Key Takeaways
- The dollar briefly dipped after softer August PCE but quickly rebounded, ending September nearly 2% stronger.
- The 10-year yield climbed to 5.28%, while Fedspeak point to more tightening, keeping December hike in view.
- Despite mixed Canadian growth data, the USD/CAD trades at 1.42, just below its 2026 high as rate differentials keep the Loonie under pressure.
- USD/MXN broke above 18 for the first time since March, as rising US yields and volatility have eroded carry support.
- Markets await Thursday’s US ISM and Friday’s payrolls for the catalyst that could extend the dollar’s early Q4 breakout.
Dollar absorbs softer PCE as yields climb
The dollar briefly fell after softer August PCE but recovered quickly, leaving DXY at 101.451 and above 101.00 for a third session. The recovery says more than the initial reaction: one softer inflation print was not enough to offset a month of higher US yields and firm Fed expectations. The dollar ends September nearly 2% stronger, its best month since March.
The support increasingly came from the long end, with the 10-year yield rising to 5.28% while the two-year moved only modestly higher. That bear-steepening points to a mix of term-premium and fiscal repricing rather than simply greater confidence in another imminent hike. Even so, Fedspeak kept December tightening in play: Williams said another hike later this year may be appropriate despite no urgency to act, while Barr signalled that further policy adjustments would likely be needed and Cook reiterated her commitment to bringing inflation back to target.
DXY now needs to hold 101 to keep the recent breakout intact, while a close above 101.5 makes the 2026 high at 101.8 really close. Thursday’s ISM report will test whether firm growth and price pressures can sustain the yield move, but Friday’s payrolls remain the cleaner challenge to the current view. Softer employment and wage data could pull December pricing and the dollar lower; another resilient report would reinforce both.
Rate gap keeps USD/CAD pointed higher
USD/CAD pushed toward 1.42 as the Canadian dollar struggled to benefit from a firmer domestic growth picture. July GDP was flat but slightly stronger than expected from a year earlier, while the August estimate suggests third-quarter growth could exceed the Bank of Canada’s forecast. That offered some support to BoC hike expectations, but the new US import ban reinforced the risk that the trade shock has yet to appear fully in the data.
The larger driver remains the rate differential, with the US-Canada two-year spread widening to roughly 155 basis points. BoC communication has acknowledged the tension rather than resolved it: Deputy Governor Gravelle described vigorous Governing Council debates over trade-related growth risks and inflation pressures from the energy shock. Markets see an October hike as a coin flip and lean more clearly toward December, but that has not kept pace with the repricing of the Fed path or the rise in US yields.
USD/CAD is now trading close to its 2026 high after rising in 13 of the past 14 sessions, leaving momentum stretched but the direction intact. The year-to-date high at 1.4248 is the next test, while 1.40 has become the more important support on a pullback. US ISM and Friday’s payrolls could extend the move if they lift Fed expectations and widen the rate gap further, while stronger BoC guidance or clearer evidence that Canadian growth is holding up would give the loonie a better chance to stabilize.
USD/MXN breaks 18 as carry support fades
USD/MXN closed above 18 for the first time since March as the peso ended its worst month since June 2024. The move reflects more than broad dollar strength: rising US yields compressed Mexico’s two-year carry advantage to roughly 310 basis points, weakening the main support behind long-peso positioning. Trade uncertainty and a broader selloff across emerging markets added pressure, while the softer US PCE print produced only a temporary recovery.
Banxico has shown little urgency to defend the currency through tighter policy. Governor Rodríguez said the depreciation is not creating inflation pressure beyond the Bank’s forecasts and argued that Mexico can set policy independently from the Fed, citing domestic slack and limited exchange-rate pass-through. That leaves the peso exposed if US yields continue higher, particularly as analysts revise their forecasts and carry positions are unwound.
The break above 18 keeps the near-term direction higher for USD/MXN, with 18.15 as the immediate test and 18 now the first support. Thursday’s US ISM data could compress the carry spread further if firm activity and price pressures lift Treasury yields, while another contractionary Mexico manufacturing PMI would reinforce concerns about domestic growth. Friday’s payrolls are the larger risk: a strong report would support the dollar and challenge the peso’s remaining carry appeal, while softer US data or progress on trade could pull the pair back below 18.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: September 28 – October 02
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
