The US dollar is stronger against all its major counterparts this morning, building on August’s 1.7-percent gain as weak Chinese data weighs on global risk appetite. US equity futures are setting up for a modestly-weaker open and Treasury yields are up across the curve, helping keep the trade-weighted greenback near six-month highs.

Global commodity prices are under pressure, the euro is softer, and both the onshore and offshore Chinese yuan pools are trading below 7.30 to the dollar after the private-sector Caixin services purchasing manager index dropped to 51.8 in August from 54.1 in July (the 50 level marks the boundary between expansion and contraction). The data suggest that an early-year post-lockdown rebound has run its course, leaving the economy struggling with a simultaneous slowdown in both of the last decade’s most powerful growth engines: exports and property speculation. Policymakers remain hesitant to flood the economy with credit, and traders are convinced that the People’s Bank of China will eventually relent in its defence of the 7.30 exchange rate, permitting a more sustained decline toward 7.45 – or beyond.

The Australian dollar is lower after the Reserve Bank of Australia kept interest rates unchanged at 4.1 percent for a third straight meeting, maintaining a relatively hawkish bias in its statement while noting potential downside risks emanating from China’s property-sector meltdown. Policymakers subtly acknowledged signs of slowing in the domestic economy and an easing in labour market conditions, and said “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable time frame, but that will continue to depend upon the data and the evolving assessment of risks” – potentially foreshadowing the Bank of Canada’s rhetorical approach in tomorrow’s decision.

The Canadian dollar is exchanging hands on the colder side of 1.36 as traders become increasingly convinced interest rates have already peaked. Data released ahead of the Labour Day long weekend showed the economy contracting -0.2 percent in the second quarter as consumer spending cooled and residential housing investment imploded – adding to evidence of a slowdown in labour markets to suggest that the Bank of Canada might opt to stay on the sidelines through the early part of next year. From a technical perspective, the risk of an overshoot into the 1.38’s is growing – with tomorrow’s rate decision, Thursday’s speech from Tif Macklem, and Friday’s jobs numbers all looming as potential catalysts – but we think such a move could prove short-lived as US data begins to deteriorate in coming weeks.

Implied volatility in equity, Treasury, and currency markets remains remarkably low after last week’s data helped support hopes for a soft landing in the American economy: 187,000 jobs were added to non-farm payrolls in August, and consumer spending grew 0.8 percent in July while the Federal Reserve’s preferred inflation measure rose just 0.2 percent. We doubt this sense of calm will survive contact with this autumn’s economic data prints, and suspect that both implied and realized volatility in currency markets is set to rise as central banks set out on increasingly-divergent paths.