Fed Chair Warsh speaks Wednesday as Treasury doubles bond buyback, sending dollar to 98.55. Tokyo CPI, Canada Q2 GDP, and US-Canada trade fallout in focus.
The Treasury’s decision to double its bond buyback program has injected a new dynamic into currency markets, sending the Dollar Index to 98.55, its lowest since mid-May. The buyback will run at least $32 billion a quarter starting early next month, following earlier moves to support the bond market – adjustments to bank capital requirements that incentivize Treasury holdings and the Genius Act, which provides a legal framework for stablecoins to invest in US bonds.
Fed Chair Warsh speaks Wednesday at the Jackson Hole symposium, and the market expects him to outline a broad critique of modern central banking. The recently released minutes showed he is considering reducing the number of FOMC meetings to six from eight. Fed funds futures have a hike before year-end almost fully discounted. Warsh’s speech is likely to address first principles rather than current policy, but the shift in tone is already priced in.
The 10-year Treasury yield has risen back above 4.70% despite the buyback, as chronic budget deficits – around 6% of GDP – and rising oil prices keep upward pressure on yields. The dollar’s weakness has been broad-based, with the euro, sterling, and commodity currencies all advancing.
Euro and Sterling
The euro is probing the 50% retracement of its decline from the January high near $1.2080, testing $1.17. A sustained break targets $1.18, the 61.8% retracement and May’s high. Momentum indicators are stretched, and the euro is fraying its upper Bollinger Band. Initial support sits around $1.1650.
Sterling reached $1.3675, its best level in six months, overshooting the 61.8% retracement of the decline from late January. It rose for the fourth consecutive week. The next target is in the $1.3700-10 area, though momentum is overbought and the pair is above the upper Bollinger Band.
Yen and Yuan
The dollar-yen pair approached 159 before the weekend, after the buyback announcement drove it back to 158. The market sees 160 as a pain threshold for Japanese officials. Tokyo’s August CPI, due August 28, is the most important data point for Japan. Headline CPI has risen to 2.0%, the fastest pace this year, with the core rate at 1.9%. A rise above the BOJ’s 2% target would reinforce expectations for a September hike, which swaps price at about 85%.
The offshore yuan is at its best level against the dollar since February 2023, with the dollar near CNH6.70. Chinese officials are managing the pace of appreciation, but the direction is clear. The yuan’s gains come even as the US 10-year premium over China hovers around 300 basis points.
Canadian Dollar and Aussie
The Canadian dollar faces a shock after US-Canada trade talks failed late Friday. The US imposed 50% tariffs on about $20 billion of Canadian goods, and Canada has threatened dollar-for-dollar retaliation. The greenback fell to nearly CAD1.3730 before the weekend but is likely to jump Monday, possibly into the CAD1.3850-1.3900 area. Canada reports Q2 GDP and the establishment employment survey this week. StatCan estimates the economy expanded at a 3.4% annualized pace in Q2, above the Bloomberg median of 2.1%.
The Australian dollar rose about 1.3% last week, its biggest weekly gain since April, reaching almost $0.7180. Resistance is in the $0.7185-0.7200 area. July CPI is due but unlikely to spur a strong reaction, given deflationary readings and below-average jobs growth. The RBA has hiked three times this year but appears in no hurry to add more.
Peso and Emerging Markets
The Mexican peso broke below MXN17.00 for the first time since mid-2024, reaching nearly MXN16.89. The central bank has cut its overnight rate twice to 6.5%, but swaps now price a 50% chance of a hike by year-end. Mexico reports July trade balance and the central bank updates its economic forecasts in the inflation report this week. The Colombian peso was the strongest EM currency last week, rising almost 3% to its best level since 2018, helped by a 12.0% policy rate.
Data and Risks
The US reports the PCE deflator, durable goods, and the advance goods trade balance this week, but the focus is on Warsh’s speech. The BLS also releases a preliminary estimate of benchmark revisions to nonfarm payrolls. Last year’s preliminary revision was -911,000, and the final number was -862,000 – a signal the market will watch closely. The Atlanta Fed’s GDPNow tracker shows Q3 growth at 4.0%, nearly double the Bloomberg median.
The failure of US-Canada trade talks is the most immediate risk for the Canadian dollar, which has rallied for four weeks. The greenback is likely to recover lost ground against the loonie as the market reprices the tariff shock.
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