Market Overview

Following a bullish close last week, the US dollar initially extended its gains against most G10 currencies. However, this momentum faced some mild profit-taking during the European morning session and appears poised to encounter resistance in North American trading. Several currency pairs have options clustered near today’s highs that expire at 10:00 AM ET, indicating potential short-term barriers.

A significant market focus remains on the US administration’s announcement substantially increasing H-1B visa fees, a development particularly impactful for India. These heightened visa costs add to existing US tariffs that raise import expenses, signaling a tougher environment for importing skilled labor alongside goods.

Meanwhile, Argentina is navigating ongoing financial difficulties, pursuing an additional loan from the US alongside an existing IMF arrangement. In the Asia-Pacific region, the Bank of Japan revealed plans to reduce its equity ETF holdings at a gradual pace of approximately 20 million yen daily—a level insufficient to impede the recent rally in Japanese equities. Most major Asian markets advanced today, with exceptions in Hong Kong, mainland China, and India. Europe’s Stoxx 600 dropped about 0.2%, and US equity futures are softer.

Benchmark 10-year government bond yields exhibit minor mixed movements, with little market reaction to Fitch’s recent upgrade of Italy’s credit rating to BBB+ with a stable outlook. The US 10-year Treasury yield hovers just below 4.13%. Market participants await remarks from five Federal Reserve officials today, including three speaking around noon ET.

Gold surged to a record near $3,726 before retracing slightly, while November WTI crude steadied around $63 per barrel, retreating back to pre-weekend lows near $62.25.

US Dollar (USD)

The US Dollar Index enters today riding a three-day winning streak—the longest since late July. After stalling near 97.85, the index is consolidating and trading slightly lower, finding initial support around 97.50 with potential to dip toward 97.20 without significant technical damage. Upside momentum targeting 97.80 could extend to 98.25 or even 98.70.

With the post-FOMC period underway and the next employment report forthcoming, market sentiment will likely drive near-term dollar performance. Today’s Chicago Fed national activity index is not expected to influence markets significantly. Five Fed speakers present a range of policy perspectives, while tomorrow’s preliminary September PMI and Q2 current account data represent notable upcoming events.

The sharp reduction in the Q2 trade deficit (to $190.4 billion from Q1’s $381.5 billion) suggests a narrower current account deficit than the record Q1 ($450 billion). Treasury International Capital data confirm strong foreign demand, with net purchases of $382 billion in US financial assets during Q2, slightly below Q1’s $385 billion. This robust foreign inflow supports the view that dollar pressure stems more from hedging activity than from a capital flight.

Euro (EUR)

The euro extended last week’s losses early on, briefly dipping to approximately $1.1725 before recovering near $1.1770 during European trading. Momentum indicators signal stretched conditions, suggesting limited further upside in North American sessions. Notably, €1.1 billion in options strike at $1.18 expire today, potentially capping gains.

Tomorrow’s preliminary October PMI is the week’s key eurozone economic release, alongside lending and money supply data that may attract economist interest. Elevated geopolitical tensions continue due to increased Russian incursions into Polish and Estonian airspace amid intensified actions in Ukraine. While currently muted, such developments hold potential for sudden market impacts.

The Swiss National Bank (SNB) meets Thursday, with the policy rate unchanged at zero and two-year yields near -0.20%. The franc trades near the upper boundary of its yearly range against the euro; however, the SNB shows resistance to reintroducing negative interest rates. Eurozone inflation data remain subdued, with harmonized CPI at zero year-over-year and core inflation at 0.7%.

Chinese Yuan (CNY)

The US dollar reached a new yearly low against the offshore renminbi (CNH), dipping to near CNH7.0850 mid-last week before recovering above CNH7.12 ahead of the weekend. The currency is now consolidating within a narrow pre-weekend range. The People’s Bank of China set today’s USDCNH fixing lower at 7.1106, following two sessions of higher fixes.

Treasury Secretary Bessent’s acceptance of the yuan’s modest appreciation this year aligns with ongoing US-China dialogues and appears consistent with Washington’s strategic pivot away from Taiwan regarding arms sales and high-level defense engagement. Concurrently, Chinese banks kept their loan prime rates steady at 3.0% (one-year) and 3.5% (five-year), with a light economic calendar expected this week.

Historical patterns show the yuan often performs relatively better against other currencies amid a strong US dollar environment, as observed in July.

Japanese Yen (JPY)

The dollar edged higher to nearly JPY148.40—its highest in two weeks—before pulling back slightly. The US dollar’s advance against the yen has now lasted four consecutive weeks, mirroring its longest streak earlier this year. Stronger US interest rates may propel the greenback toward the JPY148.65-85 zone.

The Bank of Japan’s recent hawkish stance failed to excite FX markets but increased market odds of a future rate hike from roughly 33% to slightly over 50%, reinforcing the notion that US rates primarily drive yen exchange rates. Japanese markets will be closed tomorrow for the fall equinox holiday.

Headline local data include Wednesday’s flash PMI, which typically generates muted reaction, and Thursday’s September Tokyo CPI release, an important precursor for the national inflation figures due later in October. Despite persistent bearish sentiment, bond yields tell a different story: the 40-year JGB yield peaked near 3.7% in May and has softened to 3.4%, maintaining a US 10-year premium of approximately 250 basis points after near three-year lows last week.

Japanese equities experienced a pullback following the BOJ’s announcement to slowly trim ETF holdings, yet the pace of divestment is unlikely to derail the market’s underlying upward trend. Both the Nikkei and Topix ended today with gains of 1.0% and 0.5%, respectively.

British Pound (GBP)

Sterling closed last week under pressure, reversing from around $1.3725 midweek to finish near a two-week low around $1.3465. Initial downside extended to about $1.3455 today before recovering, finding technical support close to $1.3435. The currency marginally surpassed $1.3500 during European trading.

Options with approximately GBP400 million notional expiring today at $1.3500 may hinder further appreciation. A definitive break above last Friday’s high near $1.3565 would be necessary to challenge the prevailing bearish outlook.

UK data releases are light this week, with the preliminary September PMI scheduled for tomorrow. The country’s widening fiscal deficit—driven by higher inflation inflating public service expenditure and debt servicing costs alongside weaker tax revenues—makes UK debt market performance critical. Although higher yields tend to bolster the US dollar, rising UK bond yields may simultaneously weigh on sterling.

Canadian Dollar (CAD)

Following the Bank of Canada’s anticipated rate cut last week, the Canadian dollar’s exchange rate exhibited minimal direct response. Instead, the resurgence of a stronger US dollar played the dominant role in shaping the Loonie’s performance, which registered gains of nearly 0.45%—the best among G10 currencies.

Historically, the CAD tends to perform better amid USD strength, as evidenced in July during the US dollar’s monthly advance. Short-term momentum traders frequently adopt short CAD positions on crosses like GBP/CAD and EUR/CAD amid US dollar bearishness; however, anticipated corrections in the greenback could trigger squeezes in these short CAD trades.

The USD/CAD pair remains range-bound within the pre-weekend band of roughly CAD1.3770 to CAD1.3825. Options totaling about $520 million at CAD1.3800 expire today. Near-term support is identified around CAD1.3720, aligning with a potential neckline in a topping pattern. Resistance is seen in the CAD1.3830-50 area.

Australian Dollar (AUD) and New Zealand Dollar (NZD)

The Australian dollar’s key reversal last Wednesday—after touching a three-year high slightly above $0.6705—signaled imminent near-term weakness. Subsequent selling pushed the AUD below $0.6600 by week’s end. Today, the currency finds tentative support within the $0.6560-0.6580 range but remains capped just under $0.6600, where options worth approximately A$705 million expire.

New Zealand’s economy continues to face headwinds following a disappointing GDP print of -0.6% (versus expectations of no change), which dragged the Kiwi sharply lower last week, marking the worst G10 performance with a decline approaching 1.6%. The implied year-end rate in swap markets dropped by 20 basis points last week. Two Reserve Bank of New Zealand meetings remain this year, with market pricing fully discounting two quarter-point rate cuts and assigning roughly a one-in-three chance of a 50 basis-point cut. The AUD also reached a three-year high against the NZD last week.

Mexican Peso (MXN)

The US dollar declined to MXN18.20 last week, the lowest level since July 2024, before rebounding to nearly MXN18.47 during the latter half of the week. It currently trades quietly within a narrow range between MXN18.3750 and MXN18.4325.

There is potential for modest further gains ahead of Mexico’s mid-September CPI release on Wednesday and the central bank’s policy decision on Thursday. However, sellers of dollars may re-enter, given the peso’s attractive carry, enabling long positions to weather consolidation before further dollar depreciation. The next important support target is around MXN18.00. The Mexican central bank is widely expected to cut its overnight target rate by 25 basis points to 7.50%.

In Brazil, the dollar posted an important upside reversal last Thursday against the Brazilian real, closing above Wednesday’s high after an earlier dip to a new low for the year. Brazil’s overnight rate stands at 15.00%, rendering short positions in the BRL expensive. Near-term resistance for USD/BRL is identified between BRL5.36 and BRL5.38.