Forex News

Chris Turner at ING explains that Korea’s earlier massive portfolio outflows and a weaker Korean Won (KRW) pushed USD/KRW to 1560 in June, despite a large current account surplus. Policy measures, including changes to National Pension Service hedging and access to Bank of Korea FX liquidity, helped. The AI-led export boom has broadened, supporting growth, a July rate hike and greater earnings repatriation. ING sees limited need for USD/KRW to move much below 1400 yet, but views Korea’s turnaround as a lesson for Japanese authorities on strengthening domestic investment conditions.

Won recovery anchored in domestic growth

"For much of this year, Korea has struggled with massive portfolio outflows and a weaker Korean won, which sent USD/KRW as high as 1560 in June. Those portfolio flows were stemming from foreign selling of Korean equities ($100bn sold year-to-date) and domestic residents putting money offshore. Korea's huge current account surplus on the back of the semiconductor boom did not seem to matter."

"Yet the turnaround in the won, with USD/KRW now trading under 1400, looks to have been driven by the Korean growth story. The AI investment and export boom has filtered into broader parts of the economy and delivered another strong 2Q GDP print of 0.6% quarter-on-quarter – helping the Bank of Korea to hike 25bp to 2.75% in July. It now seems exporters have greater confidence to repatriate more of their foreign earnings, where the current account surplus can run as high as $50bn on a monthly basis."

"The turnaround in the won is a reminder of the need for an attractive investment environment at home. We highlight a recent BoK research paper on the subject in a recent opinion piece. It is not clear that USD/KRW needs to go a lot lower than 1400 just yet."

"After all, foreigners still seem to be selling Korean equities. But the turnaround in Korea may be a useful lesson for Japanese authorities. Creating an attractive domestic investment environment at home – both through growth and higher interest rates – is an effective route to strengthen the domestic currency."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

Commerzbank’s Charlie Lay, Dr. Henry Hao and Moses Lim note that China’s July data showed weaker Industrial Production and Retail Sales, underscoring fading momentum at the start of Q3. Beijing has responded with calls for new fiscal measures, while USD/CNY and USD/CNH have edged higher as earlier corporate FX conversion support wanes, leaving the Yuan more exposed to deteriorating sentiment on China’s growth outlook.

Yuan vulnerability grows with weaker data

"China's economy lost further momentum at the start of Q3, with July activity data coming in below market expectations across most major indicators. Industrial production expanded 4.5% yoy, easing for the first time in three months. Retail sales growth also disappointed, reinforcing concerns that the economy is struggling to sustain the pace in H1."

"With the tech sector unable to compensate for the investment slump and soft consumption, the pressure on policymakers to deliver concrete measures is building. Premier Li Qiang convened a State Council meeting and called on officials to “promptly formulate practical and effective incremental policies” to shore up growth."

"This language represents the most senior acknowledgment to date that July’s broad economic shortfalls require a direct response. Consequently, the debate has shifted from whether Beijing will intervene to how quickly and through what mechanisms. Fiscal acceleration, including faster bond issuance and front-loaded infrastructure spending, is the most likely near-term lever."

"In FX, both USD/CNY and offshore USD/CNH rose 30 pips to 6.74 and 6.75 respectively yesterday."

"Chinese banks’ net client FX sales halved in July to an eight-month low of USD25.2bn, signaling a sharp slowdown in the corporate conversion activity that previously supported the yuan. This fading technical buffer leaves the currency increasingly vulnerable to worsening sentiment surrounding China's growth outlook."

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• EUR/USD climbs to its highest level since June as the US Dollar comes under broad selling pressure.
• Long-term US Treasury yields fall sharply after the Treasury announces larger buybacks of longer-dated debt.
• Fed rate-hike expectations ease, while markets still expect the ECB to raise rates in September.

EUR/USD climbs sharply on Wednesday, reaching its highest level since June as the US Dollar (USD) comes under fresh selling pressure following the US Treasury’s announcement that it will increase buybacks of longer-dated government debt. At the time of writing, the pair trades around 1.1653, up 0.68% on the day.

In a press release, the US Department of the Treasury said it will at least double the size of its liquidity-support buyback operations for longer-dated nominal coupon securities, covering the 10-year to 20-year and 20-year to 30-year sectors. The maximum size of each operation will increase from $2 billion to at least $4 billion.

Following the announcement, long-term US Treasury yields fall sharply as bond prices rise. The 30-year Treasury yield drops by around 9 basis points to near 5.20%, after rising above 5.30% on Tuesday, its highest level since 2007.

The Greenback was already trading on the back foot earlier on Wednesday as softer US economic data in recent weeks prompted traders to scale back expectations of a Federal Reserve (Fed) interest-rate hike at the upcoming meeting.

The US Dollar Index (DXY), which gauges the Greenback's value against a basket of six major currencies, trades near 99, down 0.65% on the day and touching its lowest level since June 1.

Attention now turns to the minutes of the Federal Open Market Committee’s (FOMC) July meeting for fresh clues on the monetary policy outlook.

In contrast, markets widely expect the European Central Bank (ECB) to raise interest rates in September amid persistent concerns over energy-driven inflation.

Meanwhile, the final reading of the Eurozone Harmonized Index of Consumer Prices (HICP) showed inflation rose 0.2%MoM in July, unchanged from the preliminary estimate. Core HICP inflation was also confirmed at 2.5% YoY.

Rabobank’s Senior FX Strategist Jane Foley notes AUD/USD is currently on the back foot, with the Australian Dollar the weakest G10 currency on a one-day view. Despite market doubts, Rabobank still expects one more Reserve Bank of Australia (RBA) rate hike this year. Foley highlights Chinese demand weakness, energy-related trade shocks and a softer domestic backdrop, but still sees scope for a shallow AUD/USD uptrend into next year.

Australian Dollar pressured yet supported

"Despite hawkish comments today from Deputy Governor Hauser, AUD/USD is on the back foot. The AUD is the weakest performing G10 currency on a 1-day view and the third weakest after the JPY and USD on a 5-day view. While it is Rabobank’s expectation that the RBA will raise rates once more this year, the market is less certain."

"Market implied policy rates are currently priced for just 12 bps of rate hikes on a 3-month view. In addition, market commentary is pointing to a list of headwinds including weaker Chinese demand for Australian commodities and a softer domestic economic climate as potentially undermining the AUD going forward."

"While safe haven USD flows on any further escalation of the Iran war could drive AUD/USD back to the 0.70 area near-term, we continue to see scope for a shallow uptrend in AUD/USD into next year aided by November RBA rate hike risk and on Rabobank’s call that the Fed will avoid tightening policy this year."

"Given the backdrop of soft Chinese growth and the consensus view that the RBA’s rate hiking cycle is coming towards the end, the AUD may be losing its shine. However, the USD has also lost its lustre in recent weeks as Fed rate hike expectations have been pared back, and this should provide AUD/USD with some support."

"Additionally, Australia’s current account has swung into deficit on the back of the country’s large net foreign liability position. While a current account deficit is not necessarily associated with a weak currency, it can raise its vulnerability in times of broad-based market uncertainty."

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UOB economist Enrico Tanuwidjaja notes that Bank Indonesia (BI) kept the BI Rate at 5.75% in August, prioritizing Rupiah and macro-financial stability over growth. Tanuwidjaja highlights BI’s focus on external risk management, use of liquidity and macroprudential tools to support domestic conditions, and a still-tight monetary stance as global uncertainty and capital flow volatility persist.

BI prioritizes Rupiah and stability

"In her maiden lead, the Acting Governor Damayanti stated that preserving rupiah stability amid heightened global financial market volatility is the key focus, while keeping inflation within BI's target range of 2.5% ±1% in 2026-2027. The overall policy mix is designed to support sustainable economic growth."

"Today’s decision was widely expected by markets and unanimous among economists surveyed prior to the meeting and importantly, BI's communication suggests that the central bank remains primarily focused on IDR stability and external risk management rather than near-term growth support. The policy statement repeatedly referenced elevated global uncertainty and continued volatility linked to geopolitical tensions in the Middle East."

"In our view, today's decision reinforces the message that BI is prepared to keep monetary conditions relatively tight until there is an improvement in the global risk sentiment, thereby moderating capital flow volatility and stabilising the rupiah."

"Given risks to rupiah’s trajectory amid still-rising external uncertainty and volatility and meaningful risks from higher energy prices, we still hold to our view for now that it is still a rate pause rather than the end of the current hiking cycle. However, given the relative stability of the rupiah in recent weeks, we scale back our forecast to just two additional 25bps rate hikes in 4Q26 to anchor rupiah’s stability and inflation expectations. This will bring the policy rate to a terminal level of 6.25% by end-2026."

"Aug’s MPC decision signals that BI remains firmly focused on defending macro-financial stability. The policy bias remains one of caution, with currency stability continuing to take precedence over growth support in the current global environment."

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• The US Treasury will double the size of some longer-dated debt buyback operations to support market liquidity.
• Buybacks will increase from $2 billion to at least $4 billion per operation for maturities ranging from 10 to 30 years.
• The new operation size will take effect on September 9 and remain in place through November 4.

The United States (US) Department of the Treasury (US Treasury) announced on Wednesday that it will double the size of some of its buyback operations aimed at supporting liquidity in the longer-dated Treasury securities market.

According to a statement reported by Reuters, the Treasury will increase liquidity support buybacks for longer-dated nominal coupon securities from $2 billion to at least $4 billion per operation.

The increase applies to two maturity sectors: securities ranging from 10 to 20 years and those ranging from 20 to 30 years. The measure will take effect on September 9 and remain in place through November 4.

Buyback operations allow the Treasury to remove certain older and less-liquid securities from the market. Increasing their size is therefore aimed at improving liquidity at the long end of the yield curve, without in itself representing a change in the overall amount of US government debt.

Societe Generale’s Sam Cartwright argues that a new UK Prime Minister has not altered the constrained fiscal backdrop, limiting ambitions on housebuilding, social care, investment and defence. The Autumn Budget is seen focusing on a defence uplift and day-to-day spending, with larger social care reforms delayed. Cartwright highlights that higher capital borrowing could lift gilt yields and challenge the Bank of England rate-cut path.

Fiscal limits and monetary implications

"A new Prime Minister has not changed the UK’s constrained fiscal backdrop. Burnham's ambitions on housebuilding, social care, investment, and defence may therefore prove difficult to deliver, even if the government uses the additional 'flexibility' in the fiscal rules."

"Even before any policy announcements, fiscal headroom at the Autumn Budget could be £11.5bn lower than projected in March, owing to the US-Iran conflict weighing on growth and pushing up interest rates. In this scenario, a favourable revision to wage growth could instead boost headroom by around £10bn. If the Iran-US situation improves, the deterioration in headroom could be as little as £5bn, but could rise to £23-43bn if it worsens."

"Autumn Budget likely limited to a defence uplift to 3% of GDP and reversing the planned slowdown in day-to-day spending Combined with the deterioration in the pre-measures forecast, we think these costs can be offset through welfare reform, spending reprioritisation, modest tax rises and the use of remaining headroom."

"A 0.3% of GDP a year increase in borrowing to fund capital spending could put our BoE call at risk and raise gilt yields by just under 20bp We currently forecast Bank Rate remaining unchanged at 3.75% in 2026, followed by 75bp of easing in 2027. However, our macro model suggests this higher borrowing could raise Bank Rate and 10-year gilt yields by around 10-20bp over the first three years, posing a risk to our view that Bank Rate falls to 3%, with 3.25% a plausible alternative."

"Risk of a loosening in the fiscal rules One risk is that Burnham's housing and investment ambitions prove difficult to deliver within the existing fiscal rules, increasing the likelihood of higher borrowing through a later loosening of the rules, for example by switching the debt target to public sector net worth, exempting defence spending, or extending the horizon for meeting the target."

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HSBC strategists review July data and the latest China Politburo guidance. Retail sales and Fixed Asset Investment softened, while Industrial Production and exports were supported by AI-related and green technology demand. Policymakers maintained a proactive fiscal and moderately loose monetary stance, signalling faster bond-funded spending, targeted liquidity tools, infrastructure investment in the “six networks”, and a services-led consumption strategy.

Policymakers lean on fiscal support

"Policymakers broadly maintained the current policy stance, reiterating “proactive” fiscal policy and a “moderately loose” monetary policy, while noting the economy is increasingly led by new growth drivers. They also flagged continued headwinds and revived calls to “strengthen counter-cyclical” support – wording that was not used during the April meeting – reflecting softer domestic momentum. Exports have helped cushion growth, but pressure for additional policy support is building."

"The Politburo called for faster spending and greater bond utilisation, starting with the deployment of existing annual quotas. Issuance has lagged versus last year: Special Local Government Bond (SLGB) issuance is 55% year-to-date (Wind) compared with 63% over Jan-July last year, while refinancing bond issuance has reached 84% of the annual quota – highlighting local fiscal constraints and a tilt towards refinancing over new investment."

"Meanwhile, the stance around monetary policy suggests less urgency for broad interest rate cuts or reserve requirement ratio (RRR) cuts. Support is more likely via targeted structural tools and liquidity operations (e.g., Open Market Operations and treasury bond purchases)."

"Accelerated fiscal spending is expected to support investment in the “six networks” – power, water, computing, information and communications technology, urban infrastructure, and logistics – which was also part of the 15th Five-Year Plan. The National Development and Reform Commission (NDRC) has cited over RMB7trn of investment this year (Xinhua, 25 May), though detailed plans are yet to be unveiled. A stronger infrastructure push should provide counter-cyclical support needed to lift domestic demand."

"Policy continues to prioritise domestic consumption, with a focus on services and human capital investment, consistent with the 15th Five-Year Plan (e.g., tourism, healthcare, sport, elderly care, childcare). This suggests support may be more targeted at services than durable goods (e.g., trade-in programmes) where policy support appears to be fading after earlier frontloading."

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BNY’s Geoff Yu highlights European Central Bank (ECB) President Christine Lagarde’s warning that Europe’s post-war growth model is eroding as global trade fragments and cheap energy fades. Lagarde argues Euro area resilience now relies on domestic demand, which drove 2025 growth and Q2 2026 expansion. She stresses the need to deepen the Single Market and capital markets, with AI investment hampered by fragmented regulation and financing.

Lagarde shifts focus to demand

"ECB President Christine Lagarde said Europe's post-war growth model is eroding as global trade fragments, cheap energy disappears and geopolitical risk reshapes investment decisions."

"She argued that the euro area’s resilience increasingly depends on domestic demand, which drove all of last year's 1.5% growth and contributed positively to Q2 2026 expansion of 0.4% q/q."

"The policy challenge is to turn that resilience into higher long-run productivity by deepening the Single Market and integrating capital markets."

"Lagarde highlighted AI as a key test, noting euro area firms expect around 9% of investment to go into AI this year, but fragmented regulation and financing still prevent firms from scaling."

"Her message was that Europe must convert market size into scale, investment and productivity."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

National Bank of Canada’s (NBC) Angelo Katsoras argues that Canada’s push to diversify exports away from the United States (US) toward the European Union (EU) faces growing obstacles as EU industrial policy turns more protectionist. He highlights that EU procurement rules, subsidies, tariffs and local content requirements increasingly favour European manufacturing, forcing Canadian firms to consider local production in Europe despite CETA’s tariff benefits.

EU rules complicate Canada’s exports

"The fact that the EU is increasingly using procurement rules, subsidies, tariffs and local content requirements to encourage more manufacturing within Europe could pose a significant challenge for Canadian exporters. Even with the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) in place, Canadian firms seeking contracts, especially in the public sector, may need to establish manufacturing facilities within the EU rather than simply exporting from Canada."

"The difficulty in increasing exports to the EU is illustrated by the fact that, even though CETA came into effect in 2017, the proportion of Canadian exports going to the EU has since risen only by about one percentage point, from approximately 4.4% to 5.5%. Further, much of the increase in 2025 was driven by commodity exports—particularly crude oil, aluminum, and agricultural products—rather than by an expansion of exports from the manufacturing sector."

"Canada must strike a careful balance between pursuing an aggressive 'Buy Canadian' strategy at home and seeking to expand exports and create new opportunities for Canadian firms abroad without alienating key trading partners."

"It is important, also, to recognize that local content policies tend to be most effective in countries and trading blocs with large domestic markets, such as China, the United States and the European Union. Canada's relatively small domestic market means it has less leverage."

"For Canada, diversifying trade beyond the United States to regions such as the EU will likely be more challenging than many people anticipate. Success will depend less on securing new trade agreements and more on adapting to a world where market access increasingly depends on local production, supply-chain resilience and economic security."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)