20/08/2025 Market Watch

Currencies Steady, Equities Mixed, Commodities Consolidate

Key Takeaways:

  • NZD fell more than 1% after a dovish RBNZ rate cut.
  • AUD weakened further on poor price action.
  • JPY posted a larger trade deficit, UK CPI came in stronger.
  • Asian stocks mixed, China’s CSI 300 rose over 1%, Shanghai hit a 10-year high.
  • European equities extended gains, US futures weak.
  • Yields mostly softer, UK Gilt yields fell despite higher CPI.
  • Gold steadied after dropping below $3312, oil remained range-bound.

The New Zealand dollar led G10 losses, sliding more than 1% as the Reserve Bank’s well-signaled rate cut was paired with dovish forward guidance. The Australian dollar remained under pressure, dragged lower after weak price action yesterday. Other G10 currencies saw limited movement, although the US dollar firmed modestly against several emerging market peers. Macro news outside of New Zealand was sparse, with Japan reporting a wider trade deficit as exports to the US, EU, and China fell, while UK inflation for July came in firmer than expected. Focus in the US remains on the FOMC minutes, although they are viewed as less impactful following the recent jobs report and policy commentary.

Asian equity markets diverged. Japanese and Taiwanese stocks declined, but most others advanced, highlighted by China’s CSI 300 rising more than 1% and the Shanghai Composite reaching a 10-year high. In Europe, the Stoxx 600 added modest gains, extending its winning streak to three consecutive sessions and six in the past seven. US index futures traded softer after Tuesday’s sell-off.

Bond markets reflected a cautious tone. European 10-year yields eased 1-2 basis points, while UK Gilts fell four basis points despite stronger CPI data. The US 10-year Treasury yield slipped just below 4.30%. Commodities showed signs of consolidation. Gold steadied after a 0.5% drop, rebounding from lows below $3312 back toward $3327. Crude oil held within Monday’s range, with October WTI trading between $61.45 and $63.00.

United States of America

Overview

The Dollar Index has remained range-bound over the past five sessions, contained between 97.65 and 98.35. It briefly tested 98.45 today, touching the 20-day moving average, before slipping back into the established range. A trendline from the July and August lows sits near 97.80, while this month’s downtrend line is positioned slightly below 98.25. This technical backdrop highlights the ongoing consolidation, with no decisive breakout in either direction.

Attention now shifts toward the Federal Reserve’s upcoming policy meeting. While today’s FOMC minutes are less relevant following recent employment data and official remarks, the September meeting is expected to deliver a 25 bp rate cut. This adjustment would remove some of the current policy restrictiveness. The Fed is also set to update its Summary of Economic Projections, where the median dot could indicate one further cut this year and as many as four in 2026. In addition, there may be a decision to reduce or conclude quantitative tightening, given that reserves are approaching “ample” levels, as signaled by declining use of the reverse repo facility.

Economic Drivers

  • Dollar Index constrained within a narrow range, reflecting consolidation.
  • Market focus on September FOMC meeting for guidance on policy outlook.
  • Expected 25 bp rate cut to reduce restrictiveness of current settings.
  • Updated Fed projections likely to show scope for one more cut in 2025 and up to four in 2026.
  • Possible reduction or end of quantitative tightening as liquidity levels improve.

Data and Events

  1. 20 August 2025: FOMC Members Speak

Price Action

  • Dollar Index confined between 97.65 and 98.35 for five sessions.
  • Brief move to 98.45 tested 20-day moving average before retreating.
  • Support from trendline near 97.80, resistance capped near 98.25.

Key Points:

  • Dollar Index locked in consolidation range.
  • Markets look ahead to Fed’s September meeting.
  • Quarter-point rate cut expected to ease restrictive stance.
  • Updated projections may include additional cuts through 2026.
  • QT program under review as reserves reach ample levels.

Australia & New Zealand

Overview

The Australian and New Zealand dollars both came under heavy pressure. The Australian dollar, after pausing earlier in the week, resumed its decline following last Thursday’s bearish outside down day. It slipped through the 61.8% retracement of its recent rally at $0.6475, falling as low as $0.6425 and edging close to the month’s low of $0.6420. A break below that level would carry bearish implications, opening the way toward $0.6350–0.6380.

In New Zealand, the Reserve Bank delivered a widely anticipated rate cut, lowering the cash rate target to 3.0% from 3.2%. Markets viewed the move as dovish, with forward guidance pointing to another 45 basis points of easing by Q1 2026. The RBNZ projects the policy rate below the neutral level of around 2.50%, reinforcing expectations for a more prolonged period of accommodation. The NZD reacted sharply, falling more than 1% and leading losses across G10 currencies.

Economic Drivers

  • Australian dollar pressured by weak market sentiment and ongoing commodity-linked concerns.
  • Anticipation of PMI data in Australia, with July readings at cyclical highs.
  • RBNZ cut policy rate to 3.0%, signaling further easing into 2026.
  • Divergence between New Zealand’s dovish stance and other central banks weighing on NZD.

Data and Events

  1. 20 August 2025: RBNZ Official Cash Rate
  2. 20 August 2025: RBNZ Monetary Policy Statement
  3. 20 August 2025: RBNZ Rate Statement
  4. 20 August 2025: RBNZ Press Conference

Price Action

  • AUD broke below retracement objective at $0.6475, extended losses to $0.6425, with support at $0.6420.
  • Further downside toward $0.6350–0.6380 if broken.
  • NZD fell more than 1%, the weakest among G10, pricing in expectations of additional policy easing.

Key Points:

  • AUD weakened, nearing month’s lows with focus on PMI data.
  • Break below $0.6420 would extend AUD bearish momentum.
  • RBNZ cut rates to 3.0% and guided for further easing into 2026.
  • NZD fell more than 1%, leading G10 currency losses.
  • Policy stance in New Zealand projected below neutral at 2.50%.

Canada

Overview

The Canadian dollar weakened as the US dollar climbed to its strongest level against it since May, with the exchange rate pushing through CAD1.3880, surpassing the August 1 high. This follows softer-than-expected July CPI data in the US, which increased expectations of a Federal Reserve rate cut next month from around 25% to just over 35%. The risk-off environment added pressure, with the Nasdaq falling 1% and broader weakness in dollar-bloc and emerging market currencies.

Attention now turns to domestic economic data. Canada will release June retail sales figures on Friday, with Statistics Canada’s advance estimate pointing to a 1.6% gain. This rebound is expected to be supported by stronger auto sales and would offset May’s 1.1% decline. More importantly, excluding autos, retail sales may show their first increase in four months. This comes after strong labor market data in June, where total employment rose by 83k, led primarily by part-time gains but with a notable pickup in full-time positions as well.

Economic Drivers

  • Softer July US CPI lifted odds of a Fed rate cut in September.
  • Risk-off sentiment weighed on dollar-bloc currencies, supporting USD/CAD upside.
  • Canadian economy showing resilience with solid job growth in June.
  • Retail sales expected to recover strongly in June, helped by autos.

Data and Events

No major economic releases are scheduled today.

Price Action

  • USD/CAD surged to 1.3870, the highest close since May.
  • Break above 1.3880 from August 1 marks new multi-month high.
  • Next resistance seen near May peak of 1.4015, with 200-day moving average slightly higher at 1.4040.

Key Points:

  • USD/CAD reached highest level since May.
  • Softer CPI boosted rate cut expectations, pressuring CAD.
  • Retail sales expected to rise 1.6% in June, driven by autos.
  • June employment data showed strong gains of 83k.
  • Excluding autos, retail sales may post first increase in four months.

China

Overview

China kept its loan prime rates unchanged, holding the one-year at 3.0% and the five-year at 3.50%, in line with market expectations. At the same time, financial flows continue to show divergence. The expansion of the Southbound Bond Connect drove record flows from the mainland into Hong Kong last month, while foreign investors reduced holdings of Chinese bonds. Appetite for “negotiated CDs” has faded, with usage declining for the third straight month in July.

The yuan remained stable within a narrow range against the US dollar. For over two weeks, the offshore yuan has traded between CNH7.1680 and CNH7.1980, hovering near the midpoint. The PBOC has continued to gradually guide the dollar fix lower, setting it below CNY7.14 for six consecutive sessions, a level that was only briefly touched once in the previous month. This reflects a more flexible approach in managing the reference rate. Despite capital outflows, implied three-month volatility for the onshore yuan has fallen to its lowest point in a year, suggesting controlled conditions in the currency market.

Economic Drivers

  • Loan prime rates held steady at 3.0% (one-year) and 3.50% (five-year).
  • Record southbound flows to Hong Kong through the Bond Connect program.
  • Foreign investors cutting exposure to Chinese bonds and “negotiated CDs”.
  • PBOC introducing more flexibility in daily reference rate settings.
  • Large trade surplus continues to shape overall external balance.

Data and Events

  1. 20 August 2025: 1-y & 5-y Loan Prime Rate

Price Action

  • Offshore yuan confined to a narrow range of CNH7.1680–CNH7.1980 for more than two weeks.
  • Dollar fix set at CNY7.1384, the sixth consecutive session below CNY7.14.
  • Implied three-month yuan volatility at one-year lows, reflecting stability.
  • A close below CNH7.1820 would be technically negative.

Key Points:

  • Loan prime rates held unchanged at 3.0% and 3.50%.
  • Southbound Bond Connect flows to HK reached record levels.
  • Foreign investors reduced Chinese bond holdings.
  • Offshore yuan stable within tight trading band.
  • PBOC gradually guiding the dollar fix lower.

Europe

Overview

The euro has remained confined within the range established on August 14, between $1.1630 and $1.1715. Today, it briefly eased to near $1.1620, testing the 20-day moving average. A trendline from the July highs comes in near $1.1745, marking the upper boundary for near-term resistance. Expiring options are also influencing trading, with sizeable positions clustered around $1.1675 and $1.1600.

Economic data from Germany highlighted continued price pressures. July producer prices fell by 0.1% month-on-month, while the year-over-year measure slipped further into negative territory at -1.5% compared with -1.3% previously. Producer price deflation has persisted since March, after briefly turning positive late last year and in the early part of this year.

Economic Drivers

  • Lack of major news flow keeping euro in a tight range.
  • Germany’s July PPI fell 0.1%, with annual deflation deepening to -1.5%.
  • Producer prices have been in sustained deflation since March.
  • Expiry of large option positions at $1.1675 (1.1 bln euros) and $1.1600 (855 mln euros).

Data and Events

  1. 20 August 2025: German PPI
  2. 20 August 2025: Final CPI

Price Action

  • Euro trading within $1.1630–$1.1715 since August 14.
  • Brief dip to $1.1620 tested 20-day moving average.
  • Trendline resistance at $1.1745.
  • Options expiries at $1.1675 and $1.1600 influencing price levels.

Key Points:

  • Euro stuck in tight range since August 14.
  • Tested support near $1.1620 and 20-day moving average.
  • German PPI shows deeper deflation at -1.5% year-over-year.
  • Options expiries creating short-term trading pressures.
  • Resistance remains near $1.1745.

Japan

Overview

The Japanese yen strengthened as the decline in US yields and risk-off moves in equities pulled the dollar lower, even as the greenback firmed against other G10 currencies. The dollar had reached a four-day high near JPY148.10 before meeting strong selling pressure. It slipped below JPY147.50 in North American trading and extended losses to JPY147.15 today. Since the August 1 sell-off, USD/JPY has largely been contained in a JPY146–JPY148 range, with the only close above JPY148 on August 11 proving temporary. The broader tone remains one of consolidation.

On the data front, Japan reported July trade figures showing a deficit of JPY117.5 bln. This brings the year-to-date trade balance to a deficit of JPY2.34 trillion ($15.8 bln), smaller than the JPY4 trillion ($26 bln) shortfall over the same period in 2025. Exports fell for the third consecutive month, dropping 2.6% year-over-year, the steepest decline since the pandemic. Shipments to the US fell 10.1%, marking the fourth straight monthly contraction, while exports to China fell 3.5% and to Europe 3.4%. Imports declined 7.5%, with sharp falls in crude oil, coal, and liquefied natural gas purchases.

Economic Drivers

  • Decline in US yields supported yen strength against the dollar.
  • Japan posted a JPY117.5 bln trade deficit in July.
  • Year-to-date trade deficit narrowed to JPY2.34 trillion from JPY4 trillion a year earlier.
  • Exports dropped 2.6% year-over-year, with steep declines to the US, China, and Europe.
  • Imports fell 7.5%, driven by weaker energy demand.

Data and Events

  1. 20 August 2025: Core Machinery Orders
  2. 20 August 2025: Trade Balance

Price Action

  • Dollar retreated from JPY148.10 high to JPY147.15.
  • Options expiries: nearly $1 bln at JPY148.00 today, $1.4 bln on Thursday.
  • USD/JPY contained in JPY146–JPY148 range since August 1 sell-off.
  • Brief close above JPY148 on August 11 proved unsustainable.

Key Points:

  • Yen strengthened as US yields declined.
  • USD/JPY remains capped within JPY146–JPY148 range.
  • Japan reported July trade deficit of JPY117.5 bln.
  • Exports fell 2.6% year-over-year, steepest drop since pandemic.
  • Imports down 7.5%, led by energy weakness.

United Kingdom

Overview

Sterling has entered a consolidative phase after a strong rally from the August 1 low near $1.3140 to almost $1.3600 last week. The currency slipped to a five-day low below $1.3480 yesterday and extended losses to nearly $1.3460 today. Support is seen around $1.3415–1.3420, where the 20-day moving average and the 38.2% retracement of this month’s rally converge. Sterling briefly recovered after the release of firmer-than-expected July inflation data, rebounding toward $1.3510, but momentum stalled in early European trading.

Inflation pressures remain elevated. Headline CPI rose 0.1% in July, with the year-over-year rate edging up to 3.8% from 3.6%, driven by base effects. In the first seven months of the year, CPI rose at an annualized pace of 4.1%, more than double the 1.9% pace over the same period in 2024. Core CPI also firmed to 3.8% from 3.7%, while services inflation climbed to 5.0%, its highest in three months. These figures reinforce sticky inflation risks and pushed back expectations of further rate cuts, with markets now pricing the next move only in early 2026.

Economic Drivers

  • Strong rally in sterling followed by consolidation as gains looked stretched.
  • UK CPI rose 0.1% in July, with annual inflation at 3.8% versus 3.6% previously.
  • Core CPI ticked up to 3.8%, and services inflation rose to 5.0%, a three-month high.
  • Inflation path in 2025 running at 4.1% annualized, compared to 1.9% in 2024.
  • Rate cut expectations pushed further out, with less than 50% chance of one this year.

Data and Events

  1. 20 August 2025: CPI

Price Action

  • Sterling retreated from near $1.3600 high to lows of $1.3460.
  • Support seen at $1.3415–1.3420 near 20-day moving average and retracement level.
  • Recovery attempt to $1.3510 stalled, with resistance near yesterday’s $1.3530 high.

Key Points:

  • Sterling consolidating after strong rally earlier in August.
  • UK inflation data firmer than expected, headline at 3.8%.
  • Services inflation rose to 5.0%, highlighting sticky price pressures.
  • Market now sees less than 50% chance of another rate cut this year.
  • First cut not fully priced until Q1 2026.

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