Instimatch - FX morning commentary - 9/6/25

Good morning

The US Dollar strengthened over the weekend and Asia currencies generally softened, as US non-farm payrolls came in stronger than expected at 135k in May, and allaying some initial fears of a much sharper slowdown in the US labour market given alternative measures such as the ADP prints. That said, the details continue to point to a moderation in the US labour market, with quite a meaningful downward revision in past NFP estimates, and the vast bulk of the employment gains were narrow concentrated in leisure and hospitality coupled with education and health services.

U.S. Treasury Secretary Scott Bessent, Commerce Secretary Howard Lutnick, and Trade Representative Jamieson Greer are expected to meet China’s Vice Premier He Lifeng in London, building on a tentative truce established in Geneva last month.  The talks are expected to focus on rare earth exports on the China side, coupled with various controls and restrictions including on semiconductors on the US side. Over the weekend, Reuters reported that China has issued temporary rare earth licenses to suppliers of top 3 US automakers, providing some signs of de-escalation ahead of trade talks. Meanwhile, the FT reported that China has agreed to fast-track approvals for rare earth export licenses for some European companies, and the overall picture seems to be one where China is still working through its system of export controls on rare earths perhaps due in part to bureaucratic inertia, even as China will very much keep its rare earth export licensing process in place given the meaningful leverage that it gives in future conflicts.

Financial markets are leaning towards a glass-half-full view of the world right now. The MSCI world equity index is trading at all-time highs, and investors are scaling back expectations for the size of forthcoming monetary easing cycles.  However, regional markets remained cautious as traders await actual outcomes rather than just talk. With U.S. CPI inflation data looming later this week, traders are balancing hopes for tariff de-escalation with broader macroeconomic dynamics.

The US dollar index which measures the greenback against a basket of major currencies, fell 0.2% to 99.02 in Asia hours.

Given the Whit Monday holiday in Europe today, FX trading could be a little more subdued. UR/USD is steady around $1.1400 after ending the week on the defensive weighed by the stronger greenback post the US jobs data.

GBP/USD opens the European session with a modestly positive bias around the $1.3550 level. On the calendar this week for GBP is jobs data tomorrow and the UK government's spending review on Wednesday. Neither should be a game changer for sterling. Expect Cable to trade a 1.3500-1.3600 range, although there will be some downside risks at some point if traders are right with their call for two 25bp BoE rate cuts this year. The market currently prices just 36bp of rate cuts this year.

USD/JPY fell 0.3% to 144.42 as data overnight showed that Japan’s economy contracted slightly less than initially estimated in Q1 amid weak consumer spending and falling exports due to tariff-induced concerns.

The US Treasury has already released its semi-annual report on Foreign Exchange Policies. No major trading partner was labelled as a currency manipulator, but among Asian markets China, Korea, Taiwan, Singapore, and Vietnam were included in the monitoring list, having met at least 2 out of 3 of the criteria that the US Treasury has set out on this front.

The Chinese yuan’s onshore USD/CNY and offshore USD/CNH pairs were both largely unchanged trading around 7.1871 and 7.1884. China’s consumer price index remained unchanged at -0.1%y/y for a third consecutive month as food deflation persists, while export growth slowed to 4.8%y/y in May, down from 8.1%y/y in April. Meanwhile, imports slowed to -3.3%y/y, the third straight month of negative growth. On net, China's trade balance actually beat forecasts yet again, rising to $103.2bn, good for a 4-month high.