Overview: The latest phase of the Israel-Iran conflict continues and the impact on the markets remains minimal. Oil prices are elevated, but private insurance seems to be slowing traffic in the Straits of Hormuz more than the direct results of a blockade that Tehran appeared to have threatened. After rejecting the G7 draft statement that urged restraint on both sides of the conflict, President Trump left the G7 meeting early and returned to Washington. On the sidelines of the meeting, the US and UK signed a trade deal though key details, like when the UK will not be subject to the steel tariff, were not announced. Separately, despite talks with Japan's Prime Minister Ishiba, no trade break through was announced. The dollar is narrowly mixed in quiet turnover against the G10 currencies and is mostly firmer against emerging market currencies.
Equities were mixed in Asia Pacific activity. Japan, Taiwan, South Korea, and Singapore posted gains, but other markets were in the red. Europe's Stoxx 600 fell every day last week before gaining about 0.35% yesterday. It is off around 0.85% in late European morning turnover. US index futures are giving back a good chunk of yesterday's gains and are down around 0.65%. Japanese bond yields ticked up after the BOJ left policy on hold and announced a slower pace of tapering starting next April. European yields are mostly 2-3 bp higher, while the 10-year US Treasury yield is off almost two basis points to around 4.43%. Gold is extending yesterday's 1.4% loss, the largest pullback in a month, to trade briefly below last Friday's low (~$3380). Oil continues to trade in a wide range. August WTI initially slipped below $70 before recovering slightly above $72 and is now near $71.35.
USD: For the past three sessions, the Dollar Index has been roughly the same range: 97.60-98.50. It is well within that range today (~98.05-98.30). A move above 98.70 would be the first sign corrective phase may be at hand, but it probably requires a break of 99.05, around where the (50%) retracement of the losses since the May 29 spike to almost 100.50, and the 20-day moving average is found. DXY has not traded above the 20-day moving average this month. The holiday-shortened week sees a slew of real sector data, though the focus, of course, on tomorrow's FOMC meeting. Today features May retail sales and industrial production. Weak auto sales will drag headline retail sales down, but excluding autos, gasoline, food services and building materials, retail sales may recover from the 0.2% decline in April. Industrial production looks flat for the second consecutive month. Separately, import and export prices appear to have softened last month. The Fed funds futures do not quite price in the two hikes this year that the median Fed dot anticipated this year in both last December's and March's Summary of Economic Projections. There is speculation that it might only reflect one cut in tomorrow's iteration. Given that weekly jobless claims (highest since last October, the four-week moving average is the highest since August 2023, and the continuing claims at the highest since November 2021), we expect a more dovish tone than the market.
EURO: The euro peaked last Thursday near $1.1630. The pre-weekend low was around $1.1490. It set the session high yesterday in North America at $1.1615. So far, today is the first day in four that the euro has not traded above $1.1600. The upper Bollinger Band is slightly below there. It is consolidating in quiet turnover in around a 15-tick range on either side of $1.1555. We suspect the consolidative tone may continue ahead of the outcome of the FOMC meeting on Wednesday, barring a new widening of Israeli-Iranian war or a tariff development from the US. German's June ZEW survey showed a further recovery in expectations. After being positive since November 2023, expectations fell from a three-year high in March (51.6) to -14.0 in April, which was linked to the so-called US reciprocal tariffs. It bounced back to 25.2 in May and to 47.5 in June. The assessment of the current situation remains dour. It was last positive in November 2021. The bottom was at the end of last year (-93.1). It rose in the first four months of the year and reached -81.2 in April before falling to -82.0 in May. The -72 reading in June is the best since last July.
CNY: The dollar established traded in a range of about CNH7.17-CNH7.20 last Thursday and continues to trade in that range. It is in an exceptionally narrow range today: ~CNH7.1785-CNH7.1875. After setting the dollar's reference rate lower for four sessions in a row, it lifted it slightly yesterday (CNY7.1789 vs CNY7.1772). The fix was set lower today at CNY7.1746, its lowest in three months. In effect, the PBOC has been guiding the yuan higher, while many foreign observers have been anticipating a depreciation of the yuan. Meanwhile, China is the largest buyer of Iranian oil (90%), and estimates suggest it may account for around an eighth of China's crude imports in March and Beijing appears to be relatively quiet outside of calling on both sides to ease tension. Initially (June 13), China was critical of Israel violating Iranian sovereignty and PRC's envoy to the UN used the word "condemnation" and Foreign Minister Wang Yi said on June 14, that China "immediately" and "explicitly" condemned Israeli action. Wang has reportedly spoken to Iran and Israel's foreign ministers and urged both sides to resolve their differences through dialogue, perhaps angling to be a mediator. Recall that Russia and Iran signed a "Comprehensive Strategic Partnership" agreement, which includes a defense pact about a week before US President Trump's second inauguration. China and Iran signed a 25-year cooperation agreement in 2021. China, Russia, and Iran have conducted several joint navel drills in recent years.
JPY: The dollar set the session low yesterday in the North American morning near JPY143.65 before recovering to about JPY144.40. It reached a four-day high today near JPY145.10. Last week's high was slightly shy of JPY145.45. As widely expected, the Bank of Japan left its overnight target steady at 0.50%. Governor Ueda said that inflation expectations are not anchored, and he seemed concerned about real sector data, with the impact of US tariffs still to come. In particular concern is about twirp he auto sector employs around 5.6 mln and accounts for about 10% of GDP. The swaps market is pricing in about 55% of a chance of a hike at the end of the year, the least in a little more than a month. Separately, the BOJ announced that it will reduce the pace of its tapering. Recall that since last summer, it has been reducing the government bonds it purchases by JPY400 bln (~$2.8 bln) a quarter. Stating in the new fiscal year (April 2026) it will reduce its bond by "only" JPY200 bln a quarter. This was largely in line with expectations and the 10-year to 40-year bond yields rose 1-2 bp today.
GBP: Sterling has traded between about $1.3515 and $1.3630 over the past three sessions. Yesterday's settlement was slightly below $1.3580, making it the second highest close in three years. It is trading quietly, mostly above $1.3550 and below $1.3590. The upper Bollinger Band is near $1.3625 today. A close below $1.3525 would sour the near-term technical tone. Tomorrow, the UK reports May CPI. After jumping 1.2% in April on utility prices, a modest 0.2% increase is expected in May, which would see the year-over-year rate ease to 3.3% from 3.5%. Services inflation and the core measure are expected to moderate.
CAD: The US dollar fell against the Canadian dollar, yesterday, for the third consecutive session and each day recorded a new low since last October. It reached CAD1.3540 yesterday, slightly below the lower Bollinger Band, which is found near CAD1.3535 today. Recall that last week's high was near CAD1.3730. The US dollar is practically flat today in a about a 20-tick range below CAD1.3585. Canada reports its April portfolio flows shortly. Through March, foreign investors were net sellers of almost C$9.4 bln of Canada's financial assets. In Q1 24, foreign investors were net buyers of almost C$24 bln of Canadian stocks and bonds. In Q1 25 the Canadian dollar was virtually unchanged against the US dollar and in Q1 24, the Canadian dollar fell by about 2.2%.
AUD: The Australian dollar finally met the $0.6550 objective we have been anticipating, which is the (61.8%) retracement of the Australian dollar's slide from last September's high (~$0.6940) to the April low (~$0.5915). It also settled at its best level since last November. It is trading in the upper end of yesterday's range and has not been above $0.6545 today or below $0.6500. A close below there could weaken the technical tone. The momentum indicators have not taken out the May highs, and the upper Bollinger Band is near $0.6560 today. This technical backdrop cautions against embracing what might seem to be a breakout.
MXN: After spiking to MXN19.1030 before the weekend amid the risk-off spurred by the new phase of the Israel-Iran war, the dollar recorded a marginal new low since last August against the Mexican peso. It narrowly took out MXN18.8250 before recovering. Last week's low was around MXN18.8265. So far, the dollar is confined to a roughly MXN18.9030-MXN18.96 range today. The momentum indicators are suggesting caution about anticipating additional near-term significant dollar losses. That said, the carry is sufficient to pay to be long the peso through a consolidative phase. The greenback set a four-day high against the Brazilian real at the end of last week near BRL5.5635 before settling slightly above BRL5.53. Yesterday, the US dollar reached BRL5.4920, its lowest level since last October, when it forged a base near BRL5.40. The early June inflation figures were softer than expected. It seemed to reinforce the sense that the central bank may have completed its tightening cycle and will leave the Selic rate at 14.75% when it meets tomorrow.
Reviewed by Marc Chandler
on
June 17, 2025
Rating:
