The US dollar closed higher against most major currencies, except for a subtle drop against the JPY. Percentage changes recorded were EUR +0.13%, JPY -0.15%, GBP +0.11%, CHF +0.05%, CAD +0.46%, AUD +0.59%, and NZD +0.47%. Ahead of the Reserve Bank of New Zealand’s rate cut expectation, NZD was weaker. In Canada, July’s CPI increased by 0.3% monthly, but the yearly rate slowed to 1.7%.
US housing data showed mixed results, with housing starts rising to 1.428 million, but building permits were softer at 1.354 million. Despite positive data, immediate attention remains on non-farm payrolls and consumer price index. Housing resilience potentially poses inflation risks if the Fed cuts rates prematurely.
Geopolitical News
In geopolitical news, Trump suggested Europe is keen to resolve the Ukraine war but ruled out US troop involvement.
There are expectations for a meeting between Putin and Zelensky, with the US facilitating negotiations. Tariffs on India for Russian oil purchases and stricter export controls on Nvidia to China are anticipated. The Reserve Bank of New Zealand is expected to cut its cash rate by 25 basis points to 3.0%.
US stocks saw declines, with the Dow up 0.02%, but the S&P fell 0.59%, NASDAQ down 1.46%, and Russell 2000 decreasing 0.78%. US Treasury yields dropped: 2-year at 3.754%, 5-year at 3.827%, 10-year at 4.310%, and 30-year at 4.911%.
USD Strength Against Commodity Currencies
The US dollar is showing strength against commodity currencies, and we see an opportunity here. With Canadian inflation slowing to 1.7% and the Reserve Bank of New Zealand expected to cut rates, the policy divergence with the US is widening. We should consider buying call options on USD/CAD, as historical data from 2022-2023 showed the pair rallied significantly when the Bank of Canada paused its hikes while the Fed remained hawkish.
The mixed US housing data, coupled with tomorrow’s Fed minutes and Chair Powell’s Jackson Hole speech on Friday, points toward a period of high uncertainty. This environment is ideal for volatility-based strategies, so we are looking at buying options straddles on the S&P 500. The VIX is currently trading near 18, but we’ve seen it spike over 20% in the days surrounding pivotal Fed announcements in the past.
Geopolitical developments could quickly override economic data, particularly the discussions around a Ukraine peace settlement. A breakthrough would be a major risk-on event, likely sending the Euro higher and weakening the US dollar’s safe-haven appeal. We should be ready for this potential shift by holding some long EUR/USD call options as a tactical play on a sudden positive outcome.
We are cautious on the technology sector given the NASDAQ’s 1.46% drop and the threat of tighter export controls on Nvidia. The semiconductor industry has been a market leader, but it is also highly sensitive to US-China trade tensions, as we saw during the trade disputes of 2018-2019. We are buying put options on a basket of semiconductor stocks to hedge against a potential downturn in the coming weeks.
The bond market is sending a conflicting signal, with yields falling despite the dollar’s strength. This suggests bond traders are anticipating a future economic slowdown, forcing the Fed to become more dovish than it is currently letting on. This is reinforced by the relatively flat yield curve, where the 2-year yield at 3.75% is not far below the 10-year at 4.31%, a pattern that has historically preceded economic cooling.
