Dollar waits on payrolls

USD: Dollar waits on payrolls

The dollar is softer as calmer Gulf headlines improve risk appetite and reduce demand for havens. Markets now seem more comfortable with the idea that shipping through Hormuz can normalize, helped by fresh diplomatic signals. That has supported higher-beta FX and taken some pressure off oil. Still, G10 moves remain contained ahead of Friday’s payrolls report.

The key point is that oil is reacting faster than the physical market has improved. Shipping remains fragile, inventories are lower, and regional risks have not disappeared. That limits how far markets can lean into the de-escalation trade. For the dollar, it means the haven bid can fade but not fully unwind.

Fed pricing has barely moved since last week’s meeting, even as Brent has fallen sharply. Markets still price about 15bp of tightening by September and roughly 35bp by December, which shows that rates are being driven more by data and post-Fed hangover than by energy alone. The latest US services data added to that tension, with ISM services holding at 54.1, business activity at 59.1 and new orders at 57.2. But employment slipped back into contraction at 47.4, while prices rose to 70.3, giving both sides of the Fed debate something to work with.

Friday’s payrolls report is the key near-term test. A second soft labor print would strengthen the case that the Fed can stay patient and could keep the dollar under pressure. A stronger report would make June look more like a one-off and bring September back into sharper focus. Until then, the dollar may stay rangebound, with Gulf headlines setting the tone for risk and payrolls setting the tone for rates.

CAD: Yield spread gives Loonie a breather

USD/CAD is trading near 1.399, its lowest level this week, with the Loonie getting some relief as the US-Canada two-year yield spread narrows. The pair is still rangebound, but the latest move shows that rate spreads remain the cleaner driver than trade headlines or oil alone. The spread has slipped toward 130bp after reaching roughly 143bp in late June and early July. That compression has helped pull USD/CAD back from the 1.42 area.

The move came from the Canadian short end. Canada’s two-year yield rose to about 2.91% this morning from 2.83% yesterday, an increase of roughly 8bp. A soft two-year Government of Canada auction helped push yields higher, with investors demanding more concession to absorb supply. Stronger domestic data also added pressure, as the recent GDP beat and July manufacturing PMI at 53.5 reduced the urgency for BoC easing.

The broader rates backdrop is also doing some work. Provincial supply from Ontario and Quebec added duration to the market, while global yields remain firm with US rates still elevated. Canada’s curve has been catching up after months of underperformance versus the US front end. That has narrowed the rate gap and given CAD a better footing, even if the Fed-BoC policy divide remains wide.

For USD/CAD, the message is balanced. A narrower yield spread gives the Loonie room to breathe, but the pair likely needs more than one day of Canadian yield support to break lower with conviction. Further spread compression, firmer Canadian data or a softer US payrolls print would put the 1.39 area back in focus. If US yields reprice higher again, USD/CAD could quickly find support above 1.40.

MXN: Peso strength meets Banxico hold

USD/MXN is trading near 17.24, with the peso at its strongest level since mid-June. Better global risk appetite has helped, as markets price a smoother path for shipping through Hormuz and lower oil reduces pressure on EM FX. The peso has also gained more than 8% from its 52-week high near 18.82 last August. That keeps MXN among the stronger performers in the EM complex.

The domestic backdrop is giving the move more support. Mexico’s economy rebounded 1.5% q/q in Q2 after contracting in Q1, helped by strong exports and firmer activity across key sectors. International reserves near $255.5bn also give Mexico a solid external cushion. The growth mix is not perfect, but it has been strong enough to keep investors comfortable owning the peso.

Banxico is still expected to keep rates at 6.5% today and maintain a cautious tone. Headline inflation has moved closer to target, but services inflation remains sticky enough to prevent a more relaxed message. Stronger growth also makes it harder for the central bank to lean too dovish. With the Fed showing limited urgency to tighten again, the macro backdrop remains supportive for MXN.

The longer-term story is broader than carry. Mexico continues to benefit from its role in the US AI infrastructure buildout, with tech-linked exports helping support the external account. That adds resilience at a time when trade talks with the US and future Banxico easing remain key risks. For now, USD/MXN can stay heavy if risk sentiment holds, Banxico stays patient and Mexico’s export momentum remains intact.

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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.