Dollar Better Bid Ahead of Jobs Report as Japanese and German Data Disappoint, but Will it be Sustained?

Overview:  It is not clear what happened yesterday, the first time US and Chinese leaders have spoken since the inauguration. The US readout suggests trade was only discussed and a deal on the rare earths was reached. China's readout included an expression of concern about US planned arms sales to Taiwan and the need for more talks to resolve the issue. The agreement in Geneva apparently covered bilateral actions and Beijing's export controls on several critical mineral and magnets are universal. Still, more talks have been planned even if not scheduled. Although the Trump-Musk break-up is as dramatic as one might expected, given the volatile personalities, the focus is on today's US employment data after a series of disappointing reports, including ADP and the weekly jobless claims. Still, the greenback is firmer against the G10 currencies, but mixed against the emerging market currencies, where the euro's pullback is a drag on central European currencies. 

Equities were mixed in the Asia Pacific region. South Korea's Kospi was the strongest with a 1.5% gain and a 5.3% rise on the week as election offers a chance for political stability after the turmoil earlier this year. Europe's Stoss 600 is flat as it tries to extend its advance for the fourth consecutive session. US index futures are 035%-0.50% higher as they recoup part of yesterday's losses. Bond yields are softer. Poor household spending data from Japan weighed on rate, and even at the very long-end of the curve. Disappointing Germany industrial production and export figures helped drag European bond yields 2-4 bp lower. The 10-year US Treasury yield is near 4.37%, slightly lower on the day and a little more than six basis points lower on the week, rivaling the 10-year Gilt for the best performance this week. Gold is consolidating quietly within yesterday's range and is trading so far today mostly between $3353 and $3375. It settled slightly below $3290 last week. July WTI remains in the upper end of Monday's trading range, which extended to almost $64. It settled on Monday near $62.50 and has mostly held above it. Today's range is roughly $62.80-$63.35. 

USD: The Dollar Index is recovering from yesterday's decline, which brought it to around 98.35, its lowest level since April 22. It was initially sold on the response to ECB's Lagarde's observation, which the swaps market had already concluded, that the ECB easing cycle is nearly over. However, news that Trump and Xi spoke and seemed to have overcome what appears to be a misunderstanding lifted DXY to around 98.85, a little above Wednesday's low (~98.65). Follow-through buying today is probing the 99.00 area. It may take a move above the 99.40 area to lift the technical tone. Barring a new social media post by the president, the US employment data is the key ahead of the weekend. The consensus sees slower job growth in May. The median forecast in Bloomberg's survey is for 130k increase after 177k rise April. The average through the first four months of the year is 144k, down from 176k average in the same period last year. The market may be more sensitive to a change in the unemployment rate, which stood at 4.2% in both March and April. It was at 4.0% last May. The JOLTS report (April) showed an unexpected rise in job openings, led by the private sector, while openings in manufacturing and leisure and hospitality fell. On the other hand, the ADP private sector estimate for May was dismal at 37k, a third of what was expected). It was the lowest estimate since the fluke -53k loss in March 2023. Although the short-term divergence between the BLS estimate and ADP can be stark, what some news wires call the "whisper number" is bound to be lower. A weak report today, and especially a rise in the unemployment rate could see the market push the next Fed cut back into Q3. Alongside the gradual slowing of the labor market, and several elevated measures of consumer debt stress, consumer credit slowed in Q1 25 (to just less than $20 bln) from more than $30 bln in Q4 24 and $25 bln in Q1 24. April's figures will be released today but typically do not move the markets. 

EURO: The "hawkish cut" by the ECB lifted the euro to almost $1.1500 yesterday from a low on Wednesday around $1.1360. On the pullback on Trump-Xi talks, the single currency found new bids near $1.1430. It has pulled back to almost $1.1410 today partly in response to disappointing German data. Support extends toward $1.1380. Although April factory orders were yesterday rose by 0.6% instead of decline by 1.5% as economist polled by Bloomberg expected, industrial production fell by more than forecast (-1.4% vs. -1.0%) and the March series was revised to show a 2.3% increase instead of 3.0%. And April exports fell by 1.7%, which was also more than anticipated. Yet, on the eurozone level, growth in Q1 was twice as strong as initially reported (0.6% vs. 0.3%). The swaps market went into the meeting anticipating a year-end rate slightly above 1.60% and rose eight basis points by the end of the session. 

CNY: The dollar held above the seven-month low against the offshore yuan seen in late May near CNH7.1615) and recovered to about CNH7.1750 before stalling yesterday. Today, it has taken out yesterday's high (~CNH7.1820) and risen to about CNH7.1870. The price action over the past few weeks may be carving out a new range between CNH7.16 and CNH7.23. The PBOC set the dollar's reference rate at CNY7.1845 (CNY7.1865 yesterday and CNY7.1848 last Friday). China reports May CPI and PPI early Monday. The market expected deflationary forces still grip prices. The median forecast in Bloomberg's survey sees consumer prices falling by 0.2% year-over-year after falling 0.1% in April. Consumer prices turned down in February after having been slowing rising since January 2024. Although many focus on weak demand (though presented as a percentage of GDP, which, we argue reflects continued strong investment) the drag on goods prices comes from food. Core prices, excluding food and energy has been mostly positive, though did slip in February below zero. It stood at 0.5% in April year-over-year. Note that earlier this week Switzerland reported that on the harmonized EU methodology, its CPI is -0.2% year-over-year. However, the Swiss 10-year yield is around 0.25%, while China's is hovering near 1.70%. China's producer prices are expected to have fallen 3.0% year-over-year after a 2.7% decline in April. If so, that would match the deepest deflation since July 2023 and the third consecutive decline. It had appeared to be stabilizing in the previous four months. 

JPY: The dollar has chopped back and forth between around JPY142.40 and JPY144.40 this week. It is making session highs in the European morning near JPY144.20. Still, it may require a close above JPY144.80 to signal a breakout. Japan's household spending was a major disappointment. Rather than rise 1.5% as the economists projected, it fell by 0.1%. The average year-over-year gain in Q1 of 0.8% was the best quarterly performance since Q3 22. Yet in GDP terms consumer spending rose by 0.2% in Q1 25 after a 0.3% increase in Q4 24. The Q1 GDP estimate of a 0.2% contraction quarter-over-quarter will be updated early Monday. 

GBP:  Sterling rose to a new three-year high yesterday near $1.3615. It held in better than the euro, and on the pullback to only around $1.3575 bids re-emerged. It is holding below $1.3600 today and tested support in the $1.3530 area in the European morning. A break of it could see $1.3490-$1.3500. A close above $1.3575-80 would appear constructive. The UK-US trade deal seemed to allow British steel and aluminum into the US without the levy the US re-introduced provided that its supply chain was clean (i.e., not re-exporting Chinese product). Yet, it turns out that UK steel and aluminum will be subject to the 25% tariff announced last week after the US agreed to allow US Steel to be combined with Nippon Steel. The UK also seems vulnerable if the final version of the US budget proposal contains Section 899, which retaliates against companies operating in the US whose home country pursues policies that the US does not like, such as a digital tax or implementing the OCED's Pillar Two, (sets15% minimum corporate tax rate on large companies and allows others to top it off if it is under-taxed at home).

CAD:  The Canadian dollar made a new high for the year yesterday after Ottawa reported a record-goods trade deficit as exports to the US collapsed by almost 16%. The greenback reached CAD1.3635 before recovering toward CAD1.3675. It has extended the recovered to almost around CAD1.3685, but the CAD1.3700 area looks more important. A move above there could target CAD1.3750. After the Bank of Canada's pause on Wednesday, with overnight target rate at 2.75%, which is within estimates of the neutral range, attention turns to the labor market today. Canada's labor market has slowed considerably in recent months. The average monthly jobs growth in the first four months of 2025 is about 13k, down from almost 42k a month in the Jan-Apr 2024 period. The median forecast tin Bloomberg's survey is for a 12.5k loss of jobs last month. Canada has lost an average of 3.75k full time positions a month this year and grew 25k a month in the same period last year. The unemployment rate has been steadily rising since bottoming at 5% in late 2022 and again in early 2023. It was at 5.7% in January 2024 and finished the year at 6.7%. Canada's unemployment rate stood at 6.9% in April, matching the cyclical high. It is expected to have risen to 7.0% last month.

AUD: According to Bloomberg's pricing, the Australian dollar made a new seven-month high yesterday by 1/100 of a cent to nearly $0.6540.The technical objective we have been emphasizing was the (61.8%) retracement of the Australian dollar's decline from last October's high (~$0.6940) to April's low (~$0.5915) found near $0.6550. It settled above $0.6500 for the first time this year, but was unable sustained the momentum and has pulled back to about $0.6485 today. A band of support may be found between $0.6455 and $0.6475. 

MXN: The dollar reached a new eight-month low against the peso today, slightly below MXN19.14. The MXN19.00-MXN19.05 offer the next important chart area. It has been a gradual but persistent grind lower in recent weeks. And that is point. The relatively low volatility, liquidity, and attractive rates make it an ideal for carry-trades against the dollar. Its actual volatility over the past month is around 8.9% (annualized). One can earn more carry in Brazil, but the volatility is almost 50% higher than the peso and the liquidity is worse. One of the implications of this is that a firm CPI print on Monday, with both the headline and core rates moving above the top of the target range that extends to 4%, the peso's attractiveness may be enhanced rather than diminished. 

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