Narrow Dollar ranges are unlikely to be sustained through the packed North American session

Overview:  Ahead of an important North American session, the US dollar has a slightly softer tone in narrow ranges against the G10 currencies. The Canadian and Australian dollars are laggards, with small losses. The yen and sterling are the strongest with around 0.2-0.3% gains. The North American session features the Bank of Canada and FOMC meetings, the US and Mexico Q2 GDP, and the ADP announces its estimate of US private sector jobs estimate. Emerging market currencies are mixed, most Asia Pacific currencies are lower, while central European currencies are firmer. The Mexican peso is among the strongest, though that honor goes to the South Korean won, which is up about 0.55%. There are reports that suggest that the US is demanding the won appreciate as part of the trade talks. On the other hand, the Indian rupee fell to a four-month low after President Trump said the tariff on India may be 20-25%. As widely expected, the Monetary Authority of Singapore left policy unchanged today. 

There seemed to be little impact in the equity market from the powerful earthquake (strongest since 2011) in the Northern Atlantic. Outside of China and Hong Kong, most markets in the region advanced, with a 1.1% rally in Taiwan, despite the setback this week of the government's domestic and foreign policy. Europe's Stoxx 600 is slightly firmer. Even German and Italian equities are firmer despite the 0.1% contractions reported for Q2 GDP. US index futures are firm. Asia Pacific bonds played a little catch up after the nearly nine-basis point decline in the US 10-year yesterday. The Treasury yield is slightly firmer today, near 4.33%. European benchmark yields are mostly a basis point lower though the 10-year Gilts yield is nearly four basis points lower near 4.59%. Gold is trading quietly (`$3322-$3334) in the upper part of yesterday’s range. September WTI rallied to almost $70 yesterday, helped by US secondary tariff threats on Russia. It has held slightly below yesterday's high and was pushed back below $69 in Europe. 

USD: At yesterday's high near 99.15, the Dollar Index has risen about 2.1% since last Thursday's low near 97.10. It flirted with the upper Bollinger Band for the first time in more than two months. It is consolidating in a narrow range (~98.70-98.90). Given today's agenda, the range is unlikely to hold. A break of 98.35 would boost the chances that a high is in place. On the upside a move above 99.20 could spur gains toward 99.80. There are three highlights today. First is the ADP private sector jobs estimate. In June, it surprised the market with a 33k fall, the first loss of jobs it reported since July 2020. Recall that BLS reports a 74k increase. The median in Bloomberg's survey sees a 75k rise the ADP estimate, while the median projection is the BLS data will be for a 100k increase. Shortly after the ADP report, the US reports its first estimate of Q2 GDP. The median forecast in Bloomberg's survey is for a 2.5% expansion and a sharp fall in the quarterly deflators. The Atlanta Fed's GDP tracker is for 2.4% GDP. The underlying measure of growth that excludes trade, inventories, and government, rose at a revised 1.9% annualized rate in Q1. Last, but not least, is the FOMC meeting. No change in policy is expected. There is some speculation that Governor Waller may dissent in favor of a cut, though he has not spoken since the sixth consecutive decline in weekly jobless claims was reported. Still, one dissent, which has been partly telegraphed, is notable, two (Bowman?) would likely boost the perceived changes of a September cut (~66%). A key source of uncertainty for Fed officials has been the tariffs, and even if there is some dispute about what the EU and Japan agreed, deals now, assuming a 90-day extension of the tariff truce with China, cover about 2/3 of US trade and provide a bit more certainty. Note that tomorrow, the US Federal Court of Appeals will hear arguments in the case that found the "emergency tariffs" were an overreach. There apparently is a discount market for the tariff rebates that could result, and some reports have suggested Cantor, (the firm that Commerce Secretary Lutnick used to run and now his son is chairman) has been an active buyer. 

EURO: The euro recorded yesterday's low in early North American turnover slightly below $1.1520. It had reached a high on Monday, in the initial response to the trade deal, near $1.1780. Although it stabilized, it was unable to get much above $1.1560 in North America and settled below Monday's low (~$1.1585) and the previous low for the month (~$1.1555). Trading is subdued ahead of the North American session. The euro is firm in a $1.1540-70 range. The eurozone eked out 0.1% growth in Q2, slightly better than expected but still slower than the 0.6% expansion in Q1. Don't blame Spain. As we learned yesterday, growth accelerated slightly in Spain (0.7% vs. 0.65%). Germany reported its economy contracted by 0.1% in Q2 after 0.4% growth in Q1. France expanded by 0.3% in Q2 after 0.1% in Q1. It was helped by a 0.6% rise in consumer spending in June (the median forecast in Bloomberg's survey was for a 0.3% decline). For its part, Italy's economy, like Germany's contracted by 0.1% growing 0.3% in Q1. Attention turns to inflation. Spain reported a 0.4% decline in the EU harmonized measure, but the base effect (-0.7% in July 2024) means that the year-over-year rose to 2.6% from 2.3%. Germany, France, and Italy report July CPI tomorrow ahead of the aggregate estimate on Friday. It is seen flat at 2.3%. 

CNY: The dollar traded in a narrow range against the offshore yuan yesterday (~CNH7.1770-CNH7.1850). On a day when the greenback was firm against nearly all currencies, the yuan's resilience is notable, not because it rose sharply, but because officials had the cover if desired to weaken the yuan and they did not. The dollar has already traded on both sides of yesterday's range and reached an eight-day high near CNH7.1880. That said after fixing the dollar higher for the past three sessions, the PBOC set the reference rate lower today (CNY7.1441 vs. CNY7.1511 yesterday). The magnitude of the change is notable. It sounds small at 0.1% but is the largest change in the fix in two months. China reports its July PMI first thing tomorrow. It is expected to be little changed from June what the manufacturing PMI was a little below the 50 boom/bust and the services PMI was slightly above. The composite PMI was at 50.7. Although many observers assume that the Chinese leaders who do not have to stand for popular elections are unresponsive the needs of the people, there has been a shift by the central government toward social welfare broad conceived. Expenditure on social security, education, and employment rose to almost CNY5.7 trillion (~$795 bln) in H1 25, which is up nearly 6.5% from a year ago. The new initiative for CNY3600 per child under the age of three may not spur more children as the issue is more complicated but could boost spending. Infrastructure spending (e.g., environmental protection, irrigation, and transportation) was off 4.5% year-over-year. 

JPY: Despite the largest decline in the US 10-year yield since mid-May (~7.5 bp), the dollar was little changed against the yen. Still, the yen was the strongest of the G10 currencies. The dollar reached JPY148.80 in the North American morning. In its consolidation in the remainder of the session, the greenback held above JPY148.30. Almost $885 mln of options struck at JPY149 expire today. The decline in US rates and ideas that the tsunami could spur repatriation have lifted the yen today. The greenback has been sold to JPY147.80. A break of JPY147.65 could spur losses toward JPY147.20-35. Japan will report June retail sales and industrial production figures tomorrow. While retail sales are likely to recover from May's 0.6% decline, industrial output is seen falling for the third consecutive month. and the fourth month in H1. The Ministry of Finance will also report weekly portfolio flows for the week ending July 25. At stake is a six-week buying spree by Japanese investors of foreign bonds, while foreign investors have been next buyers of Japanese equities for the past four weeks. The BOJ meeting concludes Thursday, and there is practically no chance of a change in policy. Still, investors will try to tease out the policy implications of the updated forecasts. 

GBP: Sterling was turned back from its approach of $1.36 last Wednesday and Thursday and fell to almost $1.33 yesterday before finding solid bids. It was the first session in four that sterling did not settle on or near its lows. Indeed, it made new session near session highs (~$1.3365). A possible bullish hammer candlestick was formed. Still, sterling settled, like the euro, below Monday's low (~$1.3350). Follow-through buying today has lifted it to almost $1.3380. A move above $1.3400 would help stabilize the tone, and a move above $1.3450 would be a preliminary sign a low may be in place. Still, if a head and shoulders topping pattern has been formed, it is not unusual to retest the neckline (~$1.3365). 

CAD: The US dollar made a new high for the month in the North American morning yesterday, slightly below CAD1.3790 and in front of the resistance we identified around CAD1.38 and frayed the upper Bollinger Band (~CAD1.3785 yesterday and CAD1.3795 today). It has not traded above CAD1.38 since the end of May. Recall that it bottomed last Wednesday near CAD1.3575. The greenback eased in the NY afternoon to around CAD1.3760 and settled slightly below the previous high for the month (~CAD1.3775). The greenback remains firm in the CAD1.3760-CAD1.3780 range. The Bank of Canada's rate decision will be announced at 9:45 am ET today. There is little doubt that it will remain on hold and its target rate at 2.75%. Going into the decision, the swaps market has slightly less than a 1-in-4 chance of a cut at the next meeting (September 17). On Thursday, Canada's May GDP is due. Economists anticipated the second consecutive contraction (-0.1% in April). The monthly estimates do not translate easily into the quarterly GDP figures. In Q1, the sum of monthly GDP estimates was 0.4%, while Q1 GDP was 2.2% annualized. The median forecast in Bloomberg's survey is for the economy to have contracted by 0.5% in Q2 (annualized) before stagnating (0.1% annualized growth) in Q3. 

AUD: Yesterday's low in the Australian dollar was recorded in the North American session near $0.6495. It stabilized but could not rise above $0.6520 and settled below Monday's low (~$0.6515). It reached nearly $0.6530 today before sellers pushed it back toward yesterday's lows. There are A$1 bln option at $0.6550 that expire today, which seemed more relevant yesterday. This month's low was set on July 17, near $0.6455 and this is the risk on a break of $0.6490. The decline in Q2 inflation, a little more than expected, gives the market no reason to second-guess its strong view of a rate cut by the Reserve Bank of Australia at is August 12 meeting and at least one more cut in Q4. The 0.7% rise in Q2 CPI allowed the year-over-year rate to slow to 2.1% from 2.4%. The trimmed mean and weighted median measures slowed to 0.6%, r and the year-over-year rates moderated to 2.7% from 2.9%-3.0%. 

MXN: The dollar set session highs yesterday in North American near MXN18.6365, a whisker above the high set in Europe earlier in the session. Sellers greeted the dollar and pushed it to session lows around MXN18.7270. It spent the waning hours of the session around MXN18.75. The dollar is trading with a heavier bias today and is probing the MXN18.70 area. In initial support is near MXN18.6350. Mexico reports Q2 GDP today. After growing by 0.2% in Q1, the economy is expected to have grown by 0.4% in Q2, according to the median forecast in Bloomberg's survey. However, it would not prevent the year-over-year pace from contracting (albeit slightly: -0.1%) for the first time since Q1 21. Consumption may have contracted for the second consecutive quarter and capex for a third quarter. Government spending is also seen to have begun a multi-quarter decline. Brazil's central bank meets. It has been hiking rates since last September when the Selic rate was at 10.50%. It now stands at 15% and likely marks the high-water level. The swaps market is pricing in the first cut for late Q1 26. For nearly four weeks, the dollar has chopped in a mostly BRL5.50-BRL5.60 range. The upper end has been frayed on an intraday basis, but the greenback has not closed outside of that range since July 8.