FX and Fixed Income Market Overview

US Dollar Performance

The US dollar continues to exhibit a softer bias against most G10 currencies, extending the losses recorded yesterday. The only notable exception remains the Norwegian krone, which is trading near unchanged levels. Emerging market currencies are also firm against the greenback.

In Central Europe, currencies including the Polish zloty are strengthening despite geopolitical tensions—specifically, Britain and France deploying aircraft to protect Polish airspace following recent drone incursions, and Poland rejecting China’s request to reopen the border with Belarus, a critical route for Chinese goods entering Europe.

Asian Currencies and Markets

The Chinese yuan is trading at new highs for the year, maintaining strength amid dollar softness. Most Asia-Pacific stock markets advanced following record highs in the US equity indexes yesterday. Taiwan and South Korea’s markets led gains, each rising more than 1%. In contrast, Hong Kong and China’s CSI 300 index lagged, closing lower.

European Equities and Bond Yields

European equities are generally weaker today, with the Stoxx 600 retreating from yesterday’s gains. Central European indices also closed lower. US equity futures, however, are trading firmer.

On the fixed income front, European 10-year benchmark yields edged higher by just over one basis point, with the UK 10-year Gilt rising two basis points following the employment report. The 10-year US Treasury yield remains little changed around 4.04%.

Commodities

Gold extended gains following a bullish outside day, reaching near $1,698 per ounce. October WTI crude oil is trading quietly within the ranges established over the past two days, hovering around the $63 per barrel level.

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Currency Details

US Dollar Index and Economic Data

The Dollar Index settled at its lowest level since late July yesterday and is trading below the 97.00 mark in late European morning session. This break positions the index for a potential retest of the multi-year low near 96.40 set on July 1.

As the two-day FOMC meeting begins, which appears to include both Federal Reserve officials, the US will release key economic reports: retail sales, import/export prices, and industrial production.

Despite a 2.1% month-over-month decline in vehicle sales, retail sales ex-autos, gasoline, food services, and building materials are forecasted to increase by 0.4%, consistent with the year-to-date trend averaging 0.3%. Import prices are expected to have declined by 0.2%, marking the third drop in four months, largely due to lower oil prices. Excluding petroleum, import prices may have risen slightly by 0.1%, remaining relatively flat over the recent four-month period. Export prices are forecast to have eased by 0.1%, offsetting gains recorded in July.

Industrial production is expected to soften again, with manufacturing output likely declining for a second consecutive month—the first such occurrence in 2024. The Atlanta Fed GDPNow tracker estimates 3.1% real GDP growth for Q3, notably above the Bloomberg consensus median forecast near 1.5%.

Eurozone Developments

The euro has surpassed the $1.18 mark today, a level unseen in two months, and is approaching options expiries amounting to roughly €1.6 billion at this strike level. The currency appears on track to test the multi-year high near $1.1830 recorded on July 1.

Euro strength is primarily attributed to the weaker US dollar alongside minimal adverse impact from Fitch’s downgrade of France’s sovereign rating. Moreover, the US two-year Treasury premium over the German bund has contracted by around 30 basis points since Fed Chair Powell’s Jackson Hole remarks, currently near 151 basis points—the lowest since last September.

Eurozone aggregate industrial production increased 0.3% in August, partially offsetting June’s revised 0.6% decline (initially reported as -1.3%). The average monthly contraction in Q2 industrial output was about 0.7%, following a 1.3% gain in Q1, which was influenced by tariff-related inventory adjustments. The Q2 figure marks the most pronounced weakness since Q3 2023.

ZEW surveys indicate that German economic sentiment deteriorated for the second consecutive month in September, with the current conditions index dropping to -76.4, the lowest since May. However, expectations improved modestly to 37.3 from 34.7, recovering part of August’s decline after a four-year high in July.

Chinese Yuan Dynamics

The US dollar is consolidating near its recent lows against the Chinese yuan, having broken below last week’s trough of CNH7.1120 to reach approximately CNH7.1090 today. The People’s Bank of China (PBOC) set the dollar reference rate at CNY7.1008 last Tuesday—the lowest for the year—and at CNY7.1027 today.

While the pace of the PBOC’s dollar fix adjustments has slowed compared to earlier 2024, it remains notably larger than in previous years. Interestingly, although today’s official fix was below CNH7.11, market estimates from six banks mostly exceeded this level, with several projecting rates above CNH7.1150.

Japanese Yen Movements

The dollar has decisively broken below last Thursday’s narrow range of roughly JPY147.00 to JPY148.15, reaching around JPY146.70 today. This aligns with the broader monthly trading range between JPY146.30 and JPY149.15. Last month’s band was wider, approximately JPY146.20 to JPY150.90.

Following the Bank of Japan’s recent policy meeting, Governor Ueda reaffirmed that if economic conditions evolve as expected, rate hikes could still occur in 2024. Market-implied rate hikes via swaps currently stand near 15 basis points by year-end, down from nearly 18 basis points at the end of July.

British Pound Update

Sterling has broken above $1.3600 for the first time since July 10, closing just below this threshold yesterday and extending gains today towards $1.3650. The immediate resistance is near $1.3680, with the multi-year high from July 1 close to $1.3790.

The UK calendar is full this week, including key Bank of England policy decisions on Thursday. Early data today showed July average weekly earnings rising 4.7% year-over-year (3-month average), slightly stronger than June’s 4.6%, though excluding bonuses, the growth moderated to 4.8% from 5.0%. The ILO unemployment rate remained steady at 4.7%. However, payroll employment declined for the seventh consecutive month by 8,000, modestly improved from a six-month average loss of 17,500.

August CPI is due tomorrow, projected to rise 0.3% month-over-month. This would stabilize the year-on-year headline inflation at 3.8%, the highest across G10 currencies. Core and services inflation components are expected to ease modestly by 0.2 percentage points to 3.6% and 3.8%, respectively.

Market pricing implies roughly a one-third probability of a Bank of England rate cut before year-end, with negligible odds this week. The central bank faces pressure to reduce its gilt-sale program in the forthcoming meeting.

Canadian Dollar Situation

The US dollar weakened to a six-day low near CAD1.3770 yesterday, extending further modestly to around CAD1.3760 today. The immediate technical targets are CAD1.3740 and the late August low near CAD1.3725.

Statistics Canada will release August CPI data today ahead of the Bank of Canada’s rate-setting meeting tomorrow. Headline inflation is expected to rise by 0.1% month-over-month, lifting the annual rate potentially to 2.0% from 1.7%, influenced by base effects. Core inflation measures are expected to remain stable between 3.0% and 3.1%.

Despite current inflation readings, market pricing anticipates a rate cut by the Bank of Canada, driven primarily by concerns about economic performance and outlook rather than inflation metrics. The Canadian 2-10 year yield curve hovers near 67 basis points, close to the lower end of its recent three-month range. The comparable US curve stands around 50 basis points, also near a recent floor.

Australian Dollar Strength

The Australian dollar climbed to a new yearly high near $0.6675. A sustained move above this level could open the path towards the $0.6700–$0.6715 area. The AUD’s previous yearly peak from last October near $0.6940 remains a plausible target for the fourth quarter.

Thursday’s employment report will be a key data event. July saw an increase of 60,500 full-time jobs—the largest monthly gain since February. RBA Governor Bullock has warned that sustained strong demand may require re-evaluation of the monetary policy trajectory. Swap markets price in two further rate cuts this cycle, down from over three cuts anticipated a few months ago.

Latin American Currencies

With softer global yields and the US Federal Reserve poised to resume easing, short-dollar carry trades have gained popularity, benefiting several Latin American currencies.

The Mexican peso, Brazilian real, and Colombian peso reached new yearly highs yesterday. The dollar dropped to nearly MXN18.33, consolidating within a narrow band near this level after MXN18.51 functioned as resistance until late last week. The next technical target lies between MXN18.18 and MXN18.20.

The dollar breached BRL5.38 last week, and slipped below BRL5.31 yesterday. Should this weaken further, the BRL5.18-5.20 range could come into focus. Similarly, the greenback broke through COP3,900 late last week, dropping to almost COP3,884 before pulling back slightly above 3,900.

Year-to-date through yesterday, the Brazilian real has appreciated approximately 16.1%, the Mexican peso 13.4%, and the Colombian peso 12.8% in nominal terms. When adjusted for carry, total returns rise substantially—towards 27.5%, 20.9%, and 20.3%, respectively.

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Disclaimer

This commentary is provided for informational purposes only and does not constitute investment advice or an offer to buy or sell any financial instruments. Investors should perform their own due diligence and consider their individual financial situations before making any investment decisions.