rise increase in the year-over-year headline rate and core. Industrial production is projected to bounce back after the dramatic decline in June (led by autos and machinery makers), while retail sales likely continue to grow. BOJ Governor Ueda's defense of the decision to hike rates last month gave market participants little reason to second guess the 10 bp of tightening discounted by the swaps market. 

Falling US rates and the broad dollar drop saw the greenback approach JPY144 before the weekend. The dollar fell in every week in July against the yen through August 2, depreciating by 9%. It bounced for two weeks for a cumulative gain of about 0.75% before falling by 2.25% last week. In the CFTC reporting week through August 20, non-commercial (speculative) positioning in the futures market was little changed with a small net long position (~23.6k contracts, each worth JPY12.5 mln or ~$87k). The August 5 low was near JPY141.70 and the low the following day was about JPY143.65, which penetrated in early trading today. It fell to JPY143.45 and remains below the pre-weekend low (~JPY144.05). The Australian dollar returned to $0.6800 before the weekend, recouping in full the losses in the carnage of the carry-trade unwind. That area held today and the Australian dollar is testing the $0.6770 area. Speculators in the futures market trimmed their net short Aussie position to about 38.9k contracts (A$100k per contract). In the last reporting week in July (through July 26), speculators were net short 8800 contracts. The dollar posted its lowest settlement of the year against the offshore Chinese yuan, near CNH7.1160. It reached CNH7.1070 today before stabilizing. Bloomberg reports that the intraday low on August 5 was near CNH7.0840. The dollar fell for the fifth week against the onshore yuan for a cumulative loss of about 2%. The PBOC set the dollar's reference rate at CNY7.1139 (CNY7.1358 Friday). It was the lowest fix since mid-June. 

Europe

Barring a new shock, this has all the makings of a quiet week in Europe. The economic calendar is light. The German IFO survey results softened but did not seem to be much of a market factor. The highlight for the eurozone comes at the end of the week with the preliminary CPI. Yet, weak economic impulses, illustrated by last week's preliminary August PMI, leaves the market highly confident of a rate cut at the September 12 ECB meeting and at least one more and possibly two (~66%) before the end of the year. In contrast, the economic impulses from the UK look strong. The data like consumer credit, mortgage approvals, money supply, are not the stuff that typically impacts monetary policy expectations. Pricing in the swaps market is still consistent with about a 37% chance of a rate cut at next month's meeting which is the most in a more than a week. following BOE Governor Bailey's dovish talk at Jackson Hole. 

The euro reached $1.12. The month's low was set on August 1 near $1.0780. The next important chart area is the $1.1275. It corresponds to last year's high and the (61.8%) retracement of the loss from the January 6, 2021 (yes, that January 6) near $1.2350 to the cyclical low in late September 2022 (Truss crisis?) around $0.9535. Support is seen in the $1.1070-$1.1100. Speculators in the futures boosted their net long euro position by 29k contracts in the last CFTC reporting week, the largest increase since July 2023. The net long position stands at about 56k contracts with a notional value of ~$7.8 bln. Sterling settled above $1.32 last week for the first time since March 2022. The 2% advance was the largest in two years. Momentum indicators are stretched, and sterling settled above its upper Bollinger Band. Since the month's low on August 8 (~$1.2665), sterling has appreciated by nearly 4.5% against the dollar. Initial support was found near $1.3180. Below there, support may be around $1.3130. The net long speculative sterling position peaked at 142k contracts in late July. It was slashed by 95k contracts in three weeks before rising by almost 20k contracts in the latest CFTC reporting week through August 20. The liquidation of long positions accounted for more than 90% of the net position adjustment. This is to say bulls took profits and then re-established positions. At 67.5k contracts, the net speculative long position has a notional value of about $5.5 bln. 

America

US data this week is more for economists than investors and traders. At a high level, the data are likely to provide some evidence that the rise in imports is going into inventory. This is consistent with stocking up for the holidays’ narrative. The escalation of Middle East tensions, the rail strike in Canada, the potential for a dock workers strike in the US all push businesses in the same direction. Personal income and consumption data feeds into GDP. Although the Federal Reserve targets the headline PCE deflator, knowing CPI and PPI allows economists to know with a high degree of certainty the deflator. It typically deviates from expectations less than CPI. The year-over-year headline and core rate are expected to rise by 0.1% to 2.6% and 2.7%, respectively. Do not expect fireworks. Mexico reports July trade figures tomorrow. It tends not to move the markets. It is likely to become a more salient issue in the coming year and the USMCA review in 2026. 

The US dollar settled last week at a five-month low against the Canadian dollar near CAD1.3500. From the year's high on August 5 (~CAD1.3945) to the pre-weekend low, the greenback has fallen by nearly 3.25%. The momentum indicators are stretched, and the US dollar settled well below the lower Bollinger Band. It is hovering near CAD1.35 in a narrow range. Initial resistance may be near CAD1.3560, but the CAD1.3600 area may be more formidable. In the futures market, the speculative net short position was reduced for the third consecutive week, but at 164.4k contracts (~$12 bln notional), it would still be a record size, but for the previous three weeks. It has been more a case of short covering (~36k contracts) rather than new longs trying to pick the bottom of the Canadian dollar. The gross long has been pared for the past five weeks (~4.5 contracts). The Canadian dollar's benchmark three-month implied volatility is the lowest among the G10 currencies near 5.4%, which is relatively elevated (~100-day moving average is slightly below 5.1%). Still, it is lower than implied volatility of the Chinese yuan. The three-month implied volatility is about 5.8%. It is also elevated (100-day moving average near 3.7%). In the broad move against the dollar at the end of last week, the Mexican peso has its best day in a couple of weeks, rising by about 2.15% and snapping a four-day slide. However, the peso is offered today, and the greenback reached almost MXN19.31 after settling near MXN19.11 before the weekend. The high from the second half of last week was about MXN19.50. The peso's three-month implied volatility reached 16.8% last week, a four-year high. That is roughly double the four-year low set in March.