28/08/2025 Market Watch

Dollar Softens, Markets Await Cues

Key Takeaways:

  • Dollar remains under pressure against G10 and emerging currencies.
  • Chinese yuan at year’s low fix, five-day rally continues.
  • US issues $185 bln in bills, $44 bln in seven-year notes.
  • US GDP Q2 may see slight upward revision to 3.1%.
  • Asia Pacific equities mixed, Europe flat.
  • US 10-year yield near 4.23%, French yields lead European decline.
  • Gold holds firm at $3400, WTI crude trades below $64.

The US dollar remains under steady pressure after its recent setback in North America. It is weaker against all G10 currencies and most emerging market peers, with the Chinese yuan leading as it extended a five-day rally, the longest since September, and was fixed at a new low for the year. Today’s US debt auctions include $185 billion in bills and $44 billion in seven-year notes. Economic data may bring a minor upward revision to second-quarter GDP from 3.0% to 3.1%, while weekly jobless claims remain in focus. Later, markets will look to remarks from Federal Reserve Governor Waller.

Equity performance across Asia Pacific was mixed. Mainland Chinese shares advanced, but Hong Kong and related indices lagged. In Europe, the Stoxx 600 gained 0.1% yesterday and is flat today as investors await cues from US trading. Benchmark government bonds saw yields adjust after the US rally, with European yields generally softer. Notably, French 10-year yields fell the most, around 2.5 basis points, while Dutch political developments had little effect on markets. The US 10-year Treasury yield eased slightly below 4.23%.

Commodities remain active, with gold steady near $3400, its highest in three weeks, signaling continued demand for safe-haven assets. Oil prices are subdued, with October WTI trading in a narrow range below $64, highlighting a lack of strong directional drivers.

United States of America

Overview

The dollar began the week with modest strength following Fed Chair Powell’s remarks last week, but momentum faded quickly. After reaching nearly 98.75, the Dollar Index retreated as North American traders sold into the rally, falling to new session lows near 98.15 and slipping closer to 98.00 today. This leaves the greenback trading within last Friday’s established range of 97.55–98.35.

Bond markets show softer yields, with the two-year yield around seven basis points lower than last week and the 10-year yield about three basis points lower. Markets still price slightly higher odds of a rate cut next month compared to last week. A potential upward revision to Q2 GDP, supported by stronger consumption, is expected. Meanwhile, eight regional Fed surveys released this month have been evenly split between improvement and deterioration, highlighting the uncertain economic outlook. Later today, Fed Governor Waller, who dissented dovishly at the last meeting, will deliver remarks on monetary policy.

Economic Drivers

  • Dollar weakness driven by shifting Fed risk assessment and dovish rate expectations.
  • Lower two-year and 10-year Treasury yields reflecting softer interest rate outlook.
  • Mixed signals from eight regional Fed surveys, showing both improvement and deterioration.
  • Market expectation of an upward revision in Q2 GDP, supported by stronger consumption.
  • Anticipation of Fed Governor Waller’s speech on monetary policy guidance.

Data and Events

  1. 28 August 2025: Prelim GDP
  2. 28 August 2025: Unemployment Claims

Price Action

  • Dollar Index traded between 97.55 and 98.35, with resistance near 98.75.
  • Selling pressure from North American markets weighed on the dollar.
  • Current levels around 98.00 reflect hesitation to break beyond last week’s range.

Key Points:

  • Dollar Index remains rangebound after early-week strength faded.
  • Yields softened, reinforcing expectations of a rate cut next month.
  • Q2 GDP likely to see upward revision on stronger consumption.
  • Mixed Fed regional surveys show uncertainty in economic momentum.
  • Fed Governor Waller’s remarks could provide new policy signals.

Canada

Overview

The Canadian dollar strengthened as the US dollar fell to a seven-day low near CAD1.3780, settling below the 20-day moving average for the first time in a month. Selling pressure continued today, driving the pair to two-week lows below CAD1.3770, with support seen around CAD1.3750 and CAD1.3720.

Attention now shifts to Canada’s economic data, with the Q2 current account balance released today ahead of the more impactful Q2 GDP figures tomorrow. Canada’s external accounts have steadily improved since 2015, with the current account deficit averaging less than 0.5% of GDP over the past four years, a significant recovery from the 3.6% deficit in 2010. In Canadian dollar terms, the deficit averaged C$3.5 billion per quarter in 2022 and C$4.6 billion in 2023.

However, the merchandise trade balance has sharply deteriorated this year. After a small deficit of nearly C$400 million in Q1 2025, Q2 is expected to show a deficit near C$19 billion, which would be the largest in at least a decade. Bloomberg’s survey points to a median estimate of around C$19.3 billion, and a weaker outcome could weigh on GDP expectations. Forecasts for Q2 GDP remain split between a 0.5% and 0.7% contraction, though the difference is minimal for market impact.

Economic Drivers

  • Canadian current account has improved structurally since 2015, averaging less than 0.5% of GDP deficit in recent years.
  • Merchandise trade balance sharply deteriorated in Q2, with risk of a record C$19.3 billion deficit.
  • Expectations of weaker current account data could impact sentiment ahead of Q2 GDP.
  • GDP forecasts point to a contraction of between 0.5% and 0.7%.

Data and Events

  1. 28 August 2025: Current Account

Price Action

  • USDCAD fell to two-week lows below CAD1.3770.
  • Settled below the 20-day moving average (CAD1.3810) for the first time in a month.
  • Support levels are around CAD1.3750 and CAD1.3720.

Key Points:

  • USDCAD fell to fresh two-week lows, breaking below key technical levels.
  • Canada’s Q2 current account balance due today, GDP release follows tomorrow.
  • Current account deficit likely to widen significantly on weak trade balance.
  • Forecasts show Q2 GDP contracting between 0.5% and 0.7%.
  • Market focus on whether deficits weigh further on Canadian growth outlook.

Japan

Overview

The US dollar briefly strengthened against the yen, reaching a three-day high near JPY148.20, marking the ninth attempt this month to hold above the JPY148 level. However, it quickly reversed as US yields retreated, pulling the pair down to JPY147.30 before slipping further to JPY147 today. Despite the weak price action, the pair remains within the range established last Friday between JPY146.60 and JPY148.80. Momentum indicators suggest that the lower boundary of this range is likely to hold for now.

Attention now turns to Japan’s upcoming macroeconomic data, with several key releases scheduled tomorrow. Retail sales are expected to show a pullback after a 0.9% rise in June, while industrial output is projected to ease following a strong 2.1% gain in the prior month. The most important release will be the Tokyo CPI, which is expected to show headline and core inflation moderating for a third consecutive month. On the policy side, the swaps market is largely unchanged this month, still pricing in 17–18 basis points of tightening by year-end. Meanwhile, the US 10-year yield premium over Japan, which narrowed to a three-year low of around 263 basis points last week, remains slightly below that level.

Economic Drivers

  • US yields fell 4–5 basis points, pulling the dollar down from intraday highs.
  • Market focus on Japanese data including retail sales, industrial output, and Tokyo CPI.
  • Tokyo inflation expected to moderate for the third month in a row.
  • Swaps market continues to price 17–18 basis points of tightening by year-end.
  • US 10-year premium over Japan near 263 basis points, its lowest in three years.

Data and Events

No major economic releases are scheduled today.

Price Action

  • Dollar peaked at JPY148.20 before falling to JPY147.
  • Failed to hold above JPY148, a recurring theme throughout the month.
  • Trading remains within last Friday’s range of JPY146.60–JPY148.80.
  • Intraday momentum suggests lower range support likely to hold.

Key Points:

  • Dollar-yen remains rangebound despite repeated tests of JPY148.
  • US yield declines triggered selling pressure on the dollar.
  • Japanese data expected to show weaker retail sales and industrial output.
  • Tokyo CPI anticipated to confirm moderating inflation trend.
  • US-Japan yield spread hovers near three-year lows, limiting dollar upside.

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