After Initial Reaction, Gold and Oil have Given Back Earlier Gains, and the Greenback Extends the Pre-Weekend Gains

Overview: The US struck Iran amid subterfuge and misdirection and while damage was inflicted, it is not clear the extent to which is nuclear capability was destroyed. Now, the world waits for Tehran's retaliation. Still, gold is slightly softer and August WTI is slightly firmer. Having given up its earlier gains (to ~$78.40) it is near $74. The dollar's upside correction seen last week has extended today. The greenback is broadly higher against the G10 currencies today, led by the antipodean currencies and the yen, which are off more than 1%. The Swiss franc is faring the best (~-0.10), followed by the Canadian dollar (~-0.45%). The greenback is also firmer against nearly all the emerging market currencies. Six Fed officials speak today and another five tomorrow, including Chair Powell's semiannual testimony before Congress. 

Equities are mixed. In Asia Pacific nearly all the bourses fell, but Hong Kong and China. The MSCI regional index fell (~0.3%) last week, its first decline in three weeks. Europe's Stoxx 600 is off fractionally. It fell for the second consecutive week last week. US index futures are firmer. The S&P 500 and NASDAQ have a two-week decline in tow. Benchmark 10-year yields are mostly firmer today. In Japan and Europe, the 10-year rates are mostly around 1 bp higher, though Gilts are flat. The 10-year US yield is slightly firmer, near 4.38%. 

USD: The Dollar Index recovered from slightly below 97.70 last Monday to about 99.15 on Thursday before consolidating ahead of the weekend. It is trading firmer today near 99.30-40 in late European morning turnover. Meanwhile, the five-day average is poised to rise above the 20-day moving average. The Federal Reserve continues to downplay survey data, and that would seem to minimize the market's reaction to the preliminary June PMI due shortly. Half of a dozen Fed officials speak today, and the market will be keen to hear insight into how they are thinking about an oil shock. Chair Powell's semiannual congressional testimony begins tomorrow. At the same time, the hard data being reported has mostly surprised on the downside. The labor market continues to slow. The four-week moving average of weekly jobs claims rose to 245.5k in the week through June 13, the highest since mid-August 2023. Tariffs, anxiety about household finances, and the cooling labor market appears to be taking a toll on consumption. Retail sales fell in May to post their first back-to-back decline since the end of 2023. Industrial output declined in two of the past three months.

EURO: The euro approached the 20-day moving average last Thursday (~$1.1430) and recovered to trade a cent higher before the weekend. A break of (now $~$1.1440) would signal a deeper correction that could extend another cent (or two). So far today, it has found support today near $1.1455. European central bankers seem to put more weight on the PMI. The composite rose from 48.3 last November to 50.9 in March. It fell for the past two months before steadying in June at 50.2, with a small gain in services (50.0 vs. 49.7) and an unchanged manufacturing reading (49.4). The composite seems broadly consistent with expectations that the eurozone economy likely stagnated in Q2 after a 0.6% expansion in Q1. The main drags appear to be coming from slower government spending and weaker net exports. Growth is expected to be subdued in H2 25.

CNY: The PBOC has been setting the dollar's reference rate lower, but the greenback remains its trough against the offshore yuan. The 20-day moving average was near CNH7.3060 at the end of April and is now below CNH7.1885. The greenback has chopped mostly between CNH7.1650 and CNH7.2000 since earlier this month and is now near CNH7.19. The PBOC set the dollar's fix at CNY7.1695 before the weekend, the lowest in three months. By doing so, officials limit the pace at which the yuan is rising. It was raised slightly to CNY7.1710. 

JPY: The dollar rose through the previous day’s high every session last week and set a new high for the month ahead of the weekend JPY146.20. It soared to nearly JPY147.95 today, its highest level since mid-May when it reached roughly JPY148.65. As one would expect, the intraday momentum indicators are stretched. Japanese economy contracted by 0.2% at an annualized pace in Q1and growth in Q2 does not look like it will recoup it in full. April industrial output fell by 1.1% after rising by 1.4% in Q1. Exports rose by 0.1% in May after falling 2.7% in April. Exports fell by about 1.8% in Q1. The economic weakness and uncertainty over US tariff policy, where Japan's auto sector is bracing for a substantial blow, was sufficient to keep the Bank of Japan on the sidelines last week. The preliminary June PMI composite rose (51.4 from 50.2), the highest since February. It averaged 50.6 in Q1 and 50.9 in Q2. Of note, the manufacturing PMI rose above 50 for the first time since last May. Tensions with the US are set to rise as it apparently rebuffed US pressure to boost domestic spending to 3.5% of GDP. Japan sees to spend 2% by 2027. 

GBP: Sterling recovered from the pullback below $1.34 on June 19 to poke above $1.35 before the weekend. It stalled in front of the 20-day moving average (~$1.3515) and was sold to session lows near $1.3440 ahead of the weekend. It has been sold to test support near $1.3370, and a break could spur another half-cent loss initially and possibly $1.3170-$1.3200. The UK economy is weakening after it led the G7 with 0.7% quarter-over-quarter growth in Q1. The Bank of England did not cut rates last week (no surprise), but the swaps market has a nearly 80% chance of a cut at its next meeting on August 7. The UK manufacturing PMI rose for a third consecutive month to 47.7 (from 46.4). It has not been above 50 since last September. The services PMI rose to 51.3 (from 50.9). The composite edged up to 50.7 (from 50.3), its best in Q2. It averaged 50.9 in Q1 25 and Q4 24. 

CAD: The Canadian dollar rose to a ten-month high a week ago (~$0.7850 or CAD1.3540). Still, the Canadian dollar fell after the start of last week and begins this week with a four-day decline in tow. The settlement before the weekend was the highest since the end of May for the greenback and it settled above the 20-day moving average for the first time since May 20. The five-day moving average is crossing above the 20-day move moving average time in a month today. The US dollar is testing CAD1.3800 area. The next target is the late May have near CAD!.3865. Canada reports May CPI tomorrow. The median forecast in Bloomberg's survey anticipates a 0.5% increase, which, given the base effect, would leave the year-over-year rate at 1.7%, depending on the rounding. However, when leaving the overnight lending rate at 2.75% earlier this month, the Bank of Canada noted the firm underlying measures. That will likely draw the market's attention tomorrow. The median and trimmed core reading average a little more than 3.1% in April, the highest since Q1 24. The Bank of Canada's easing cycle began last June with the overnight lending rate at 5.0%. The swaps market has one more cut in the cycle discounted toward the end of the year.

AUD: Before the weekend, the Australian dollar was turned back from almost $0.6500 and like the Canadian dollar, posted a new closing low for the month. It settled near the session loans recorded in the waning hours of last week's activity. It has been sold below $0.6400 today and reached near $0.6380 in European turnover. Nearby support is seen near last month's low (~$0.6355). Australia's composite PMI rose for the first time in three months (51.2 vs. 50.5). It has held above 50 since the end of Q3 24. The highlight of the week is the May CPI on Wednesday. The futures market has around 80% chance that the central bank will deliver its next cut at the July 8 meeting. It has two more cuts nearly fully discounted for this year. That would bring the overnight cash rate to 3.10%. The swaps market has around a 40% chance of a cut early next year to finish the easing cycle.

MXN: The dollar settled (~MXN19.1745) above its 20-day moving average against the Mexican peso for the first time this month as the correction unfolds. It has extended its recovery today to about MXN19.3430 but is near MXN19.23-MXN19.25 in late European morning turnover. Mexico has a busy week of economic data, culminating with the central bank meeting on Thursday, at which many expect another half-point cut despite inflation being above the target range. April retail sales will be reported shortly, alongside the IGAE economic activity report that is similar to a monthly GDP. Retail sales rose by an average of 0.5% a month in Q1, which is the strongest quarterly performance since Q2 23. However, the economy seems fragile. The IGAE averaged a 0.29% gain in Q1 25 and fell by almost 0.50% a month in Q4 24. A 50 bp cut this week will bring the overnight cash target rate to 8.0%. The swaps market expects the terminal rate to be near 7.50%. 

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