Market Overview: US Dollar Softens Amid Mixed Global Signals

Late European morning trading shows the US dollar weakening, hovering near session lows. News flow remains sparse, with significant portions of the US federal government still closed. Mainland China markets are observing a holiday. Within the G10 currency group, the Canadian dollar trails in a broadly subdued dollar environment. Most emerging market currencies are gaining ground against the US dollar. The Argentine peso experienced its third consecutive day of selling pressure after a strong rally last week, closing at its highest point since September 22.

Gold demand remains robust, positioning the metal to potentially surpass yesterday’s record peak near $3,895. Equity markets are predominantly stronger today. While Japanese markets present mixed results, nearly all other major exchanges outside China and India (which is also on holiday) have advanced, notably South Korea’s Kospi, which surged 2.7%. Europe’s Stoxx 600 index continues its upward momentum, gaining around 0.75% today following yesterday’s 1.15% rally, marking a fifth consecutive day of gains. In the US, index futures rallied yesterday despite initial government shutdown concerns and are currently exhibiting a firmer tone.

Most European benchmark 10-year government bond yields have eased, although the UK 10-year Gilt yield has inched higher. The US 10-year Treasury yield stands modestly below 4.10%, near the midpoint of its recent trading range. November WTI crude futures trade close to $61.50, maintaining levels above the early September test near $61.

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US Dollar Dynamics and Economic Indicators

The Dollar Index maintains a position just above the 50% retracement level of its gains following the Federal Reserve’s rate cut on September 17, near 97.40. Although trading softer within the previous session’s range, the index shows vulnerability, having declined across four consecutive sessions — marking its longest losing streak since June. The 61.8% retracement resides just below 97.15.

Market sentiment is subdued, exacerbated by a disappointing ADP private sector employment report that registered a jobs decline for the second month running, and the third decline of the year. This report, alongside a downward revision in August figures, increased expectations for another Fed rate cut by month-end. Notably, the ADP data attributed most of September’s job losses to a methodological recalibration aligned with Bureau of Labor Statistics benchmarks, explaining a 43,000 reduction compared to pre-adjustment data. However, the August revision remains unexplained.

Manufacturing sector indicators remain subdued: the final manufacturing PMI held steady at 52.0, while the ISM manufacturing index marginally rose to 49.1 from 48.7 but remains below the contraction threshold (50) since February. Prices paid by manufacturers declined from 63.7 to 61.9, signaling elevated but decelerating input cost pressures. Employment conditions improved slightly to 45.3 from 43.8 but persist in contraction territory. New orders softened to 48.9, retreating from August’s stronger 51.4—the highest level since January.

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Euro Area Performance and Monetary Context

The euro has approached but remained just beneath its 50% retracement of losses suffered since the Fed rate cut, located slightly above $1.1780. Today sees the expiration of options on nearly €3 billion at strikes between $1.1785 and $1.1790. Resistance lies ahead near the 61.8% retracement level and last week’s highs around $1.1815.

The US two-year Treasury yield premium over Germany’s equivalent narrowed for a fourth consecutive session, slipping below 153 basis points after peaking just above 162 basis points last week. This represents the largest daily decline in over a month, about six basis points.

Despite moderate growth, the eurozone’s unemployment rate held steady at 6.3% in August, matching its average since last August after a low of 6.2% in July—the lowest since the inception of the euro.

Separately, Switzerland reported a 0.3% month-over-month decline in its harmonized CPI for September, resulting in a year-over-year inflation rate of zero; inflation briefly turned negative in May. The Swiss National Bank’s deposit rate remains at zero, with negative yields persisting on sovereign bonds extending to five years.

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Chinese Yuan and Offshore Activity

The US dollar exhibited an outside day movement against the offshore Chinese yuan (CNH) yesterday. It initially rose to nearly CNH 7.14, surpassing Tuesday’s high of approximately CNH 7.1330, before reversing course and falling through Tuesday’s low of about CNH 7.1245. Monday’s low stood just below CNH 7.1190. Trading has been subdued today, contained within yesterday’s range, with support potentially near last week’s lows around CNH 7.1110. The onshore yuan ceased trading Tuesday before the extended holiday with the US dollar near CNH 7.13.

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Japanese Yen and Policy Outlook

After nearing JPY 150 against the US dollar late last week, the greenback has depreciated daily, touching approximately JPY 146.60 yesterday and holding just above that level currently, but showing signs of fragility. The dollar has retraced roughly three-quarters of its rally post-Fed rate cut. Yesterday’s low marked its weakest level since the rate reduction, coinciding with the release of the disappointing ADP employment figures and a decline in US yields.

The US 10-year Treasury yield premium over Japan narrows to near 245 basis points, the lowest since April 2022 and down from a January peak of approximately 355 basis points.

Bank of Japan Deputy Governor Uchida reaffirmed the central bank’s stance that rate hikes remain contingent on economic and price developments consistent with expectations. He referenced the recent Tankan survey but did not mention weaker industrial production or retail sales figures disclosed earlier this week. Market pricing indicates about a 63% probability of a rate increase later this month and over a 75% chance of a hike by year-end. Japan is scheduled to release August labor market statistics and the final manufacturing PMI shortly.

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British Pound: Resistance Levels and Yield Differentials

Sterling briefly surpassed the 50% retracement of losses incurred since the Fed rate cut, trading above $1.3525 yesterday, and today remains near the upper bound of yesterday’s range. Key option expiries totaling £556 million occur near $1.3470 today. Last week’s peak hovered around $1.3535, with the 61.8% retracement level positioned near $1.3570.

The Bank of England has paused rate changes while market participants price in continued Fed easing. The UK’s two-year government bond yield stigma relative to US equivalents currently exceeds 44 basis points, reversing a small discount observed in early August. Just prior to the Fed cut, the UK premium approached 46 basis points, the highest since July 2023.

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Canadian Dollar Under Pressure

The US dollar remains firm against the Canadian dollar. After briefly testing support near CAD 1.39 on Tuesday, it rebounded to challenge last week’s four-month high close to CAD 1.3960. Presently, USD/CAD trades just above CAD 1.3930 but remains below CAD 1.3950, with options totaling around $360 million expiring today at CAD 1.3965.

Technical indications suggest a potential bullish wedge or pennant pattern forming. Several technical anchors coalesce between CAD 1.4000 and CAD 1.4020, including the 200-day moving average, May highs near CAD 1.4015, and the 38.2% retracement of this year’s decline at CAD 1.4020. The Canadian dollar faces headwinds from subdued economic data and a stronger US dollar backdrop. The latest manufacturing PMI dropped to 47.7 from 48.3, extending its run below the 50 expansion threshold since January.

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Australian Dollar: Consolidation and Trade Data

The Australian dollar stabilized near the upper limit of Tuesday’s range after recovering from approximately $0.6520 late last week to almost $0.6630. It remains above $0.6600 today, an area coinciding with option expiries totaling A$1.9 billion today and another A$1.7 billion tomorrow. Resistance is evident near $0.6625, where options near A$800 million also expire. The 61.8% retracement of losses since the Fed’s last rate hike is situated just above this, near $0.6635, with last week’s high slightly under $0.6630. Beyond that, the next significant resistance appears near $0.6665.

Australia’s goods trade surplus for August came in at A$1.83 billion, below expectations and down from A$5.4 billion in August 2023. The average monthly surplus through August this year is approximately A$4.2 billion, compared to nearly A$6.0 billion in the first eight months of 2023. Australia’s trade with China surpasses the combined total with its next five largest partners: Japan, the US, South Korea, Singapore, and India. Imports from the US declined for the third consecutive month.

Meanwhile, household spending growth slowed to 5.0% year-over-year in August from a revised 5.3% in July (initially 5.1%). This moderation contributes to the Reserve Bank of Australia’s cautious monetary stance. Futures markets do not fully price in a policy rate cut until late Q1 2026.

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Mexican Peso and Regional Developments

The US dollar reached a low near MXN 18.24 yesterday following the weak ADP report, then rebounded to almost MXN 18.38 and has fluctuated slightly above MXN 18.42 before retreating to nearly MXN 18.34 today. The year’s low was set on September 17, near MXN 18.20, coinciding with the FOMC rate reduction.

Against the Brazilian real, the dollar recorded its yearly low just below BRL 5.27 the following day, climbed above BRL 5.37 last week, dipped briefly below BRL 5.30 yesterday, and moved past Tuesday’s high near BRL 5.3340. The dollar settled within Tuesday’s range, negating a clear technical signal.

Brazil’s manufacturing PMI declined to 46.5 in September from 47.7, marking the lowest reading since April 2023 and continuing a downtrend since March. Mexico’s manufacturing PMI edged down to 49.6 from 50.2, the first sub-50 reading since June 2024, consistent with the sub-50 trend in the Mexican IMEF index.

August worker remittances to Mexico surprised to the upside, rising to nearly $5.58 billion from $5.33 billion in July. However, year-to-date remittance growth has slowed, likely reflecting tighter US immigration policies. Through the first eight months, remittances totaled about $40.5 billion, down from nearly $43 billion in the same period last year. Moreover, the US dollar buys approximately 5.5% fewer pesos compared to a year ago.

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_Disclaimer: This analysis is provided for informational purposes and does not constitute financial advice._