The US Dollar’s Firm Tone, G10 and EM Highlights
The US dollar traded with a firmer bias in subdued markets, supported by rising US rates and an oversold short-term setup. It stayed firm versus the yen even as a BOJ Deputy Governor fuelled expectations of a possible hike next month, while price action continued to track US yields more closely than Japanese rates. In G10, the euro slid to a five-day low near $1.1640 and probed below it, with the 200-day moving average around $1.1635 and the 61.8% retracement near $1.1625. Dollar/yen hovered near recent highs, setting a strongest close in six sessions near JPY159.30 after stalling below ~JPY159.50, with the post-intervention peak just under JPY159.80 on 18 August; the five-day moving average crossed above the 20-day average for the first time since last July’s intervention. Sterling fell about 0.4% to just under $1.3585 and extended towards $1.3570, while GBP840 mln of options at $1.3550 expire today; the next support zone is flagged at $1.3335–60. The Canadian dollar slipped about 0.25% on the week as the Canada–US two-year spread widened to 128 bp, pushing USD/CAD to almost 1.3895 with resistance near ~1.3910, the 20-day at ~1.3920, and 1.3950–60. The Australian dollar peaked near $0.7190 before easing to $0.7165, its five-day average, as rate-hike expectations firmed; futures pricing moved to almost a 50% chance of a hike next month versus just over 10% at the end of last week, while a year-end hike is fully priced compared with almost 60% previously.
In EM, the dollar edged above MXN16.99 with MXN17.00 meeting last week’s high just under MXN17.08; the 20-day average sits near MXN17.10 and 17.1365 marks the 38.2% retracement of the move from the late-July high around 17.54. After settling below CNH6.72 on Tuesday for the first time in 3½ years, it rebounded to about CNH6.7225 and hovered around CNH6.72 as the PBOC lifted the fixing to CNY6.7840 from 6.7829. The rupee weakened after a holiday, reversing from almost INR95.39 on Tuesday to about 95.56 today, with last week’s high a little above 95.76. Elsewhere, South Korea’s Kospi rose 1.5% even after back-to-back hikes took the base rate to 3%, while Europe’s Stoxx 600 fell 0.4%; Nasdaq futures gained about 1% and S&P 500 futures rose by under half that. Benchmark 10-year yields rose 3–5 bp yesterday, and today Europe added 1–2 bp while the US 10-year was up 2 bp to nearly 6.67%. Gold fell 1.3% to a four-day low just under $4579 with a corrective target near $4555, while silver stayed within Tuesday’s $67.45–$69.95 range after stalling near $70; October WTI rebounded from below $80 to near $83.30 and hovered around $82, with last week’s high almost $87.70. US trade data showed the H1 26 deficit at about $534.8 bln versus $716.6 bln in H1 25 and $558 bln in H1 24, while in Q2 net exports subtracted about 1% from GDP and inventories were a 0.7% drag; jobless-claims momentum pointed to a four-week average of 204k in mid-August. In Europe, eurozone M3 rose 3.4% y/y in July versus 3.3% in June, household lending increased to 3.1% from 3.0%, and lending to non-financial firms accelerated to 4.4% from 4.0%. Australia data showed household spending up 1.1% in July versus a 0.3% forecast, with June revised to 1.0% from 0.8%; private capex fell 3.6% in Q2 versus a 0.8% forecast, while Q1 was revised to 6.9% from 6.5%. Japan’s investors sold JPY1.98 tn of foreign bonds and nearly JPY870 bln of foreign equities, both the first sales in three weeks. China’s industrial profits grew 11.2% y/y in July versus 15.1% in June, while Mexico posted an H1 26 trade surplus of $9.86 bln versus $1.43 bln a year earlier as exports rose 10.7% and imports 7.7%; its central bank raised this year’s GDP forecast to 1.5% from 1.1% and cut next year’s CPI view to 2% from 2.1%.
Derivative Strategies and Trade Recommendations
We believe derivative traders should position for continued pressure on the Canadian dollar as trade tensions with the US escalate. Given that Canada’s discount to US two-year yields has widened to 128 basis points, buying USD/CAD call options targeting the 1.3950 to 1.3960 range is highly attractive. Historical trade disputes, such as the tariff conflicts of 2018, show that the Canadian dollar can quickly shed 4% to 5% of its value when import bans are threatened.
With the US 10-year Treasury yield climbing toward 6.67%, we expect the US dollar to keep challenging the Bank of Japan despite potential rate hikes. Traders should consider buying short-dated USD/JPY call options or utilizing bull call spreads to capture a push past the JPY 159.80 resistance. Historically, unilateral central bank interventions struggle to succeed when the macroeconomic backdrop is dominated by high global oil prices and surging US yields.
Sterling is extending its losses toward $1.3570, with major option expiries at $1.3550 creating a short-term magnet for price action. We recommend buying put options on GBP/USD targeting the next technical support level between $1.3335 and $1.3360. Data from previous sharp trend reversals indicates that speculative long unwinding often accelerates once key retracement levels are breached.
The euro has slipped below its 200-day moving average near $1.1635, signaling a shift in momentum that traders should exploit. We suggest buying near-the-money put options on EUR/USD to target the next support area around $1.1625. Historically, when the euro fails to hold its 200-day moving average during a broader US dollar rebound, a further downside of 1.5% to 2% is common.
In contrast, the Australian dollar remains resilient near $0.7165, bolstered by a strong 1.1% surge in July household spending and hot CPI data. With the market now pricing in a 50% chance of a rate hike next month compared to just 10% last week, we favor buying AUD/USD call options. Similar hawkish repricing events in the past have consistently driven the Aussie dollar to outperform other major currencies in the short term.
Gold’s sharp 1.3% drop to $4,579 and silver’s struggle near $70 indicate that the recent metals rally is losing steam. We advise hedging existing long metals positions by buying bear put spreads, targeting a drop in gold toward $4,555. Past market cycles show that when US Treasury yields rise, precious metals typically undergo a 3% to 5% corrective pullback.
