Overview: The dollar was better bid yesterday in North America after the better-than-expected JOLTS report, but it has come back offered today. Still, the general tone is one of consolidation. The greenback is a little softer against the most G10 currencies and all but a handful of emerging market currencies. Meanwhile, most of the final May PMI readings have been revised up from the flash weakness after the April US tariff drag. The Bank of Canada may stand pat today after firmer core CPI and Q1 GDP readings, but its easing cycle does not appear over. ECB meets tomorrow and there is little doubt that it will deliver another quarter point cut. A pause is likely as the neutral rate is approached and the past easing still needs to work its way through the economy.
The gains in US equities yesterday are appearing to help lift global equities today. Most Asia Pacific bourses were higher, led by a 2% advance in Taiwan and South Korea. The Stoxx 600 in Europe is up around 0.50%, which if sustained, would be the largest rally since early last week. US index futures are firm (~ 0.10%-0.20%). Benchmark 10-year yields have edged higher. While the 10-year JGB is up a little more than one basis point the 40-year bond yield is up three basis points to a new five-day high (~3.14%). European 10-year rates are mostly 1-3 bp higher. The benchmark US Treasury yield is edging 1-2 bp higher to hover near 4.46%. Gold is trading firmly but within yesterday's range. After reaching almost $63.90 yesterday, July WTI has been confined to about a 50-cent range above $63.05 so far today.
USD: The Dollar Index recovered from a six-week low slightly below 98.60 yesterday seen in the early Asia Pacific activity on Tuesday morning to a session high a little below 99.35. It was recorded shortly after the expected increase in job openings. Other parts of the April JOLTS report were as encouraging. The layoffs increased more than expected and the quit level fell. It stopped short of Monday's high (~99.40) and held below it today though drew slightly closer. It is probing support near 99.00 in Europe. Given the Fed's reaction function, survey data is not given as much weight as one might expect, and officials have been clear. This probably means only a passing interest in the ISM services and final PMI. It puts the Beige Book, which will also be released today, in a difficult position. Fed Chair Powell has often emphasized it even though it is anecdotal. Given the focus on the labor market this week, which leaves the ADP private sector jobs estimate. Through April, the ADP estimate has on average undershot the BLS estimate by about 11k a month. But, over the past 12 months, the ADP has overshot the official estimate by almost 20k a month.
EURO: The euro was turned back from $1.1455 yesterday and fell to about $1.1365, meeting the (38.2%) retracement of the gains from the May 29 low near $1.1210. It has struggled to re-establish a foothold above $1.14. Note that options for 1.3 bln euros struck at $1.1450 expire today. The ECB appears to place more weight on the PMI survey than the Federal Reserve. Still, the final services and composite reading today were revised higher from the preliminary reading. The services PMI rose to 49.7, up from 48.9 of the flash estimate and but still below the 50 boom/bust level for the first time this year. Initially, it looked like the composite fell below 50 to 49.5, but the final reading put it at 50.2 from 50.4 in April. It was the second monthly decline, but it has not been below 50 this year. Still, it may add little to the ECB's information set ahead of tomorrow’s meeting. The staff is expected to shave this year’s growth and inflation forecasts, clearing the deck for the ECB to deliver another quarter-point rate cut. Shortly before the ECB meeting, Germany will report April factory orders. After the 3.6% surge in March, which may be boosted by activity ahead of the US tariffs, factory orders are seen falling back around 1.5%. This may translate into weaker industrial output figures and a smaller April trade surplus, both of which will be reported at the end of the week.
CNY: The dollar approached the 200-day moving average (CNH7.2265) on Monday, and despite the disappointing decline in the Caixin manufacturing PMI, and its broader gains, the dollar fell CNH7.1855 against the offshore yuan yesterday. It slipped a little further today (~CNH7.1830) before recovering to about CNH7.1955 A break of the CNH7.18 area leaves little in the way of a retest on last week's six-month low near CNH7.1615. The PBOC set the dollar's reference rate at CNY7.1886 (CNY7.1869 yesterday). Caixin's services and composite PMI will be released tomorrow, and like the manufacturing PMI, they are expected to tick up. Still, with container shipments to the US making new lows and the trade strains resurfacing, the upticks may prove temporary. We continue to be concerned that without more stimulus the Chinese economy will struggle to meet the 5% growth target.
JPY: The dollar recovered smartly yesterday from a five-day low slightly below JPY142.40 and raced back to around JPY144.10 before running out of steam. It was unable to take out Mondays high (~JPY144.15) but it did so today, rising to nearly JPY144.40. Yet, it was not able to sustain the momentum. It is finding support in Europe near JPY143.80. A break now back below the JPY143.25-50 area could reinforce the sense of consolidation rather than a corrective phase. The market hardly responds to Japan's preliminary PMI and the same goes for the final reading, still both the service and composite PMI were revised higher. For the record, the final services PMI was 51.0 (50.8 flash reading and 52.4 in April). The initial May composite PMI was estimated at 49.8 and was revised to 50.2. It finished last year at 50.5 and was at 52.6 last May. Tomorrow, Japan reports April labor earnings. Nominal earnings are expected to accelerate to 2.6% year-over-year (from 2.3%) and real earnings continue to fall (-1.5% vs. -18% in March).
GBP: Sterling was confined to Monday's trading range yesterday. The session low was a little below $1.3500, seen in early North American turnover. It is trading inside yesterday's range today in what appears to be constructive consolidation and is slightly below $1.3550 in late European morning turnover. The final UK's May PMI does not change anything. The services PMI was revised to 50.9 from 50.2 initially and 49.0 in April, which was its lowest level since January 2023. This, coupled with the upward revision to the manufacturing PMI, saw the composite rise to 50.3 from the 49.4 flash estimate and 48.5 in April. Last May, it was at 53.0. The swaps market sees practically no chance of a rate cut at the June 19 Bank of England meeting and does not have the next cut fully discounted until November.
CAD: Canada will be adversely affected by the doubling of the US steel and aluminum tariffs. Even before it was announced, economists (surveyed by Bloomberg) expected the Canadian economy to contract this quarter and next. Given the lag of monetary policy, there is little that the Bank of Canada can do to avoid the contraction. But it did front load rate cuts last year. Through the easing cycle that began last June, the central bank cut the overnight lending rate by 225 bp to 2.75%. The full effect of the cumulative easing has likely not run its complete course yet. The higher core April inflation readings and the somewhat stronger than expected Q1 GDP (2.2% vs. 1.7% median in Bloomberg's survey) may allow the Bank of Canada to pause today. In recent days, economists (surveyed by Bloomberg) have come around to the judgement of the swaps market that the Bank of Canada will standpat today. The US dollar recorded a seven-month low against the Canadian dollar on Monday (~CAD1.3675) and recovered but was unable to rise above Monday's high (~CAD1.3745). It is trading quietly inside yesterday's range, holding above CAD1.3700 but unable to rise much above CAD!.3730. Options for $960 mln at CAD1.3750 expire today.
AUD: The $0.6500 area is proving to be formidable resistance for the Australian dollar since early last month. The upper Bollinger Band is found there too now. With a few exceptions, it has remained on the $0.6400-hande since early May. The session low today was recorded after the disappointing Q1 GDPO report. It held barely above $0.6450 where A$625 mln options at $0.6450 expire today. Australia saw its final services and composite PMI, but the real interest was with the Q1 GDP estimate. The economy expanded by 0.2% in Q1 25, half of the pace that the median forecast in Bloomberg's survey anticipated. The economy expanded by 0.6% in Q4 24. The PMI is consistent with a gradually slowing of growth. The composite averaged 50.8 in April and May, down slightly from the 51.1 average in Q1 25. Tomorrow, Australia reports April's trade balance (smaller surplus is expected) and household spending (may recover from a 0.3% decline in March).
MXN: The dollar consolidated near its recent trough against the peso yesterday. It recorded the low in early European turnover near MXN19.2025. The broad dollar gains helped lift it to session highs of nearly MXN19.2850. Still, the peso's resilience remained evident. The dollar settled below MXN19.24 and slipped through yesterday's low to almost MXN19.2015. It is hovering near its low in late European morning turnover. Mexico reports last month's domestic vehicle sales. Recall that in the last two months of 2024, vehicle sales rose to their best level in seven years (~146k-148k). A slowdown in sales has taken place this year, but through April, they have averaged about 118k a month, which is a little better than the average in the first four months of 2024 (almost 116k). Mexico's vehicle is also little changed in Jan-Apr period at about 324k a month on average compared with 321k average for the same 2024 period. Exports (mostly to the US) have slowed to a monthly average this year of about 258k. In the first four months of 2025, they averaged almost 279k a month.
Reviewed by Marc Chandler
on
June 04, 2025
Rating:
