In the foreign exchange market, the dramatic short-covering rally in the yen looks like large pools of capital, perhaps even pension funds, adjusting positions rather than intervention per se. Three times now (after the April/May intervention, then after the late July operations, and again last week) the dollar held JPY155. The highlight next week includes the reaction to the German state election that could possibly see the AfD secure a majority, which could send reverberations through the German political establishment. The European Central Bank meets, and the market is confident it will deliver another rate hike and keep the door open to additional tightening. At the end of the week, the US reports August CPI. A firm or even steady pace could boost speculation of a Fed hike on September 16.
USA
EMU
Drivers: Two considerations stand out. First, the results of the German state election in Saxony-Anhalt could see the populist AfD win its first state election. The key is that it has to win sufficiently to secure majority. In other states, the firewall around the AfD that has effectively blocked it has forced sometimes unstable coalition governments. This is taking place as Le Pen is ahead in the polls in a run-off with the Mélenchon. Chancellor Merz, who had often been critical of Merkel from the right, tried to steer the CDU to the right, but the further he went the further the AfD seemed to go. His tenure as Chancellor could be impacted by the election. Second, there is little doubt but that the ECB will deliver a quarter-point to 2.50% and recognize that inflation risks are on the upside. The swaps market is pricing in a strong chance of a hike and possibly another in Q1 27.
Data: The key data is the ECB meeting on September 10. It is nearly a forgone conclusion that it will hike its key rates by 25 bp, which would lift the deposit rate to 2.50%. We assume that the ECB officials as a whole are not persuaded by the American example of withdrawing forward guidance and being less transparent about its reaction function. Given the strong chance (70%+) of another hike before the end of the year, the market is giving officials a free option. Given that the staff may have to revise up its forecasts for 2027 and 2028 CPI forecasts (2.3% and 2.0%, respectively), ECB President Lagarde could simply suggest that the central bank’s work may not be done.
Prices: With the midweek losses the exception, the euro spent last week largely confined to the range set on August 28, the day Fed Chair Warsh spoke at Jackson Hole. That range was roughly $1.1580-$1.1660. The midweek low was almost $1.1565. The euro’s resilience in the face of the stronger-than-expected US jobs growth was notable. The $1.1575 area corresponds to the (38.2%) retracement of the euro’s rally from the late July low (~$1.1355) to the August 20 high (~$1.1710). Still, with the momentum indicators still falling, the consolidative/correction phase may not be over.
PRC
Data: This week’s data are closely watched. The most important of these are the August trade figures and the CPI. Since China has been finding other channels to recycle the current account surplus, including sovereign wealth funds, as well as portfolio and direct investment, the monthly reserve figures do not capture the attention of the market the way they once did. Europe and America seemed particularly troubled by China’s growing trade surplus. Many emerging markets economies are on the other side. They are selling commodities and raw materials to China. Its imports in July were about 27.5% higher year-over-year. Exports, mostly of manufactured goods at both ends of the value chain, were up nearly 24% year-over-year, and therein lies the challenge. The US increasing tariffs and blockage of Chinese goods add to the pressure for Europe (and others) to do the same. China’s August CPI and PPI will be reported early on September 9. The general picture will not change. China’s measured consumer prices are hardly rising. The headline has risen by about 0.5% year-over-year, and while some disinflation reflects weak demand, the decline in food prices has also been an important driver. The core rate is hovering around 1.0%. China’s producer prices were gradually moving out of deflation and the war in Iran helped accelerate the process.
Prices: The dollar fell to almost CNH6.7050 ahead of the weekend. That is lowest level since January 2023, when it traded to CNH6.6975. The median forecast in Bloomberg’s survey is for the dollar to finish the year at CNH6.70. This seems too conservative. Subjectively, we suspect it may be closer to CNH6.65, and maybe a little lower.
Japan
Drivers: It does not always hold but it seems fair to say that markets respond more to surprises than to as-expected developments. The market has come around to the view that a BOJ rate hike later this month is about as done of a deal as these things get. Moreover, the pricing in the swaps market implies hawkish guidance toward another hike before the end of the year. Another consideration, of course, is intervention. Indicative pricing in the options market is consistent with the talk of long dollar positions being protected by long put structures, which would cushion the blow of intervention.
Data: The BOJ meeting that concludes on September 18 and a rate hike has become sufficiently discounted to make its absence more unsettling than its delivery. This saps the interest from most of the economic data. Still, the July labor earnings and trade figures may draw interest. In June real cash earnings rose by a revised 2.2% (up from 1.6%) year-over-year. However, higher real wages have not translated into stronger consumption. At the same time that the earnings data will be reported on September 8, Q2 GDP revisions will be announced, but in the first estimate private consumption was flat. The other data point of note is the July current account. Of note, despite the undervalued yen, Japan continues to report a trade deficit, though in the current estimate of GDP, net exports contributed about half of Japan’s growth.
Prices: The JPY155 level is key on the dollar’s downside. Japan’s intervention in April/May and the joint intervention in late July did not drive the greenback below it. Similarly in last week’s yen surge, the JPY155 held again. We suspect the upside may be limited to the JPY157.00-JPY157.25 area.
UK
Data: The UK reports July GDP and details on September 11. The World Cup and the heat wave is thought to have boosted UK June GDP by 0.3%. The economy appears to have cooled. After growing by 0.4% quarter-over-quarter in Q2, the median forecast in Bloomberg’s survey is for a meager 0.1% expansion in Q3. The swaps market sees only a slight change (~10%) of a rate hike at the September 17 Bank of England meeting. That said, the market has a hike fully discounted by the year and another one by the end of Q1 27.
Prices: Sterling’s retreat from the $1.3675 high on August 21 extended to $1.3475 in the middle of last week. It forged a possible base there. It must re-establish a foothold above the $1.3550 area to lift the tone, and even then, the $1.3575-$1.3600 area may be more important, technically. The momentum indicators are still falling, and the trendline connecting the June and July lows will come in around $1.3550 at the end of next week.
Canada
Data: There are no government economic reports in the week ahead. The Bank of Canada met last week and left its overnight target rate at 2.25%. Despite the trade shock, the market continues to anticipate the next move is a hike, and the market has two hikes fully discounted in the next eight months.
Prices: The diverging employment reports favored the Canadian dollar in early August, but the divergence ahead of the weekend weighed on it. The Canadian dollar was the weakest of the G10 currencies before the weekend. It lost a little more than a third of one percent. The Canadian dollar rallied Wednesday and Thursday last week, encouraged by the hawkish hold of the Bank of Canada and the broadly weaker US dollar. The greenback’s low last week was about CAD1.3765. Recall that it settled at CAD1.3760 before the US-Canadian trade talks collapsed. The pre-weekend US dollar bounce saw it recover slightly above CAD1.3870, which met the (61.8%) retracement of the Wed-Thurs slump. The CAD1.39 area offers initial resistance and last week’s high was around CAD1.3940. A move above there targets CAD1.40 next.
Australia
Data: Australian data is limited to a couple of banks’ confidence surveys and the Melbourne Institutes Consumer Expectation survey. The central bank meets September 29. The recent string of data (including stronger than expected Q2 GDP on the heels of somewhat hotter than expected inflation and strong private sector credit growth) and official comments have encouraged the market to boost the chances of a rate hike to around 66% from a little less than 50% at the end of the previous week and about a 12% chance as recently as August 25. A hike to 4.60% is fully discounted by the end of the year in the futures market.
Prices: The Australian dollar fell to about $0.7120 in the middle of last week. Although it was the lowest it had been since August 21, it still managed to hold above the 20-day moving average. The Aussie rose to $0.7215 before the weekend, a new high since mid-May. The Australian dollar posted an outside up week. It traded on both sides of the previous week’s range and settled above it higher. Initial resistance may be around $0.7250 but the big target is the four-year high from May (~$0.7280).
Mexico
Data: Mexico reports August vehicle production and exports at the start of the week and industrial production at the end of the week. However, the most important high-frequency data point is August CPI in the middle of the week. The headline rate on a year-over-year basis may rise for the first time since March. It approached the middle of the 2-4% target range in July (3.12%, the lowest since the pandemic). The core rate has been a little stickier and in July it slipped below 4% for the first time since last April. It has fallen moderately since the January peak, slightly above 4.50%. It may have slipped marginally.
Prices: The US dollar bounce we expected stalled in the MXN17.05-MXN17.07 area. It posted a bearish outside down day on September 3 and follow-through selling ahead of the weekend took it to MXN16.8625. That is a new low since the mid-2024 run-up to the presidential election. The price action reinforced the cap that has formed over the past three weeks. On a weekly basis, the greenback has recorded lower highs for the eighth consecutive week. On a net basis, the US dollar has risen once in the past seven weeks. It is difficult to find meaningful chart support near current levels, but we suspect that there may be scope toward MXN16.80 next.