FOREX: AUD Crosses - Trade Sideways And Consolidate As USD Takes Center Stage

The BBDXY range overnight was 1204.11 - 1208.69, Asia is currently trading around 1205. The USD has been consolidating around 1205, managing to hold above its support in the face of the ongoing Fed debacle. A sustained break below 1197/1195 is needed to regain the momentum lower and retest the year's lows. We are heading into corporate month-end and this could explain the market's reticence to press the USD lower as we could see some USD demand potentially over today and tomorrow.

• Otavio Costa on X: “For the first time, the US is running twin deficits while government debt has reached extreme levels, and the dollar stands at one of its most overvalued levels in history. This combination is unsustainable. Something must serve as the outlet for these pressures, and the most likely escape valve is the dollar itself.”
• “While many argue the selloff has gone too far, we see it as likely the opening phase of a broader, long-term weakening trend — driven by the growing necessity of financial repression rather than mere policy choice.”
• Phil Magness on X: “Questions you should be asking right now: 1. Why does Trump want to control the Federal Reserve board? 2. Why does Trump want to staff it with an economist who's best known for his crackpot scheme to intentionally devalue the dollar & effect a backdoor national debt default?”
• Bloomberg - “Dollar, Two-Year Yields Navigate Shifting Rate Winds Together: The dollar’s strengthening correlation with Treasury yields is a double-edged sword, as traders grapple with repricing the outlook for Federal Reserve interest rates against a backdrop of a weakening labor market and burgeoning inflation pressures..”
• Data/Events :  MBA Mortgage Applications

Fig 1: BBDXY 2H Chart

Source: MNI - Market News/Bloomberg Finance L.P

Government bond yields have extended gains post the July CPI beat, albeit with limited follow through. The front end move was beyond 3bps before being pared. The 3yr yield was last near 3.42%. The 10yr remains close to 4.32% in latest dealings, fading a move above 4.34% post the data. 

• Headline CPI was +2.8%y/y, versus 2.3% expected, while the trimmed mean rose 2.7%y/y prior was 2.1%. Given this is the first month of the quarter and it doesn't contain updates on most of the services components, the market may be treating the print with some degree of caution.
• In the futures space, 3yr (YM) was off 4.5bps to 96.55 not long after the data. 10yr futures were holding at -2bps.
• OIS dated RBA contracts are around 1-2bps firmer verus pre data levels. 

• China's Industrial Profit in July declined, marking a third consecutive month.
• China Industrial Profits YoY contracted -1.5%, following -4.3% in June.
• This is the seventh monthly decline out of the prior 12.  
• The Year to date result of -1.70% was in  line with the prior month's result of -1.8%.
• The Year to date Industrial Company's Profit was CNY4.02tn.