USD limping into quarter end, bears in control.

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We saw a bit of fuss ahead of the weekend as US President Trump suspended trade talks with Canada over its moving forward with a digital services tax mostly aimed at US internet services giants like Meta, Netflix and Amazon. USDCAD was above 1.3750 at one point on Friday before settling well back below 1.3700, and then over the weekend Canada cancelled the tax before it could go into effect today, offering some further relief for CAD (and Canada, which has very little leverage in its confrontation with the US on trade issues).

Overnight, the big mover was the Japanese yen, which powered stronger across the board for no readily identifiable reason, with only month-end and quarter-end timing to point at as a possible driver of JPY-positive flows. Some thoughts on GBPJPY below after that pair hit five-month highs last week.

Looking ahead, it is tough to see what can derail the USD bears here besides some dramatic spike in volatility that drives position squaring. Friday’s hot core PCE inflation numbers did little, as we know to discount US inflation data amidst the await for a dovish Trump nominee for Fed Chair seemingly any day now (post July 30 FOMC meeting this heats up again if we have no cut at that meeting). As noted last week, China’s persistent dampening of USDCNH volatility may be a key ingredient holding back a broader USD weakening as AUDUSD, for example, can’t seem to break free to the upside.

Chart: GBPJPY
Trying to pull the focus a bit away from the major USD pairs, it’s worth having a look at GBPJPY, which has poked to new highs since early January last week and is at the highest end of the range since the meltdown in the summer of 2024 after the surprisingly large BoJ cut in July and the ensuing JPY carry trade meltdown. Clearly, we have seen a recent rebuilding of carry trades, if on a far smaller scale, with the recent strong global risk sentiment and the sense that no matter how high Japanese inflation remains, the Bank of Japan will stand pat and the Japanese Ministry of Finance is even moving to limit long JGB issuance. For its part, sterling may have received a boost recently as UK Chancellor Reeves is reportedly looking at revisiting rules for new taxes on “non-doms” (UK non-domiciled residents have local residency but are from elsewhere), especially the 40% inheritance tax. But in the big picture, GBPJPY looks far too high if we consider the net international investment position (massively positive for Japan and massively negative for the UK), the negative fiscal impulse risk from the UK, where fiscal speed limiters are the very high yields. At the margin, worth considering as well that Japan may have to focus on its embarrassingly weak currency relative in trade negotiations with the US. Technically, bears don’t have a case until/unless we get in impulsive sell-off that cuts well back into the old range below 196.85.