Overview: The US dollar is mostly softer today against the G10 currencies. Ironically, the New Zealand dollar is the strongest following the widely expected quarter-point cut by the central bank. The Canadian dollar is the laggard, the only G10 currency not to have found traction against the greenback. Most emerging market currencies are also enjoying a firm tone, including the South Korean won, ahead of what is expected to be a quarter-point cut from its central bank tomorrow.
Despite the strong gains in US equities yesterday, most of the Asia Pacific equity markets fell today. Taiwan, South Korea, and Singapore bucked the trend. Europe's Stoxx 600 is given back most of yesterday's 0.33% gain, while US index futures are also trading lower. Bond markets are also under pressure. Japan's 40-year bond auction saw its weakest reception in nearly a year and yields across the curve rose. European 10-year benchmark yield are mostly 2-4 bp higher, though Italian bonds are doing best in the eurozone and are nearly flat. The 10-year US Treasury yield is up nearly three basis points to 4.47%. The US will sell $28 bln two-year floating rate notes and $70 bln five-year notes today, alongside $60 bln four-month bills. After being hit for 1.3% yesterday, gold has returned firmer. It is up nearly 0.75% around $3324 in late European morning turnover. July WTI is trading quietly in a narrow (~$60.85-$61.45) range inside yesterday's (~$60.25-$62.15) range.
USD: The initial attempt by North American traders to sell into the dollar's gains in Asia and Europe yesterday found ready buyers in the Dollar Index near 99.20. It was from there that DXY was bid to new session highs close to 99.60 with the help of the rebound in the Conference Board's measure of consumer confidence. It reached slightly above 99.85 in Asia Pacific turnover today, stopping shy of last Friday's high (~99.95). A move above 100.00-100.10 lifts the tone. If Federal Reserve officials are not persuaded that the soft data will necessarily carry into the hard data, today Richmond and Dallas Fed surveys will receive little attention. That said, the oil and gas rig count has fallen for four consecutive weeks through May 23 and at 566, the rigs, it is the lowest since November 2021. The FOMC minutes will likely confirm what officials have subsequently signaled. The central bank is in no hurry to cut rates, the median projection of two rate cuts this year risks being fragmented.
EURO: The euro's attempt to recover in early North America yesterday stalled in front of $1.1380 and as European markets were closing for the day, the euro fell to new session lows near $1.1320. It slipped below $1.1300 briefly today, where options for 1.4 bln euros are set to expire today. Important support is seen in the $1.1275-85 area held and the euro recovered to near $1.1340 in Europe. There are also options for nearly 1.3 bln euros at $1.14 that also roll off today. The ECB's inflation forecast surveys are not important in the current context. They were unchanged at 2.5% for the three-year view but rose to 3.1% from and 2.9% for the one-year outlook. Instead, the real story this week is the soft eurozone actual CPI. France reported yesterday. Its EU harmonized year-over-year rate eased to 0.6% from 0.9%. Germany and Spain's May CPI are expected to ease to 2.0%, while Italy's may slip below that threshold when reported at the end of the week, while the aggregate estimate is due next Tuesday. The swaps market is nearly fully discounting an ECB rate cut at next week's June 5 meeting and another cut in early Q4.
CNY: Since the dollar reached a record near CNH7.43 against the offshore yuan in early April, it has fallen by about 3.6% to Monday's low of almost CNY7.1615. It reached a three-day high today slightly shy of chart resistance seen near CNH7.2015. Beyond that there may be scope toward CNH7.2100-50. However, the greenback has come off and fell to session lows near CNH7.1860 in early European hours. The PBOC set the dollar's reference rate below CNY7.19 for the third consecutive session but lifted it to CNY7.1894 from CNY7.1876 yesterday and CNY7.1833 on Monday. There are two press reports that are talking points. The first is that China's new five-year plan (to be formally unveiled next March) may double down on economic independence and the import-substitution strategy. Second, reports indicate that the PBOC wants major lenders to raise the share of yuan lending in cross border activity from around 25% to 40%.
JPY: The fact that the dollar rallied to almost JPY144.50 and had its best session in two weeks despite the seven basis-point pullback in the US 10-year yield underscores the decoupling that has taken place in recent weeks. In early North American activity, the greenback was sold to around JPY143.85 before setting new session highs. The dollar approached the resistance in the JPY144.60-80 area that houses the (38.2%) retracement of the dollar's decline from the May 12 high (~JPY148.65) and the 20-day moving average. It entered that band today and was repulsed. The dollar was sent back to JPY144.00, where it stabilized in the European morning. It is not clear what the Ministry of Finance will do. It sent out a survey broadly Monday night to market participants about the current market conditions and views on issuance, but today's 40-year bond auction was poorly received (weakest demand since last July). Here is the issue: CPI in April was 3.6%. The 30-year bond yield rose to nearly 3.20% last week and is now a little above 2.90%. The 40-year bond yield is near 3.35%, having reached 3.70% last week. In the near-term, the key may be the price of rice. Koizumi, the new farm minister, appears to be staking his political future on being able to drive the price of rice lower and nearly doubling last month. He has ordered the auction of 300k metric tons of rice from government stockpiles. If he is successful, he may challenge Prime Minister Ishida in the fall, regardless of the outcome of the July upper house elections. Separately, the government indicated it will tap the reserve funds in the current budget and earmark JPY900 bln (~$6.3 bln) to help blunt the effect of the US tariffs.
GBP: Sterling set a new three-year high slightly shy of $1.36 on Monday, when the UK and US markets were closed for holidays. It was sold to session lows near midday in NY near $1.3500. It tested support near $1.3460 and recovered back above $1.3500. Resistance in early North American turnover may extend toward $1.3530. The euro fell to a new eight-week low against sterling yesterday, slightly below GBP0.8375, but it looks to be bottoming. A downtrend line comes near GBP0.8425 today and around GBP0.8410 ahead of the weekend.
CAD: The US dollar put in a bullish hammer candlestick against the Canadian dollar on Monday after it fell to a new seven-month low (~CAD1.3685). It reached CAD1.3835 yesterday and is consolidating in CAD1.3800-CAD1.3840 range today. Options for $380 mln at CAD1.3830 expire today. A move above there targets CAD1.3870. While the swaps market has about a 1-in-4 chance of a Bank of Canada rate cut next week, economists who submitted their response to Bloomberg this month favor a cut 7-to-4.
AUD: The Australian dollar set a six-month high on Monday slightly above $0.6535 and recorded the session low yesterday in North America near $.6435. It found support today near $0.6425 and recovered back to $0.6450 in early European turnover. Australia's April CPI was unchanged at 2.4%. The trimmed mean measure remained stuck in the 2.7%-2.8% band for the fifth consecutive month. The CPI may have been slightly disappointing, but the Reserve Bank of Australia will see the May report before it meets next in early July. The futures market has about a 60% chance of a cut discounted in July (down from around 70% yesterday). There are nearly 70 bp of cuts discounted for this year, which is about five basis points less than yesterday. Still, the RBA is perceived to be the most dovish of the G10 central banks. As widely expected, the Reserve Bank of New Zealand cut its overnight cash target rate by a quarter-point to 3.25%. It has reduced its key rate by 100 bp this year after cutting by 125 bp last year. The swaps market has another cut fully discounted and a little more than a 25% chance of another.
MXN: Latam currencies tended to do well yesterday, but the Mexican peso was a laggard and straddled little changed levels most of yesterday's North American session. Still, outside of the beleaguered Argentine peso, which fell nearly 1% yesterday, the Mexican peso was among the worst performers in the region. The greenback extended its gains marginally today to almost MXN19.31. Late today, Mexico's central bank will release its quarterly inflation report. This report takes on special importance give that headline inflation in the first half of May rose about the top of the target range for the first time this year and the core rate it threatening to do the same. Banxico will likely underscore the downside risks to growth and may bring its 0.6% growth projection more in line with the IMF's, which sees a small contraction. In addition to the tariffs and the re-shoring thrust, the US is also challenging Mexico by proposing to tax foreign worker remittances by 3.5% (rather than 5% in the initial draft). In 2024, worker remittances were worth almost $65 bln to Mexico, most coming from the US. While Mexico will cope, several small countries in central America will find it more difficult.
Reviewed by Marc Chandler
on
May 28, 2025
Rating:
