Overview: The US dollar is firmer against all the G10 currencies, but its gains have been muted, and "consolidation" better characterizes the price action. What were seen as dovish central bank minutes has dragged the Australian dollar down the most among the major currencies, and it is off a little more than 0.5%. The Canadian dollar is down the least (less than 0.10%). Additional dollar gains in early North America look likely. Emerging market currencies are more mixed. Central European currencies the laggards today, while the Russian ruble, Malaysian Ringgit, and Chinese yuan lead the advancers.
The market took news of the collapse of the Dutch government in stride. The euro is heavier, off around 0.25%, which is a middling performance today, while Dutch 10-year yields re slightly lower but within the range of European yields today, which are mostly 1-2 bp lower. The strong reception at the UK long-bond auction lent support to the 10-year Gilt, whose yield is off about six basis points today. The 10-year US Treasury yield is off almost three basis points to 4.41%. Japan's 30-year yield drifted lower for the third consecutive session, while the 40-year edged higher for the first time in four sessions today. Equity markets were mixed. The large bourses but Tokyo and India were higher in the Asia Pacific. Europe's Stoxx 600 is off (~0.25%) for the second consecutive session and US index futures are around 0.35% lower. Gold was sold after it reached a four-week high near $3392. It is now below $3360. After yesterday's 2.8% rally, July WTI is consolidating in the upper end of yesterday's range (it reached almost $63.90) and is near $62.75 now having settled near $62.50.
USD: The Dollar Index slipped briefly through yesterday's lows earlier today before it stabilized and turned higher. The low was slightly below 98.60 and it recovered to almost 99.00. The April low, which was also a three-year low, was closer to 97.90. The focus is on the breakdown of US-China's truce, the doubling of US steel and aluminum tariffs (as of tomorrow), and speculation that Russia will retaliate for the Ukraine's bold drone strike. The OECD's updated forecasts cut this year's growth projection for the US to 1.6% from 2.8% anticipated in March (2.9% for the world, down from 3.3%). Moreover, it warned of the inflationary impact of the tariffs. Most of the news in today's factory orders was already contained in the poor preliminary durable goods orders report that was weighed down by the precipitous drop in Boeing orders, but weakness was seen in the core orders (excluding aircraft and defense). The JOLTS report has lost some of its market appeal. In any event, the median forecast in Bloomberg's survey is for job openings to have fallen to 7.1 mln in April, which would be the lowest since the end of 2020. May auto sales will be reported through the day, but a slower pace is expected. In fact, it could be the first back-to-back decline since Oct/Nov 2023. Auto sales jumped to 17.77 mln seasonally adjusted annual pace in March as businesses and households tried to get ahead of the tariffs. It was the highest since October 2017. Recall that consumption was revised lower in the Q1 GDP figures (1.2% vs. 1.8%). Retail sales were sluggish in April and a decline in auto sales will underscore the weaker demand for consumer durables.
EURO: The euro reached a six-week high near $1.1450 in North American turnover, a little before the European session ended. It pulled back toward the $1.1415 in the North American afternoon but recovered to approach session highs in late dealings. It reached a new high near $1.1455 before being pushed back to $1.1400. The fall of the Dutch government after Wilders' Freedom Party left the coalition in a dispute about immigrations seemed to have little impact. A move, and especially a settlement below $1.1385, weakens the technical tone. Ahead of Thursday's ECB meeting, the preliminary eurozone May CPI was reported. The flat month-over-month reading allowed the year-over-year rate to ease to 1.9% from 2.2%. The core rate eased to 2.3% from 2.7%. Both were a little softer than expected. The base effect, in this case, the low readings in Q3 24, warns of upside risks after this month. That reinforces the case for the ECB to pause after this week's cut, and ahead of what ECB President Lagarde suggests is the neutral rate (1.75%). Switzerland reported its May CPI. Its national measure saw the year-over-year rate slip below zero for the first time since March 2021 (-0.1%) while the EU harmonized measure fell to -0.2% from 0.3% year-over-year. The Swiss National Bank meets on June 19, and the lowly inflation risks a return to negative policy rate, which currently stands at 0.25%. The swaps market has 33 bp of cuts discounted at this month's meeting. In a close call, we lean toward a quarter-point cut.
CNY: Even though the dollar fell against most currencies yesterday, the offshore yuan was one of the exceptions. The dollar eked out a small gain. It rose to a nine-session high near CNH7.2240 but was trading near the middle of the session’s range (~CNH7.2010-CNH7.2240) in late turnover. Despite the greenback's firmer tone today, it has been sold against the yuan. The dollar returned to the CNH7.1855 area. Last Friday's low was nearCNH7.1815. The PBOC set the dollar's reference rate slightly higher (CNY7.1869 vs. CNY7.1848 yesterday). The Caixin's manufacturing PMI runs a little stronger than the China Federation of Logistics & Purchasing version and May stands out as an exception. The Caixin iteration fell to 48.3 from 50.4. The median forecast in Bloomberg's survey was for a small gain to 50.7. It was below 50 twice last year (July and September). The "official" one rose to 49.5 and 49.0. It was above 50 in February and March.
JPY: The doubling of US steel and aluminum tariffs would seem to make trade talks between the US and Japan more difficult. Prime Minister Ishiba was quoted on the news wires declaring that Japan has no intention on compromising on US tariffs. The dollar has been sold to a five-day low today near JPY142.40. It traded below the trendline that held yesterday, drawn of the April and May lows, near JPY142.50 today. It recovered to around JPY143.25 before consolidating. The intraday momentum indicators suggest it can challenge the session highs in North America.
GBP: Sterling reached $1.3560 yesterday as it approached last week's three-year high near $1.3595. It trended lower in the North American afternoon and fell to around $1.3515, which was below the low set in Europe (~slightly under $1.3520). Yesterday's high has held today, and sterling was sold back to almost $1.3500. Support is seen in the $1.3480 area and a break of could target last week's low by $1.3415.
CAD: The US dollar recovered after having been sold to a marginal new low for the year near CAD1.3675. It has held above CAD1.3700 today. Last week's low was around CAD1.3685. Nearby resistance is seen near CAD1.3750. Canada's economy is soft but underlying inflation rose. This puts the Bank of Canada in a difficult position when it meets tomorrow. The swaps market is discounting about a 1-in-5 chance of a cut. Before the inflation data, there was around a 2-in-3 chance of a cut discounted. The newest responses in Bloomberg's survey were sufficient to push the median from a rate cut to standing pat. The swaps market has almost 43 bp of cuts between now and the end of the year. May 1 was the last time the swaps market was fully discounting two cuts this year.
AUD: The Australian dollar approached support in the second half of last week near $0.6400, and the broad US dollar weakness saw it test the $0.6500 area yesterday. Despite several intraday violations last month, the Aussie has not been able to close above there. The What was seen as confirmation of a dovish bias in the minutes from the recent central bank meeting that resulted in a quarter-point cut though a half-point move was considered, sent the Aussie back to around $0.6450 today. Australia's Q1 inventories (up 0.8%, more than expected)) and net exports (f-0.1% as a percentage of GDP) will help economists make last minute revisions to Q1 GDP, which is due on Thursday. Growth in Q1 looks to be round 0.4% after 0.6% growth in Q4 24. The futures market favors another rate cut next month (~80% chance, up from a 50% chance in the middle of last week).
MXN: The peso again displayed remarkable resilience. Ahead of the weekend judicial vote, the peso had softened. The dollar set new highs for the week ahead of the weekend a little below MXN19.44. It also settled above the 20-day moving average for the first time since mid-April. Nevertheless, the peso came back strongly yesterday. In fact, it was the strongest among emerging market currencies yesterday, with around a 1.15% gain. It was the largest gain since early April. The greenback recorded the low for the year last week around MXN19.1830. The dollar recorded a bearish outside down day yesterday by trading on both sides of the previous session's range and settling below its low. The dollar is pinned near yesterday's lows in quiet turnover. Today's range so far is about MXN19.2030-MXN19.2435). Assuming it is pushed through last week's low we target the 200-day moving average initially that is near MXN19.0460. For the better part of the past six weeks, the dollar has been chopping in a range between BRL5.60 and BRL5.75 with a few exceptions. Before the weekend Moody's cut the outlook for its Baa1 rating to stable from positive. The local currency 10-year yield eased by a single basis point but other sovereign yields in the region rose.
Reviewed by Marc Chandler
on
June 03, 2025
Rating:
