Overview: Speculation that Japan will take measures to stem the rout in the government bond market has helped spur a short-covering bounce in the dollar after finished last week poorly and sold off yesterday. There has been a sharp drop in Japanese long-term bond yields, and although the dollar is higher against all the G10 currencies today, the yen is the weakest, off nearly 0.75%. Given the intraday momentum indicators and sentiment toward the dollar, we suspect North American participants will sell into the greenback's gains.
European benchmark 10-year yields are off 1-3 bp today. The 10-year US Treasury yield is four basis points lower near 4.47%. Equities are mostly higher today, but several large bourses in the Asia Pacific region did not participate, including China, South Korea, Taiwan, and India. Europe's Stoxx 600 fell in the last three sessions of last and is building on yesterday's gain today to recoup nearly everything it lost in second half of last week. US index futures are 1.3%-1.7%. Gold is trading heavier. It has returned to the pre-weekend low near $3290. July WTI is extended yesterday's gains. It held $60 at the end of last week and recovered to near $62 yesterday, which is where it is currently hovering near.
USD: The 50% tariff on the EU that the US threatened on Friday was postponed until July 9 when the 90-day grace period from the reciprocal tariffs expire. Recall that before the weekend, the euro had recouped most what was lost on the US threat as the many thought it was negotiating ploy. PredictIt.com had around a 1-in-3 chance of them actually coming into effect. Still, President Trump's postponement saw the Dollar Index extend last week's losses to almost 98.70 yesterday, a new low for the month. A short-covering rally, following indications that Japanese officials are moving to stabilize the bond market. By early European turnover, the Dollar Index reached 99.40. A move above 99.50 targets 100.00. US (and UK) markets re-open after a long holiday. US high-frequency data today includes April durable goods orders, where a sharp drop in Boeing orders will depress the headline. Excluding transportation orders, a recovery from the 0.4% fall in March is expected and shipments excluding defense and transportation look flattish. March house prices are due. May's Conference Board's consumer confidence measure likely improved after hitting five-year lows in April.
EURO: The euro rose above $1.1400 yesterday for the first time since late April. It has been sold back to nearly $1.1335 today. We expect buying to emerge on this pullback, with the intraday momentum indicators turning up. At the end of last week, Moody's lifted the outlook for Italy's debt to positive. Italy's 10-year premium over Germany has narrowed from last month's high near 130 bp to around 100 bp, a four-year low. The eurozone confidence measures improved marginally but as is often the case, elicited little market response. Tomorrow the ECB's April inflation survey will be reported. It is not expected to change much from March’s 2.9% and 2.5% expectations for one- and three-years, respectively.
CNY: China reported at in April industrial profits rose 1.4% year-to-date, year-over-year. Profits have fallen for the past three years. It had, as is usually the case, little market impact. Chinese companies compete by seeking market share and the patient capital of banks, especially state-owned banks, rewards market share, arguably on ideas that a strong market share can be monetized and integral to long-term competitiveness. This stands in contrast to market-central capitalism, which is impatient and appears to pay a premium for short-run profits. The competition for market share was driven home by BYD yesterday, which announced price cuts of up to 34% om 22 of its electric and plug-in hybrid models, following its best month of sales in 2025 (April) and outpaced Tesla among EV sales in Europe for the first time. The dollar fell to a new low since last November against the offshore yuan yesterday. It reached nearly CNH7.1615 before it recovered to session highs near CNH7.1830. It is recovering further and reached almost CNH7.1930. The PBOC set the dollar's reference rate at CNY7.1876. Yesterday, the fix was set at CNY7.1833 (CNY7.1919 at the end of last week). It was the biggest adjustment of the fix since April 7 and the first below CNY7.19 since April 3.
JPY: Hawkish comments by BOJ Governor Ueda and signals from officials that it may be preparing to take action in the bond market is helping the dollar stage a possible key upside reversal against the yen. It wants to slow its bond purchases, but long-term yields are surging. It wants to continue to raise rates as price pressures remain above target, but the economy is weak. It contracted in Q1 and the uncertainty emanating from the US trade balance clouds the outlook. Meanwhile, new farm minister Koizumi announced the release of another 300k metric tons of rice from the government's warehouses to drive the price down. It had already sold 200k tons, but with little success in stemming the price surge. The greenback made a new low for the move (slightly below JPY14215) and recovered to trade above yesterday's high (~143.10). It reached nearly JPY144.05 in Europe today. Japanese long-term bond yields plummeted. The 30-year yield fell almost 20 bp, to a two-week low. The 40-year yield dropped nearly 25 bp. We suspect the bulk of the dollar’s gains are behind it. Initial support may be near JPY143.50 now. Unrealized losses at Japanese lifer insurers from their bond holdings are growing but may be offset by gains unrealized gains on their equity portfolios. The Topix index of insurances companies for the second consecutive session yesterday, for the first time this month. It is slightly higher on the month. It is up slightly less than 1% year-to-date. Separately, Japan reported a 3.1% year-over-year increase in April producer service prices, down from 3.3% in March, which matched the peak from earlier this year and is the highest in a decade. Still, more importantly in terms of the central bank's reaction function is Tokyo's May CPI due at the end of the week. After a large jump in April (to 3.5% from 2.9%) it may tick slightly lower. However, the core and ex-fresh food and energy measures are expected to have risen further. The Bank of Japan finds itself in a couple of binds.
GBP: Sterling posted a bullish outside up day last month and follow-through buying lifted it to nearly $1.3545 before the long holiday weekend, a new three-year high. The gains were extended yesterday to almost $1.3600. In thin turnover yesterday, it settled above its upper Bollinger Band for the second consecutive session, for the first time this year. The upper Bollinger Band is near $1.3550 today. It is consolidating quietly today, inside yesterday's range. The stronger than expected CPI and retail sales reported last week saw the market push out the next Bank of England rate cut to November. The year-end base rate is seen near 3.80%, up from 3.50% at the end of April. The divergence of rates with the eurozone and the US new tariff threat on the EU have helped drive sterling to its best level against the euro since early April, which also lends the pound support against the dollar. The next area of chart resistance may be in the $1.3630-50 area.
CAD: The US dollar slipped to a new marginal low for the year yesterday near CAD1.3685. The greenback has been trending lower since reaching nearly CAD1.48 in February, its highest level since 2003. The odds are around 30% in the swaps market, down from more than 65% before the CPI report. The US dollar has approached a weekly uptrend line, which depends on how it is drawn, but may come in near CAD1.3680. Yesterday's US dollar recovery, leaving a potentially bullish hammer candle stick in its wake, may mean a near-term low is in place. It is approaching a band of resistance (CAD1.3780-CAD1.3800). This week's data highlight is Q1 GDP due May 30. After 2.6% annualized growth in Q4 24, the median forecast in Bloomberg's survey is for a 1.7% expansion in the first quarter. Economists in the survey project a contraction in the current quarter. Bank of Canada Governor Macklem was in interviews over the weekend, underscoring that US tariffs are the "biggest headwind" for the Canadian economy.
AUD: The Australian dollar made a new high for the year yesterday slightly above $0.6535. We have been targeting the $0.6550 area, which corresponds to the (61.8%) retracement of the decline since the $0.6940 high recorded at the end of last September. It is softer today, near session lows in Europe (~$0.6445). Australia reports the April monthly CPI tomorrow. It is likely to softer after being stuck at 2.4%-2.5% for the previous four months. The median forecast in Bloomberg's survey is for 2.2%, which would be the lowest since last October. Whatever will drive the central bank's decision at its next meeting (July 8), it will not be the April CPI. The Reserve Bank of New Zealand, on the other hand, meets tomorrow, and is widely expected to cut its target rate 25 bp to 3.25%. The swaps market had another cut fully discounted by the end of the year and a little more than a 50% chance of another.
MXN: The US dollar slipped to a marginal new seven-month low against the peso yesterday. It briefly traded below MXN19.1850. Recall that last week's high, set on Thursday, was near MXN19.46. The greenback is firmer today and is pushing above MXN19.26 in Europe. Last Friday's high was near MXN19.3760 and this month's down trendline comes in near MXN19.3960 today. Tomorrow the central bank will release its inflation report. Recall that it recently halved this year's growth forecast to 0.6%. This may still be optimistic. The IMF's latest projection is for a 0.3% contraction this year. The median forecast in Bloomberg's survey sees a 0.1% decline in output. The central bank expects the recent rise in CPI to be temporary and looks for the headline and core rates to continue to moderate, with both at 3% at the end of next year.
Reviewed by Marc Chandler
on
May 27, 2025
Rating:
