Overview: The on-again, off-again US tariffs are back on, but the judicial process is not over. On top of that, US Treasury Secretary Bessent acknowledged what many have suspected: US-Chinese talks have stalled. The dollar, which was offered yesterday, has come back bid today. It is up against nearly all the G10 currencies. The yen is the exception, arguably helped by the firmer Tokyo CPI. The week may also be remembered for the snapping of the sharp jump in Japanese long-term yields. The 30-year yield posted its first weekly loss in five weeks, with an eight basis point pullback. The yield of the 40-year bond fell (43 bp) to post its first decline in eight weeks. The dollar is firmer against all the G10 currencies on the week but is only higher against the Canadian dollar and Japanese yen as we close out the month.
Equities in the Asia Pacific region were mostly lower. Australia and New Zealand were notable exceptions. Europe's Stoxx 600 is about 0.6% better after falling around 0.8% in the previous two sessions. US index futures are nursing small losses. Benchmark 10-year yields are 1-2 bp higher in Europe, and the 10-year US Treasury yield is up almost a basis point to near 4.43%. It is virtually flat this week coming into today. Yesterday's recovery in gold stall and it is trading inside the upper end of Thursday's range. It is struggling to sustain the foothold above $3300. It is off about 1.8% on the week, which leaves it up fractionally for the month, its fifth consecutive monthly gain. July WTI is firm in European turnover, near session highs (~$61.45). It settled near $62.35 a week ago and settled last month close to $57.60.
USD: The Dollar Index's price action was poor yesterday but there has been no follow-through selling today. After setting a seven-day high, which approached the down trendline drawn off the Feb, and May highs (~100.50), it reversed course and finished below Wednesday's low (~99.40) to post a potential key downside reversal. It has bounced back to around 99.60. There may be scope for additional gains into the 99.80-100.00 area. The Federal Reserve targets the headline PCE deflator, but the thunder is stolen by the CPI and PPI. The PCE rarely surprises outside of a rounding adjustment. The April PCE deflators is seen rising by 0.1% for a 2.2% year-over-year pace. Last year's low was 2.1%, which was the lowest since February 2021. The core is expected to rise 0.1% for a 2.5% year-over-year pace, down from 2.6% in March. It has not been lower for a little more than four years. Personal consumption itself may slow to 0.2% (from 0.7% in March). Separately, the goods trade deficit is expected to have narrowed by about $20 bln in last month but at $143 bln remains elevated. Recall that the Q1 average was a little more than $155 bln and last year's monthly average goods deficit was about $100.2 bln. Some of the imports likely still made their way into inventories, and wholesale inventories are expected to have matched March's 0.4% increase. We expect the final University of Michigan's consumer survey to be revised higher from the preliminary as more responses after the 90-day cooling off/negotiating period with China was agreed will be incorporated. The US May employment report is next week's US data highlight. The median forecast in Bloomberg's survey is for 130k increase in nonfarm payrolls. The average in the first four months of the year was 144k compared with 176k in the Jan-Apr period last year.
EURO: The euro posted a potential key upside reversal yesterday. It was sold to an eight-day low of $1.1210 before it rebounded to $1.1385 and settled above Wednesday's high. It drew a little closer to $1.1400 today but has met sellers that took it back to almost $1.1320. Price pressures are subsiding in the eurozone. France reported its May CPI earlier this week and the EU harmonized year-over-year pace slowed 0.6%. Spain's eased to 1.9% from 2.2%. Italy's slipped to 1.9% from 2.0%. German states reported stickier CPI, and the national figure will be reported shortly. It may be little changed from 2.2%. The aggregate report is due next Tuesday, but the highlight of the week is the ECB meeting on June 5. The market is confident that another quarter point cut will be delivered to bring the deposit rate to 2.0%. However, the ECB is likely to pause. The swaps market has one more cut fully discounted in H2.
CNY: The dollar briefly breached the 20-day moving average (~CNH7.2060) against the offshore yuan yesterday for the first time since April 23. It was subsequently sold to a new session low near CNH7.1825, which was below Wednesday's low. Still, it managed to settle inside Wednesday's range. It is hovering near CNH7.20 now. After setting the dollar's fix higher for the past three sessions, the PBOC set it lower today (CNY7.1848 vs. CNY7.1894 Thursday). China will report its May PMI tomorrow. Both the manufacturing and non-manufacturing components are expected to have ticked higher but are unlikely to put Beijing's collective mind to rest that its 5% GDP target is secure.
JPY: The dollar initially jumped to almost JPY146.30 on news of the trade court ruling against the Trump administration, which met the (61.8%) retracement objective of the dollar's drop since seeing JPY148.65 on May 12. It was sold down to nearly JPY144 in the North American session, and to JPY143.45 today. This week's low near JPY142.10, which is also the month's low. It was a busy day for Japanese macro data. In a nutshell, here is what we learned. The labor market was steady (2.5% unemployment 1.26 job-applicant ratio unchanged from March). Industrial output dropped 0.9% (rather than -1.4% as the median forecast anticipated), leaving. Retail sales rose 0.5% in April after falling 1.2% in March. That means in the first four months of the year, Japanese retail sales rose at an annualized rate of about 2.7%. In the Jan-Apr 2024, Japanese retail sales rose at an annualized rate of 5.1%. Meanwhile, Tokyo's May CPI remained elevated. The headline was unchanged at 3.4%. The core measure that excludes fresh food ticked up to 3.6% from 3.4%, and the measure that excludes both fresh food and energy rose to 3.3%, which is its highest level since the end of 2023. The swaps market is pricing in about 17 bp of tightening this year, virtually unchanged since the end of April, and down from 30 bp at the end of March.
GBP: Sterling's initial drop yesterday saw it meet the (38.2%) retracement of its advance since the $1.3140 low was recorded on May 12. It recovered from about $1.3415 to rise above $1.3500 where it stalled in North America. It rose a little further today but has pulled back to around $1.3455. Sterling has risen 1.0% this month, its fourth consecutive monthly advance. As we have noted, at the end of the year, the swaps market is pricing a 3.83% base rate, which is about 30 bp higher than a month ago. While this has appeared to help sterling, the correlation between changes in the exchange rate is twice as strong with the Dollar Index itself. Over the past 30 sessions, the correlation with changes in sterling and the one-year yield is about 0.45, while it is 0.88 with the Dollar Index. The correlation over the past 60 sessions is around 0.30 and 0.80, respectively.
CAD: The US dollar traded on both sides of Wednesday's trade range, but the close within the range neutralized the technical implications. Still, the greenback's upside was stalled slightly beyond the (50%) retracement of the leg down from the May 12 high (~CAD1.4015) and in front of the 20-day moving average (~CAD1.3870). A move above CAD1.3900 lifts the US dollar's technical tone. It is consolidating quietly today between about CAD!.3800 and CAD1.3830. Canada reports Q1 GDP today. The Canadian economy is expected to have grown by 1.7% at an annualized rate down from 2.6% in Q4 24. It is difficult to go from the monthly GDP print to the quarterly estimate. In Q4 24, the cumulative monthly GDP prints added up to 0.4%. With 0.1% growth in March, which is what the median forecast in Bloomberg's survey anticipates, the cumulative monthly GDP prints would be 0.3%. Economists are pessimistic for this quarter, and the median forecast in Bloomberg's survey is for a small contraction (0.6%, at a seasonally adjusted annual rate) and a flat Q3. The Bank of Canada meets next week, and after the higher underlying inflation readings last week, the market has cut the odds of a rate cut to about 25%. It had been near 68% before the CPI.
AUD: The Australian dollar found bids ahead of $0.6400 that carried it to $0.6460 amid the general pullback in the US dollar. That met the (38.2%) retracement objective of the sell-off from the year's high set Monday (~$0.6535) to yesterday's low. However, it remains within its well-worn range so far today between about $0.6410 and $0.6455. The next retracement (50%) is slightly above $0.6470, but the $0.6500 area is the real nemesis. It traded about it four times in May without closing above it once. Australian data disappointed today. April building approvals had been expected to rise by 3% but fell by -5.7%. Retail sales fell by 0.1% rather than rise by 0.3%, as was expected. The exception to the disappointment was the 0.7% increase in public sector credit (05% expected). The odds of a July rate cut edged up to about 67% from about 60%. Australia reports Q1 GDP next week and the median forecast in Bloomberg's survey is for a 0.5% expansion (quarter-over-quarter).
MXN: The peso snapped a three-day decline yesterday, which matches the longs decline since the end of March. It rose by about 0.35% against the US dollar. The greenback approached the 20-day moving average (~MXN19.4330) but has not settled above it since mid-April. The dollar is holding barely above yesterday's low (~MXN19.2925) in quiet turnover. Mexico reports April's unemployment rate today. It is expected to rise from 2.22% to 2.55%. It was at 2.61% in April 2024 and 2.82% in April 2023. On Sunday, Mexico is to vote for its federal judges. There are reportedly nearly 3400 candidates vying for about 880 positions, and nearly all campaigning was banned. Next week's data highlights include worker remittances and May domestic vehicle sales, not typically market movers.
Reviewed by Marc Chandler
on
May 30, 2025
Rating:
