DXY has been largely range bound in July & Aug around 98-100 levels. But we think that the forces which started the fall in DXY from 110 towards current levels, are still present and in the same degree perhaps. Tariff led policy uncertainty (US Federal Appeals court declared tariffs as illegal on Friday), faster rate cut possibilities (if Aug NFP come as per our estimates at 40k) & lower US growth prospects due to lower supply of labor as well as AI capex momentum looking stretched. EUR has found it difficult to sustain above 1.17 recently for various reasons. Latest being the French no confidence vote. Historically, Euro area political risks impact the currency only when there are clear signs of contagion or a lasting impact on real activity. Both seem unlikely, in our view. Hence we should see EUR headed towards 1.20 levels by end CY25. Technically we need to have a weekly close above the 1.17 level for another up move towards 1.20 level. The star FX performer for Aug was CNY. And this came without much FX market pressure. Also when both CNY and CNH were already trading weaker than the CNY fixing, policymakers still moved the fixing stronger. Taken together with a jump in the FX conversion ratio in July, we think this shows the interplay between clear policy intentions and the response of market participants. Structurally, CNY continues to screen as significantly undervalued, with the degree of undervaluation now comparable again to the period of the “China shock” in the mid-2000s. Recent economic performance—large export market share gains and a surge in the current account surplus bode well for CNY. We believe CNY is eventually headed towards 7.00 levels by end CY25. This has important implications across FX markets, both because it takes some of the onus off the Euro to provide the Dollar depreciation impulse and because CNY is an important regional anchor for low-yielder currencies in both EM and G10. JPY on the other hand has been 147 centric for past many weeks. The ruling LDP is scheduled to hold a review of the Upper House election results at a general assembly on Tuesday. But we think the political instability is priced in already. Any weakness due to political noise should be used to buy JPY against USD as we believe PM Ishiba might not finally resign. Also, we believe that BOJ is set to hike rates by 25 bps in it’s 30th Oct meeting considering the elevated inflation profile & a US trade deal in place. Our eventual target for JPY is 138 by Dec’25. Stop to the view is 152. CMP is 147.05. AUD needs to break above .66 levels for a decisive up move otherwise is range bound between .64-.66. CAD too is range bound between 1.36-1.38 for this week. Currently at it's 50 DMA (1.3735), we see a weak NFP triggering a move lower to 1.36 levels. GBP on the other hand has significantly underperformed against EUR which we find perplexing. UK rate cut probabilities have been priced out (only 10 bps in REMCY25 & 23 bps till Mar’26) where as Eurozone we still expect another cut by Dec’25(markets pricing in only 10 bps of cut by Dec’25). We continue to remain short EURGBP as our previous trade recommendation on 10th Aug’25. Half risk short at .8655 & another half short at .8725. Profit target is .8505 and stop loss is .8770. In summary, this week’s NFP data might give further impetus downwards to DXY. The next move lower in DXY is likely to be led by CNY & JPY. With US federal appeals court voting tariffs illegal, policy confusion in US is too significant to ignore. In addition, worries on Fed independence might also push DXY lower for longer. Best bets against DXY are EUR, JPY and CNY in that order. While Sep is traditionally a bullish month for DXY but this year it is different. Even if US equities fall due to a very weak NFP, DXY might still fall because of faster rate cut possibilities. And if the NFP comes strong around median 75k no, it might still fall due to lower growth being priced in US ex AI capex spending.
