It seems like a low-probability scenario that the US can cap long-term US interest rates when hostilities in the Middle East are disrupting the energy market, while China appears not to be showing the extent of the buying restraint It previously did. Moreover, investment-grade corporate issuance is projected to raise a record over $200 bln this month. The inability to stabilize US yields may jeopardize the efforts to weaken the . Treasury Secretary Bessent claims to possess asymmetrical information about what the BOJ will do. Yet, the market has fully discounted a 25 bp hike by next week and a strong probability (77%) of another hike in December. The US 10-year premium over Japan is approaching 200 bp, the most since the end of Q1.
Meanwhile, at the Republican convention, President Trump has offered $5000 to each adult US citizen if the GOP retains both houses of Congress in November’s midterm election. The cost is estimated at $1.2-$1.3 trillion. After being told of $5000 stimulus checks from the ”Doge Dividend”, $2000 from the tariff dividend and $1000 from the expiring ACA subsidies, the market appears somewhat immune to the last promise. Still, it shows the lack of any semblance of concern for the fiscal straits. Meanwhile, the ECB rate hike today is nearly a foregone conclusion and the door to a December hike needs to remain open or the euro potentially faces what could be sharp decline.
Prices
G10
• The reached almost $1.1655 yesterday, its best level since August 28. It met the (61.8%) retracement objective of the losses from the August 21 high (~$1.1710) and settled above the 200-day moving average. It is in a narrow range of less than 20 ticks above $1.1620, ahead of the outcome of the ECB meeting. Options for almost 1.7 bln euros at $1.1650 expire today as do 1.2 bln euros at $1.1600.
• The yen consolidated yesterday and it continues today. The has recovered from almost JPY153.30 to JPY154.15 in Europe. Commitment of Traders report showed non-commercials (speculators) in the CME data were still adding on to short yen positions as of last Tuesday, the day before the squeeze began. They were rebuilding the shorts that were covered in the two weeks after the late July intervention. The same appears to be true of Japanese retail accounts. They were net short JPY3.6 trillion (~$23.5 bln) last week.
• rose to almost $1.3570 yesterday, a nine-day high. The $1.3575 area is the halfway mark of the decline from the August 21 high (~$1.3675). Sterling is trading quietly today between about $1.3535 and $1.3560. Support is seen in the $1.3520-30 area. Tomorrow, the UK is expected to report a flat July GDP with a contraction in industrial output and stagnation in services.
• The consolidated yesterday despite the escalating trade conflict. The US two-year premium has narrowed slightly in recent days. A break of CAD1.3760 would target the three-month low set last month near CAD1.3730, reached the day before the trade talks with the US failed. The 20- and 200-day moving averages converge between CAD1.3830 and CAD1.3840. Options for about $455 mln at CAD1.3800 expire today, which is the session low so far.
• The recorded a higher high and a higher low yesterday for the fifth consecutive session. The pattern may break today. Yesterday, the Aussie reached almost $0.7240, its best level since May 14 The four-year high was set May 6 near $0.7280. It is holding below $0.7230 today. A break below $0.7200, where options for A$760 mln expire today, warns of a consolidative or corrective phase. There are no significant Australian economic reports in the coming days. The futures market has about a 75% chance of a hike later this month, up from around 50% at the end of August.
EM
• The dollar was sold on Tuesday after reaching almost MXN17.00. It fell slightly below MXN16.91 and extended its decline yesterday to almost MXN16.87. The greenback is trading quietly today within yesterday’s narrow range. Last week’s two-year low was near MXN16.8575. Our correlation work shows the Mexican peso is a better proxy for the JP Morgan Emerging Market Currency Index than the Dollar Index. The JP Morgan Emerging Market Currency Index edged higher yesterday, for the fifth session in the past six. It has fared better than many would have anticipated given the dramatic rise of the yen, which had ostensibly funded some of the emerging market carry trades, and the rise in yields.
• The dollar ground down to a new low against the yesterday. It approached the CNH6.70 level, which has not traded below since January 2023. For the second consecutive session today, the greenback has been confined to about a CNH6.7030-CNH6.7080 range. Given the dollar’s weakness, the PBOC seemed to have little choice but to lower the dollar’s fix today, and it did, albeit slightly (CNY6.7766 vs. CNY6.7769 yesterday).
• Despite continued reports of central bank intervention, the fell for its third consecutive session today. It matches the longest losing streak in nearly two months. Many observers attribute the rupee’s weakness to the higher oil prices. The dollar reached INR94.7525 today, an eight-day high and settled above the 20-day moving average for the first time since August 27. Last month’s high was a little above INR95.76.
Other Markets
• The major US equity indices settled below opening levels again yesterday and rising rates and oil prices are sapping risk-appetites. Nearly all the large bourses in the Asia Pacific region fell today, with Australia and Hong Kong leading with a little more thana 1% decline. After losing 1.4% yesterday, Europe’s Stoxx 600 is off another 0.2% in late morning turnover. US index futures are narrowly mixed.
• The tripling of the US Treasury bond buyback failed to persuade the market that Treasury Secretary Bessent’s purchases will make much of a difference given the rising oil prices and corporate and US government supply. The slightly more than a five-basis point increase in the US 10-year yield was the most since the day after Bessent announced that the Treasury would at least double the bond buybacks. The yield is up a little less than two basis points today to a new high near 4.86%. European yields jumped 7-11 bp yesterday, and as is often the case in a rising rate environment, the peripheral premiums over Germany widened. European yields are mostly slightly softer today, though the 10-year UK Gilt is up a almost a basis point to a new high around 5.27%.
• traded inside Tuesday’s range yesterday, and for the sixth consecutive session today, it traded on both sides of $4400. Silver looks better technically. It traded on both sides of Tuesday’s range yesterday and settled above its high. However, there has been no follow-through today, and silver is trading with a heavier bias inside yesterday’s range. Still, for the fourth session, it is holding above $65.
• October has extended its gains to almost $97.85 today. The 98.30 area is the (61.8%) retracement of the losses from the early April high (~$117.65). The October contract settled above the upper Bollinger Band for the past two sessions. It is near $96.70 today.
Data
• Weekly US have been steady between 204k and 207k for the past three weeks. Several Fed officials have characterized the labor market as stable, which allows them to focus on the other mandate, price stability. August are expected to have risen by 0.4%, which would lift the year-over-year rate to 5.3% (from 4.7%) at the headline level. The core is seen firming to 4.6% from 4.2%. Tomorrow’s CPI is more important in the reaction function of most, if not all, Fed officials. The headline is seen flat at 3.4%, while the headline may tick down to 2.4% from 2.5%.
• The ECB will hike key rates 25 bp shortly. This will lift the deposit rate to 2.50%. The market is also confident (~90%) of a hike in December. The swaps market has another hike in H1 27 discounted. The ECB staff will update its forecasts. In June, it anticipated 0.8% growth this year, 1.2% in 2027 and 1.5% in 2028. After Q2 GDP was revised to 0.6%, the staff will likely bump up this year’s forecast. The staff had projected 3% CPI this year, 2.3% next, and 2.0% in 2027. The August aggregate CPI was 3.3%, and it rose by a cumulative 0.2% in the last four months of 2025. That may be challenging to best this year, which seems to suggest an upward revision to this year’s forecast.
• Australia’s Melbourne Institute’s measure of consumer inflation expectations was steady at 4.9% in September. It finished last year at 4.7% and peaked in April at 5.9%. Firm data and hawkish comments from central bank officials have bolstered market expectations for a hike late this month. Three weeks ago, the futures market had about a 10% chance of a hike discounted and now there is a little less than a 75% chance discounted.
• Japan reported the surge in machine tool orders continued in August. For the third consecutive month, the year-over-year pace exceeded 50%. The preliminary estimate was for a 64.7% rise year-over-year (50.4% in July). Both domestic and foreign orders are up over 60% year-over-year. In August, foreign orders rose 4.6% after slipping 3.8% in July. Domestic orders fell for the second consecutive month (-3.2% in August and -8.2% in July). The weekly portfolio flow report from the Ministry of Finance showed that last week, Japanese investors bought foreign bonds for the first time in three weeks. However, they sold more foreign equities than bond purchases. For their part, foreign investors bought Japanese bonds for the third consecutive week, the longest buying streak since January. Foreign investors also bought Japanese stocks for the second consecutive week; something they have not done since May.
