Overview: The dollar is mostly softer today in narrow trading ranges, though it is firmer against the yen and Swiss franc. The weakness of US data (ADP, ISM services, and anecdotal Beige Book) lifted the market confidence of at least two Fed cuts this year. Most emerging market currencies are also trading higher against the dollar today. Still, overall, the foreign exchange market is relatively calm, and ranges are mostly narrow. The outcome of ECB meeting today (rate cut and reductions in this year's growth and inflation forecasts are likely) and tomorrow's US employment report are awaited.
Equities are generally firmer. Among the large markets in the Asia Pacific region, Japan and Australia did not participate in today's advance. Europe's Stoxx 600 is rising for the third consecutive session. US index futures are firm. Bond markets are also bid. Japan's 30-year bond auction was alright. The bid-cover of 2.92 though is not regarded as inspiring. Still, the 10-year yield fell almost four basis points to 1.45%. European benchmark yields are mostly 3-4 bp lower. The 10-year Treasury yield is slightly softer near 4.34%. Gold is firm in the upper end of this week's range, which is a little below $3400. July WTI is trading quietly in a $62.50-$63.15 range. It has been capped this week below $64. Last month's high was closer to $64.20.
USD: The dollar traded poorly yesterday. Weighed down by a surprisingly poor ADP private sector jobs estimate (37k vs. 114k expected), a softer than expected ISM services (the first sub-50 reading since June 2024), and a Beige Book that underscored drag of the economic and policy uncertainty, the Dollar Index trended lower in North America. Tuesday's low was slightly below 98.60 and this was approached yesterday. The more important level is 97.90-98.00, the three-year low set last month. It is trading quietly today in a narrow range below 99.00. We already know that the US April goods deficit narrowed dramatically to $87.6 bln from the rush to get ahead of the tariffs that ballooned the deficit to $162.3 bln in March. Goods imports in April tumbled by almost 20%, a record. Exports rose 3.4%. The overall April trade balance will be reported today an dis is seen narrowing to around $66 bln from $140.50 bln. The US reports Q1 productivity and unit labor costs. These are among the economic phenomena that are not observed directly but deduced from the GDP data. Productivity contracted (-0.8%) after growing by an average of 2.1% in 2024 and 3.1% in 2023. Unit labor costs are a mirror image. They rose by an average of slightly less than 2% last year and a little more than 2% in 2023. They jumped 5.7% in Q1 25, pending today's revision. Weekly jobless claims may draw some attention after last week's report (week through May 23) showed a 14k job to 240k, the first increase in four weeks, and the second highest since early last October. Still, the national jobs report tomorrow is more important. Slower nonfarm payroll growth is expected (~130k vs 177k) but the key may be the unemployment rate. It was at 4.2% in March and April, matching last year's high. The Atlanta Fed's GDP tracker will be updated later today. On Monday, it was raised to 4.6% from 3.8%.
EURO: The euro settled firmly yesterday and above $1.14. Options for 2.4 bln euros struck there expire today. It is holding above $1.1400 so far today and has been unable to rise above $1.1435. A move above $1.1455 re-targets the 3 1/2-year high set last month near $1.1575. Above there, the initial scope may extend another cent. There is practically no doubt that the ECB will deliver another quarter-point cut today. The sub-2% aggregate May CPI removes whatever lingering doubt there may have been. There seems to be two issues. First are the updated forecasts. It is reasonable to expect growth and inflation forecasts to be trimmed. In March, the ECB saw the economy expanding by 0.9% this year, 1.2% next, and 1.3% in 2027. It had CPI at 2.3% this year, 1.9% in 2026, and 2.0% in 2027. For comparison purposes, note that the IMF's updated forecasts are for 0.8% growth this year and shares the ECB's outlook for the next two year. Its CPI projection is 2.1% this year and again converges with the ECB for 2026 and 2027. The second issue is forward guidance. We suspect ECB President Lagarde to be circumspect and non-committal. Barring a new shock, a pause seems to be in order. So, no cut in July, while September, which sees new forecasts, may be a closer call.
CNY: The greenback's broad weakness saw it fall for the second consecutive session against the Chinese yuan. The dollar was sold to an eight-day low near CNH7.1700. It is holding today, and the dollar has pushed up to about CNH7.1820. Last week's low, the lowest since last November, was near CNH7.1615. The PBOC lowered the dollar's reference rate after increasing it for the past two sessions (CNY7.1865 vs. CNY7.1886). Caixin's services PMI ticked up to 51.1 from 50.7 but the much weaker than expected manufacturing PMI (48.3 vs 50.4 in April) was sufficient to drag the composite PMI lower to 49.6 from 51.1. It is the first break of 50 since the end of 2022. The headwinds from the trade dispute with the US appear to be growing again as container shipment to the US have fallen again. The facture of the agreement struck in Geneva seems to be over chips and critical minerals and magnets. Yet, it seems that China is progressing with its largely domestic chip industry, which is being forced to innovate somewhat differently. At the same time, the replacement of China's capacity in critical minerals (and their processing) and magnets seems more challenging for the US to replace in the short- to medium-term.
JPY: The dollar initially rose to a three-day high yesterday near JPY144.40 but the softer US data and the 10 bp pullback in the US 10-year yield provided too much, even if the correlation has slackened lately. The dollar was sold to almost JPY142.60. It made a marginal new low today near JPY142.50 before recovering to JPY143.40. Tuesday's low was closer to JPY142.40. The JPY142 area offers support. Labor cash earnings were steady at 2.3% year-over-year in April. Consider that in April 2024, they had risen by 1.6% year-over-year. Yet, adjusted for inflation, real cash earnings continue to fall. They fell 1.8% in the year through April. In April 2024, they had fallen by 1.2% on a year-over-year basis, and in April 2023, they were off 3.2%. This is likely one of the factors that constrain household spending, which will be reported tomorrow. It is seen slowing to 1.5% in April from 2.1% in March.
GBP: Sterling rose to $1.3580 on the back of the weaker dollar. It is trading in a narrow range slightly below there today (~GBP1.3540-$1.3575). The high in late May was near $1.3595. Above $1.3600, the next highs from March 2022 come into view near $1.3645. The upper Bollinger Band is slightly above there today. The 2022 high was recorded in January (~$1.3750). The UK reported a small increase in auto registrations (a proxy for auto sales) and the third consecutive rise in the construction PMI, which remains below 50 as it has since the end of last year.
CAD: The Bank of Canada held policy steady yesterday, but it seems clear that the easing cycle is not over. Still, in the face of the greenback's heavier today, the Canadian dollar rose to its best level since last October. The US dollar approached CAD1.3650. It has held today but looks vulnerable as the upside has been capped near CAD1.3685. The lower Bollinger Band is near CAD1.3625 today. From a technical perspective, there is little to hang one's hat on until closer to CAD1.3600, and even then, the "support" does not look particularly strong. Canada reports its April merchandise trade balance today. Although it reported a nearly C$2 bln trade deficit in February and March combined, the nearly $3.1 bln surplus in January offset it in full. The means in Q1 25, Canada recorded slightly more than a C$1 bln goods surplus. In Q1 24, a small deficit was reported. Canada's IVEY PMI is also due. It typically is more volatile and runs hotter than the PMI composite. It was at 47.9 in April, down from 51.30 in March, which was the first back-to-back decline since July-August 2024.
AUD: The Australian dollar pushed above $0.6500 in North America yesterday and again failed to close above it. It is trying again today and is bid around $0.6515 in late European morning turnover. Last week's high was slightly above $0.6535, a little shy of the $0.6550 area we targeted, which corresponds to the (61.8%) retracement of the losses from last October (~$0.6940) to the April low (~$0.5915). Australia reported its goods trade surplus earlier today. It narrowed from March's A$6.9 bln, which was the largest since January 2024 to A$5.4 bln. That is still above last year's average (~A$5.7 bln). Exports slowed. They slipped by about 2.4% after jumping 7.2% in March (the largest gain since April 2022). Imports rose by 1.1% after tumbling 2.4% in March. Separately, household spending rose by 0.1% in April after falling 0.3% in March. At an annualized rate, it is rising at a 2.4% pace. In the first four months of 2024, household spending rose at an annualized rate of around 3.3%.
MXN: The weaker greenback, lower US rates, and equity gains helped underpin the peso yesterday. The peso rose to its best level since last October. The US dollar approached MXN19.1625 before stabilizing. It is in a narrow range between MXN19.1895 and MXN19.2135. It has been a slow but steady grind lower from May's high set on May 6 near MXN19.7820. We continue to see potential toward the MXN19.00 area initially. Yesterday, Mexico reported a dramatic 10.8% surge in May auto sales. The reality may not be as impressive. The report is not seasonally adjusted, and auto sales have risen every May beginning in 2006. It was the sixth time that May auto sales rose by more than 10%. May auto sales were about 0.4% lower than sales in May 2024. Separately, Brazil's composite PMI slipped lower and remained under 50 for the second consecutive month. Disappointing real sector data and the recent softer PMI print may give the market reason to re-think the likelihood of a rate hike at the June 18 central bank meeting. The dollar approached BRL5.61 yesterday, with BRL5.60 offering important support. It has been frayed on an intraday basis a few times here in Q2 but has not settled below it once.
Reviewed by Marc Chandler
on
June 05, 2025
Rating:
