DXY Outperforms On Fresh US Strikes On Iran - Yields Rise Across The G10

OVERVIEW : Tuesday, September 1st, 26’

Markets turned more defensive as US-Iran tensions escalated further, with Trump confirming that the US was striking Iranian targets near the Strait of Hormuz in retaliation for Iran’s attempted sea-mining of the Strait. US CENTCOM also confirmed attacks against the IRGC, while Iran launched retaliatory missiles against US bases and interests. The latest developments also cast further doubt over any return to the previous US-Iran understanding, with Araghchi and Baghaei saying the US must first return to its commitments, while Iran’s President said Tehran would abide by the agreement if the US does. WTI and Brent extended their gains, with shipping risks and uncertainty around the US-Iran understanding keeping the crude complex underpinned. The Dollar outperformed across G10, supported by the more defensive geopolitical backdrop and a rise in Treasury yields, with the 10Y rising to 4.80%. Precious metals sold off despite the escalation, as the stronger USD and higher yields dominated the move.

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US DOLLAR

The Dollar outperformed across G10, supported by the more defensive geopolitical backdrop and a rise in Treasury yields, with the 10Y rising to 4.80%. Fed’s Barr added to the hawkish tone, saying that if inflation does not moderate soon, it will be time for an interest rate hike, reinforcing the support from higher yields. US data was mixed, with S&P Global Manufacturing PMI final coming in at 53.9 vs. 53.2 expected, while JOLTS job openings rose to 7.271M from 7.182M, slightly below expectations. ISM Manufacturing PMI eased to 54.6 from 55.6, missing the 55.2 forecast, but the softer activity data was not enough to offset the broader USD support from higher Treasury yields and the more defensive geopolitical backdrop.

Data:

  • US JOLTS Job Openings (Jul) 7.271M vs. Exp. 7.3M (Prev. 7.182M)
  • US S&P Global Manufacturing PMI Final (Aug) 53.9 vs. Exp. 53.2 (Prev. 53.9)
  • US ISM Manufacturing PMI (Aug) 54.6 vs. Exp. 55.2 (Prev. 55.6)


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EURO

EUR saw only a marginal performance on the day, with the broader USD strength weighing on the single currency, although EUR ultimately closed marginally firmer. ECB commentary remained mixed, with Rehn warning that the conflict of attrition in Iran could keep inflation elevated, while Simkus said a September hike would “not be enough” but that a 50bps move was not needed. Nagel struck a more constructive tone on growth and noted easing in core and services inflation with no second-round effects, while Kocher said an ECB hike would be needed if upside risks are confirmed in the projections. Euro area data provided little fresh support, with no meaningful EUR reaction to the morning’s Final Manufacturing PMIs, which were mostly revised lower. Headline HICP rose to 3.3% YoY from 2.9%, in line with expectations, while core inflation eased to 2.1% vs. 2.3% expected and services inflation fell to 3.0% from 3.3%. The unemployment rate remained at 6.4%, slightly above expectations, while German Manufacturing PMI final improved to 54.3 from 52.2, marginally beating expectations.

Data:

  • European CPI Ex Food & Energy (Aug Y/Y) 2.1% (exp. 2.3%, prev. 2.2%).
  • European HICP (Aug YY) 3.3% vs. Exp. 3.3% (Prev. 2.9%); Services 3.0% (prev. 3.3%).
  • European Unemployment Rate (Jul) 6.4% vs. Exp. 6.3% (Prev. 6.4%).
  • German S&P Global Manufacturing PMI Final (Aug) 54.3 vs. Exp. 54.1 (Prev. 52.2).
  • German Retail Sales (Jul MM) -3.4% vs. Exp. 0.4% (Prev. -1.1%).
  • German Retail Sales (Jul YY) -2.5% (Prev. -0.2%).
  • European S&P Global Manufacturing PMI Final (Aug) 52.7 vs. Exp. 52.8 (Prev. 51.9).


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GREAT BRITISH POUND

GBP was firm on the day, with rising UK yields providing initial support before broader USD strength weighed on Sterling, leaving the Pound ultimately closing relatively flat. BoE’s Mann reinforced the hawkish tone, saying it is better for interest rates to be a little too high and then corrected if necessary. The UK 10Y yield reached 5.21%, its highest level since the GFC, keeping the rate backdrop supportive for GBP. UK data was mixed, with Nationwide house price growth slowing to 1.6% YoY vs. 2.1% expected, although monthly growth came in at 0.2% vs. 0.1% expected. Final Manufacturing PMI was broadly stable at 51.7 vs. 51.5 expected, easing only slightly from 51.9.

Data:

  • UK Nationwide Housing Prices (Aug YY) 1.6% vs. Exp. 2.1% (Prev. 1.4%).
  • UK Nationwide Housing Prices (Aug MM) 0.2% vs. Exp. 0.1% (Prev. -0.1%).
  • UK S&P Global Manufacturing PMI Final (Aug) 51.7 vs. Exp. 51.5 (Prev. 51.9).


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AUSTRALIAN DOLLAR

AUD saw two-way price action on the day, with stronger Chinese manufacturing data initially supporting sentiment and helping the Australian Dollar find some demand. China’s private RatingDog Manufacturing PMI rose to 51.5 in August from 50.9, beating expectations of 51.0 and keeping the China-linked AUD backdrop constructive. The domestic data was also relatively supportive, with Australian Building Permits falling 3.6% M/M vs. -4.8% expected, while the Q2 Current Account deficit narrowed to AUD 27.2B vs. AUD 30B expected. However, geopolitical escalations ultimately weighed on risk-sensitive currencies, with AUD giving back its earlier gains and closing flat on the day.

Data:

  • Chinese RatingDog Manufacturing PMI (Aug) 51.5 vs. Exp. 51.0 (Prev. 50.9)
  • Australian Building Permits MM (Jul P) -3.6% vs. Exp. -4.8% (Prev. 7.2%)
  • Australian Current Account (Q2) -27.2B vs. Exp. -30B (Prev. -27.1B)


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CANADIAN DOLLAR

CAD saw choppy price action on the day, with the Loonie failing to outperform despite rising oil prices, as the broader US trade war backdrop continued to weigh on sentiment. USTR Greer added to the pressure, warning that Canada could face additional tariffs as well as import bans or prohibitions, similar to measures Canada has previously imposed on the US.

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NEW ZEALAND DOLLAR

NZD saw choppy price action on the day, with a lack of demand for the high-beta Kiwi weighing on sentiment as the geopolitical backdrop deteriorated. Attention now shifts to tomorrow’s RBNZ decision, with the market looking for fresh direction from the Bank’s policy signal.


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JAPANESE YEN

JPY saw choppy price action on the day, with a lack of fresh domestic catalysts keeping the currency directionless. However, the Yen remained resilient against another round of escalations in the Middle East, with the more defensive backdrop helping to limit downside and ultimately leaving JPY closing flat on the day. US Treasury Secretary Bessent told Japanese officials that rate hikes are needed, while a Japanese MoF official stressed that the BoJ should act based on the domestic economy rather than US influence. Meanwhile, the Japanese 10Y yield reached 3.00% for the first time since 1996, as markets positioned for a potential BoJ hike this month. On the data side, S&P Global Manufacturing PMI rose to 54.9 from 54.5, marking an eighth consecutive month of expansion and the strongest reading since April, with new business growing at its fastest pace since January 2018.

Data:

  • Japanese Capital Spending YY (Q2) 1.6% vs. Exp. -0.2% (Prev. 0.0%)
  • Japanese Company Profits YY (Q2) 24.6% vs Exp. 15.2% (Prev. 14.6%)
  • Japanese Company Sales YY (Q2) 5.9% (Prev. 1.1%)


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SWISS FRANC

CHF lacked any meaningful demand on the day, closing as a clear laggard on the day with greenback catching all defensive demand on the back of escalation in the middle east.