Sterling shines

Overview: The US dollar is softer against all the G10 currencies but the Japanese yen. Sterling is leading the advance and is at new two-year highs, knocking on $1.3250. More generally, the dollar's consolidative tone remains intact, but it looks like a pause rather than a reversal, especially against the dollar-bloc currencies. The weaker yen is a headwind for most of the regional currencies, including the yuan. Most central European currencies are firmer, helped by the euro. 

Equities were mixed in the Asia Pacific region, but Europe's Stoxx 600 is firmer near its best level for a month and US index futures are slightly higher. Benchmark 10-year yields are rising. Even China's 10-year bond yield is up a couple of basis points (to 2.17%). European 10-year yield 3-5 bp higher, with Italian BTPs and UK Gilts leading the way. The 10-year US Treasury yield is up a couple of basis points to 3.84%. Gold is a little heavier but holding above $2500 so far today. The record high was set a week ago slightly below $2532. September WTI is paring yesterday's nearly 3.5% rally, scored on the back of rising Middle East tensions, Libya's internal dispute leading to an announcement of a stoppage in production and exports and new of repeated attacks on Colombian pipelines. September WTI reached $77.60 and is now around a dollar lower. It had rallied a little more than 7.5% over the past three sessions after losing around 6.5% in the previous four sessions. 

Asia Pacific

Market-moving news was light in the region and largely limited to the minor slowing in Japanese service producer prices to 2.8% in July from cyclical high of 3.1% in June. The swap market has almost 10 basis points of tightening by the BOJ in the remainder of the year and another 10 bp in in H1 25. China reported firmer industrial profits, 4.1% year-over-year through July. This is a bit more than projected as slower output and producer price deflation were thought to be headwinds. The swaps market has discounted about 35 bp reduction in China's seven-day repo in the next three months. Many observers also see scope for another reduction in requires reserves by the end of the year. Month-end cash demand has pushed the seven-day repo rate to almost 2%, the highest in a couple of months.

The dollar recovered from the low set yesterday in early Asia Pacific turnover near JPY143.45 to a high a little above JPY144.60 in the North American afternoon. Arguably, the greenback's gains were helped by its broadly firmer tone and the tick up in US rates. It has reached almost JPY145.20 today. There are almost $3.5 bln in options that expire tomorrow at JPY145.25-50. The Australian dollar traded in about a third-of-a-cent-range below $0.6800 yesterday. Initial support near $0.6760, was tested and held. It recovered to within striking distance of last week's high, $0.6800, and makes the consolidation look bullish. The year's high was set in January near $0.6840. The dollar's recovery against the yen helped it trade higher against the Chinese yuan yesterday. The greenback fell to a new low for the year (~CNH7.1140) in early trading on Monday and held above CNH7.12 in the North American session. It rose to almost CNH7.1320 today. Nearby resistance is seen near CNH7.1350, and then the CNH7.1470-CNH7.15 area. The PBOC set the dollar's reference rate at CNY7.1249 (CNY7.1139 yesterday). Whether Chinese companies have accumulated $1 trillion as one analyst says or half as much as others estimate, a broad bear market for the dollar we anticipate will mean a stronger yuan. A 10% appreciation of the yuan would see it return to 2022 levels. It has already appreciated by more than 3% since the 2023 low. Moreover, there is precedent. From the 2020 low to the 2022 high, the yuan appreciated by more than 10%. 

Europe

The eurozone's money supply M3 for July is due tomorrow. It continues to recover, but no longer seems to have much market impact. Recall that it was contracting in most of H2 23 and has recovered steadily this year. It accelerated to 2.7% in July from 2.2% in June. This is the fastest growth since January 2023 (3.0%). The highlight of the week is the preliminary estimate of August CPI due Friday Given the base effect, a 0.2% month-over-month increase would see the year-over-year rate fall to 2.2%, which would be the lowest in three years. Here in the last week of August, the UK's schedule is devoid of market-moving data, with passing interest in Nationwide's house price index, consumer credit, and mortgage lending. The swaps market has another BOE rate cut fully discounted and a little less than 75% chance what would be the third cut before year end. This is essentially unchanged since the middle of last week and before Governor Bailey's comments at Jackson Hole, where he seemed more confident of rate cuts though noted some degree of restrictiveness was still appropriate. After hitting 2% in May, CPI is expected by the central bank to finish the year at 2.8%.

The euro mostly traded in a half-of-a-cent range below $1.12 yesterday and is in less than a quarter-of-a-cent range below $1.1180 so far today. The market seems to lack near-term conviction. It is up 4 1/4-cents since the low on August 1 near $1.0780 and since August 15 alone is 2 1/2-cents. There are 1.3 bln euros in options that expire at $1.1150 today. A break of $1.1150 targets $1.1100 but it would seem still be consistent with consolidation. A correction must take out $1.1100. Sterling traded in a bit stronger than the euro. It was confined to a narrow range in North America of mostly $1.3180-$1.3210 yesterday but has set a new two-year high today near $1.3250 in the European morning. This has stretched the intraday momentum indicators. Yesterday's high may offer initial support. 

America

Headline durable goods orders were flattered by a surge in Boeing orders (72 vs 14) and military capital equipment (1.2%). Excluding aircraft and defense, durable goods orders slipped (0.1%). Shipments of those goods, which feed into GDP calculations fell by 0.4%. They have not risen since April. The Atlanta Fed's GDP tracker for Q3 was left unchanged from last week's estimate at 2.0%. On tap today, house prices, the Conference Board's consumer confidence measure and the Richmond and Dallas Fed's surveys. Mexico's president-elect Sheinbaum appointed Victor Rodriguez Padilla as the new CEO of Pemex. Rodriguez has an academic background, and he has co-authored several articles and essays with Sheinbaum. He seems like a capable technocrat, like many of her appointments. Still, there is a Herculean task ahead of him. Mexico's July trade figures will be reported today. There is a strong seasonal pattern for deterioration in July, and the median forecast in Bloomberg's survey is for a $1.65 bln deficit after $1.04 bln in June. In July 2023, Mexico reported a $645 mln shortfall. Exports rose 2.6% in H1 24 year-over-year and Mexico's imports increased by 2.2%. Separately, Canada announced that it will match US tariffs on Chinese goods, imposing a 100% tariff on Chinese-made electric vehicles (effectively October 1) and a 25% level on steel and aluminum imports from China (effective October 15). Recall that the EU's recently announced tariff on China's EV imports of 38%. 

The Canadian dollar was the best performer among the G10 currencies yesterday. In fact, it and the Swiss franc were the only ones to best the greenback yesterday. This was a continuation of the US dollar's sell-off since the high of the year was set on August 5 near CAD1.3945. It slipped slightly below CAD1.3465 yesterday, its lowest level since March 21. For the second consecutive session the US dollar settled below its lower Bollinger Band (found ~CAD1.3465 today). The next chart support is in the CAD1.3400 area and then CAD!.3360. The Mexican peso led the emerging market currencies higher before the weekend with its 2.15% rally. It gave nearly half back yesterday and was relegated to the bottom of emerging market currencies yesterday. Still the dollar trading inside the pre-weekend range of roughly MXN19.00-MXN19.50. There are options at MXN19.50 for nearly $1.4 bln that expire tomorrow. Month-to-date, the peso is the second-worst performing currency among the emerging market complex, off about 4.0%, sandwiched in between the Russian ruble's 6.1% drop and the Turkish lira's 2.6% decline.