A flight to safety in currency markets is slowly unwinding this morning, but jitters remain as traders gain a better understanding of how a worldwide software outage is impacting the global financial system. Airlines, telecommunications firms, banks, and stock exchanges are suffering service disruptions after an update from the CrowdStrike cybersecurity firm reportedly took down systems running Microsoft’s Windows operating system, but price action in the foreign exchange pairs we track remains consistent with typical liquidity conditions, suggesting that market participants are finding ways to transact.

The technological tumult comes after days of strange weather in financial markets, with shifts in the US presidential election campaign, changing interest rate expectations, and disappointing Chinese political guidance intersecting to trigger unpredictable and disconnected moves across a range of asset classes. Equity markets are extending yesterday’s declines, Treasury yields are inching lower, and risk-sensitive currencies are on the defensive as safe haven instruments catch a bid.

The dollar looks set to end the week on a slightly stronger footing after Donald Trump failed to put minds at ease in a rambling 93-minute acceptance speech at the Republican National Convention last night, outlining a self-contradictory and inaccuracy-laden economic platform while providing a reminder that both of America’s political parties have nominated extremely old men. After briefly touching the 70-percent threshold, betting odds on a Republican victory have reverted back to the 61-percent level that prevailed ahead of last weekend’s assassination attempt.

Volatility expectations have climbed, but remain relatively moderate. Currently holding just above the 16 mark, the VIX equity market “fear index” is sitting at its highest levels since April, yet remains well below the 20 threshold that is typically associated with a “medium” level of concern, and similar currency market measures look well contained. Inflation breakevens – which might be expected to surge on prospects of a fiscally expansionist, trade protectionist, and geopolitically isolationist regime – are actually down, suggesting that markets remain unconcerned.

The safe-haven Japanese yen is holding its ground, and is up a little over 2 percent on a month-to-date basis against the dollar. Data out last night showed inflation remaining above the central bank’s 2 percent target last month, keeping expectations aloft ahead of its policy meeting at the end of the month. The all-items consumer price index rose 2.8 percent in the year to June, matching the previous month’s pace, while the “core-core” measure – most similar to the core measure used in most advanced economies – climbed 2.2 percent, accelerating slightly as a weak currency pushed import prices higher. We think the Bank of Japan could raise rates by 15 basis points, while outlining a more restrictive plan for quantitative tightening, but considerable uncertainty remains – underlying economic conditions are not supportive of a rapid upward shift in rates.

We remain unsure on whether sharp moves in the yen over the last two days were representative of renewed intervention efforts – market positioning against the currency had reached extremes earlier this month, raising the exchange rate’s vulnerability to a technical short squeeze – but there’s little question that authorities have managed to introduce two-way volatility over the last few months. It’s interesting to note that the Bank of Japan’s Treasury selling efforts have had little to no effect on liquidity conditions in US debt markets – data out yesterday showed net demand fully offsetting a drop in the the country’s holdings when intervention began in May, with Japan’s stockpile shrinking from $1.128 trillion from $1.15 trillion in the prior month. Despite rampant alarmism about the US debt trajectory and the future role of the dollar, foreign demand remains strong, and the domestic private sector continues to absorb the bulk of new issuance. To put it simply, the US government is not facing anything resembling a foreign buyers strike, and the domestic private sector is receiving a substantial income transfer as the Federal Reserve keeps rates elevated.

The Canadian dollar is down after Statistics Canada said retail sales likely fell -0.3 percent in June, following a -0.8 percent decline in May, deeply undershooting market expectations. Eight of nine categories showed weakness, suggesting that consumer spending is falling in a broad-based manner as real income growth subsides and higher borrowing costs squeeze budgets. On a per-capita basis, retail volumes have shrunk relative to early 2020 levels, marking a stark contrast with the US, where stronger household balance sheets and solid wage gains have translated into ever-higher spending levels. The Bank of Canada is widely expected to deliver a second consecutive rate cut at next week’s meeting, responding to slowing inflation, rising unemployment, and growing consumer stress as it moves policy in a less restrictive direction.

Mexico’s peso remains on the defensive as exogenous forces crimp demand. With Japanese intervention and stubbornly-high US yields raising funding costs, carry trade flows are reverting lower. The country’s dependence on remittances from migrant workers and reshoring investment by American firms is coming under threat as Donald Trump escalates anti-immigration and anti-trade rhetoric on the campaign trail. And a long-standing correlation with US equity market performance is putting the currency on the firing line as technology firms face a deepening selloff. We expect bullish speculators to return, but appreciation from here will remain strictly limited as the background threat environment worsens.

Ahead today, New York Fed president John Williams and Atlanta president Raphael Bostic will make their last appearances before the central bank’s pre-meeting blackout period begins. In comments yesterday, Williams appeared to signal a willingness to begin cutting rates before jobless rates worsen in a meaningful way, saying “absolutely we don’t want to wait until we get to 2 percent inflation and we don’t want to wait to see data that would suggest that we’re moving significantly away from maximum employment before we take any action … we have to be forward looking”. Odds on a September rate cut are sitting at near-certain levels , and we expect the first explicit easing signals to be provided when Chair Powell speaks with the press after the central bank’s decision on the 31st.