Overview: Despite the US jobs report, which was considerably better than the fears induced by the ADP estimate and the gradually rising jobless claims, and apparent resumption of China's rare earth exports to US (and European) auto makers, Asia and European participants sold into the dollar's gains they inherited. The greenback has largely unwound its pre-weekend gains. The US-China trade talks are being held in London today. China's export control of critical metals and magnets was a shot across the bow. As the US dominates chip technology, and therefore the supply chain, China demonstrated it does the same more or less in the rare earths space. Separately, China reported slower exports last month and a decline in exports to the US, but a larger trade surplus overall. Japan had previously reported Q1 GDP contracted but upward revisions to consumption and inventories despite a downward adjusted to business investment, saw the economy stagnate rather than shrink. The dollar is weaker against the G10 currencies and most emerging market currencies.
Asia Pacific equities rallied today, led by more than 1% gains in Hong Kong, the mainland shares that trade there, and South Korea's Kospi. Note that Australian markets were closed for the King's Birthday. Europe's Stoxx 600 is snapping a four-day advance, and US index futures are little changed. European 10-year yields are 4-5 bp lower and the 10-year US Treasury yield is around 2-3 basis points lower near 4.48%. It has risen 11 bp before the weekend. Gold fell 1.25% before the weekend and extended its losses today to around $3293 before recovering to around $3328 before consolidating in Europe. July WTI edged a bit closer to $65 to reach two-month high. It was sold to around $64.20 before finding a new bid in Europe.
USD: The Dollar Index traded firmly ahead of the weekend after a poor German industrial output report and a better US jobs report than the dismal ADP estimate suggested. It nearly met the (50%) retracement of the decline from the late May high (~100.50). There has been no follow-through buying today, and the Dollar Index is confined so far to last Friday's range. The low was around 98.65, and it is holding above 98.80 but it looks vulnerable. Last week's low was closer to 98.35. The weekend unrest in Los Angeles, the use of the national guard and threat of Marines are unsettling but the link to the capital markets is not clear. Today's wholesale inventories and NY Fed's inflation survey are not typically market-movers. The data highlight of the week is Wednesday's CPI, where the median in Bloomberg's survey is looking for a small increase in the year-over-year pace. Surveys are one way to track inflation expectations. Market-based measures are another. The former are elevated compared with the latter. Consider the Fed's survey for the one-year outlook. It was 3.63% in the April survey. The one-year breakeven was at 3.15% at the end of April and has been holding below 3% since May 12, and settled last week slightly above 2.75%. After the jobs data, the Fed funds futures pushed the next cut into Q4 and is now the least sure that the Fed will cut twice this year in more than three months.
EURO: The euro was under pressure ahead of the weekend after the poor German industrial output figures (-1.4% in April and the March gain was revised to 2.3% from 3.0%) and largest decline in exports in six months (-1.7% in April). The better-than-feared US jobs report pushed on the open door. Within an hour of the data, the low was in place slightly ahead of $1.1370. In the North American afternoon, it hovered near but mostly below $1.1400. It has held above $1.1390 today and is extending gains in Europe to almost $1.1445. The pre-weekend high was near $1.1460 and last week's high was closer to $1.15.
CNY: The broader gains in the dollar dovetails with the corrective/consolidative phase we anticipated against the yuan. Last week it held the year's low (~CNH7.1615) in late May and recovered to almost CNH7.1940 ahead of the weekend. In the context of today's softer tone, it has been pushed back to around CNH7.1825 today. The PBOC set the dollar's fix higher (CNY7.1855 vs CNY7.1845) for the first time in three sessions. Deflationary forces continue to grip China, but earlier claims of it exporting it to the US seems wide of the mark. Producer prices fell 3.3% year-over-year in May, the most since July 2023. The weakness in producer prices seems to support for the arguments that China suffers more from over-investment than under-consumption. It is true that consumer prices are also deflating. They fell by 0.1% year-over-year in May. While consumer inflation is low, it is the weakness in food prices that pushes it over the edge. Food prices fell by 0.4%, twice the April's prices, while non-food prices were flat. The core rate, excluding food and energy, was up 0.6%, matching the year's high. Separately, China reported May trade figures, and although exports to the US fell, overall exports rose 4.8% (down from 8.1%) and imports fell 3.4% after 0.2% slippage in April. The net result was a $103.22 bln monthly trade surplus ($96.2 bln in April).
JPY: The dollar based in the JPY142.40-60 area last week and briefly poked above JPY145.00 after the US jobs report, which saw a sharp jump in US rates. The greenback settled above its 20-day moving average for the first time since May 19. The dollar has been turned back today to straddle JPY144 in the European morning. Last Friday's low was near JPY143.45. Japan revised the Q1 GDP contraction way. Rather than fall by 0.2% that was previously reported, Japan's economy stagnated. Consumption was revised to 0.1% from flat, but the inventories contribution was twice what was initially estimated (0.6% vs. 0.3%) while net export subtracted 0.8%. Business investment was revised to 1.1% from 1.4%. The GDP deflator was left unchanged, up 3.3% year-over-year, the highest since the end of 2023. Separately, Japan reported April's current account, which true to form, deteriorated in April. It has done so in 19 of 20 years. The surplus fell to JPY2.26 trillion from JPY3.68 trillion. The trade balance itself fell back into deficit (~JPY33 bln from JPY516.5 bln surplus) for the first time since January.
GBP: Sterling stalled at the end of last week after setting a new three-year high (~$1.3615). The stronger dollar ahead of the weekend saw sterling approach $1.3500. Sterling is trading firmly inside last Friday's range (~$1.3510-$1.3585) and may probe the $1.3600 area in North America. The UK economic calendar begins off quietly but features the employment report tomorrow and April GDP on Thursday. Still, given the recent comments by Bank of England officials, there is practically no chance of a rate cut at next week's Monetary Policy Committee meeting. The swaps market has almost 2/3 of a chance of a cut at the following meeting in August, but the next cut is not fully discounted until November.
CAD: The US dollar recovered from CAD1.3635, a new low for the year, last Thursday and reached slightly through CAD1.3700 ahead of the weekend. First, the US data overshadows the Canadian report. Second, underneath the optics, which showed a nearly 58k increase in full-time posts, the most in five months, there were weakness. These went beyond the increase in the unemployment rate to a new cyclical high of 7% (6.3% in May 2024) and includes a decline in aggregate hours worked and job losses in manufacturing and logistics (transportation and warehousing). Still, the greenback trades heavily today and is near the pre-weekend low (~CAD1.3660).
AUD: The high for the year was set last Thursday slightly below $0.6540. The pullback ahead of the weekend extended to about $0.6480. It has returned bid today and is around $0.6530-5 in Europe. The $0.6550 is a retracement target we have been anticipating. Australia sees a couple of bank surveys on consumer and business confidence tomorrow, but they tend not to be drivers of the exchange rate. The central bank meets next on July 8, and the futures market is discounting a little more than an 85% of a cut.
MXN: The dollar finished last week at its lowest level against the Mexican peso since September and has fallen further today to reach about MXN19.0650. It appears to be drawing gradually toward the MXN19.00 area. The peso rose by about 1.7% last week, its largest gain since late January. Latam currencies made up three of the four best performing emerging market currencies last week (BRL +2.9%, KRW +2.0%, MXN + 1.7%, and CLP +1.2%). Some link the strength of Latam currencies to rising commodity prices and/or carry trades, while the honeymoon after the Korean election appears to have been a factor for the won. Mexico will report May CPI shortly. Price pressures have accelerated as last month progressed and both the headline and core measures are expected to rise above 4%, the top of the 3% +/- 1% band. The central bank's chief concern is about the weaker growth profile and not on the firmer CPI readings. The swaps market continues to favor another 50 bp cut when the central bank meets again (June 26). Separately, Mexico will report its May vehicle production and exports. Output fell almost 4% in April to about 326k vehicles and was about 9% lower year-over year. Mexico exported almost 257k vehicles or about 21% of its output. In April 2024, Mexico exported nearly 290k vehicles, or almost 20% of its output.
Reviewed by Marc Chandler
on
June 09, 2025
Rating:
