Last week, the US dollar fell to new lows for the year against half the G10 currencies, including sterling, the Norwegian krone, and Canadian, Australian, and New Zealand dollars. A key question is whether it is a breakout and a signal that ana acceleration of the dollar's decline is at hand. On balance, and within a larger downtrend, we think there is a better case for the dollar trade consolidate with a firmer bias in the near-term. The three-month moving average of nonfarm payrolls rose in both April and May. The unemployment rate has been steady at 4.2% for the past three months. From the Fed's vantage point, it is not signaling a new for urgent action. This will allow it to continue to allow the current restrictive setting to restrain price pressures. The May CPI, a highlight for the week ahead, is expected to be firm with small gains in both the headline and core year-over-year measures. Surveys continue to warn that most businesses intend on passing at least some of the higher tariffs on to their customers. Meanwhile, the US-China trade talks resume in London on Monday.
The economic data highlights in addition to the US CPI include China's inflation and real sector data for May, and the UK employment report and April GDP. With Ukraine's continued drone attacks on Russia, a retaliatory strike by Moscow threatens to be significant and could weigh Europe. Contrary to talk of a capital strike against the US (over fiscal concerns and the erosion of US exceptionalism narrative), US 10-year bonds are the best performer among the G7 so far this year, and although the S&P 500 is underperforming Europe, it is posting a small gain on the year, while Japan's Nikkei and China's CSI are nursing small losses.
US
Drivers: The Trump administration's tariff strategy met judicial resistance, but the issue is far from resolved and adds to the uncertainty that hangs over businesses and investors. Congress does not appear ready to reclaim the power it deferred to the executive branch.
Data: Fed officials have indicated that survey data alone will not persuade them. The economy still appears to being skewed by the behavior around the tariff announcements. Still, we learned last week that both auto sales and job growth slowed in May. Attention turns to prices this week. The May CPI is expected to have risen by 0.2%, which, given the base effect (unchanged in May 2024), the year-over-year rate may rise to 2.5% (from 2.3% in May), which would be the first increase since January. A 0.3% rise in the core rate could lift the year-over-year rate to 2.9% or 3.0%, on the rounding. The PPI will draw attention, but it is unlikely to match the 0.4%/0.5% month-over-month decline posted in April. Amid reports about poor reception to government bond auctions recently, the US Treasury will sell $119 bln in coupons in the week ahead. US yields rose ahead of the weekend and settled higher on the week.
Prices: The Dollar Index may have put in a near-term low this past Thursday near 98.35. Still, a band of resistance is seen from about 99.65-100.00. At the same time, Russia's retaliation against Ukraine after Kyiv daring and impactful drone strike, could, in addition the economic macro story sparks a short-covering rally. A move above 100.50 could target 102.00.
EMU
Drivers: After cutting its policy rates by 200 bp beginning in June 2024, the ECB is likely to pause and wait for the cumulative effect of the easing to catch up to it. While tensions within the eurozone appear to be at a low ebb, tensions with the US have not been resolved. Indeed, thew new German government is considering a new 10% digital tax, which is likely to complicate efforts to reach a rapprochement with the US. Russia's retaliation against Ukraine also leaves the euro vulnerable.
Data: This week's economic reports include the aggregate April trade surplus and industrial production figures. March data may have been flattered by efforts to get ahead of the US tariffs and April may see some payback. Consider that Germany reported a 3.6% jump March factory orders and a 2.3% jump in industrial output, but in April factory orders edged up 0.6% while industrial production dropped 1.4%. Similarly German exports in April fell 1.7% after rising 1.2% in March.
Prices: The euro fell to almost $1.1370 after the US employment data but quickly recovered to trade back to around $1.1415, where it was prior to report. Still, we think there is a reasonable chance that Thursday's high, slightly shy of $1.1500 marks a near-term high. This leaves the euro vulnerable to a move back into the $1.1260-$1.1320 area.
China
Drivers: Beijing may be making inroads as the US retreats such as from the World Health Organization. However, its own policies seem to prevent it from taking as much advantage of vacuum the US is creating. Its currency is closely managed to be largely stable against the US dollar. Its 10-year yield is up about three basis points, year-to-date, while the US 10-year yield is off about 10 bp, the largest decline among the G10. The CSI 300 is underperforming with roughly 1.5% decline year-to-date.
Data: China reports May CPI and PPI as the market open on Monday. With consumption rising at a roughly 8% compounded annual rate since the Great Financial Crisis, we tend to be more persuaded by the excess investment framing. The deflation in consumer prices partly reflects the heavy weight given to food, and the competition for market share, as the recent price cut announced by BYD illustrates. Lending figures are likely to have remained strong as local government and banks have new quotas to fill. May trade may have been distorted by the practical embargo until the deal was struck with the US on May 11. That said, some reports indicate US retails may have ordered containers of goods before the cooling-off period but by the end of May contain shipments had slowed again.
Prices: The dollar approached the year's low against the offshore yuan set late May near CNH7.1615. It held and the dollar recovered toward CNH7.1940 after the US jobs data. We suspect it will recover more in the coming days. Initially, the CNH7.20 area beckons but upper end of the recent range extends toward CNH7.2240-60. Against the onshore yuan, the greenback can test the CNY7.20 area, where the 20-day moving average is found. It has not traded above this moving average for over a month.
Japan
Drivers: The yen's exchange rate continues to reflect the dollar's broad movement rather than interest rates, as is often the case. Over the past 30 sessions, changes in the exchange rate and the 10-year US yield are about 0.25, and with the two-year Treasury note, is more than double it. The correlation with changes of the Dollar Index is holding over 0.90. For the record, the correlation between changes in the exchange rate and US 10-year is higher than the correlation between changes in the exchange rate and Japanese 10-year yields, and greater than the correlation with changes in the 10-year spread.
Data: It looks like a heavy economic slate in the coming days, but most of the data is old (like another look at Q1 GDP and revised April industrial output That leaves the April current account, some survey data and the tertiary industry index, which typically are not market movers. The swaps market has a little more than 16 bp of tightening before the end of the year. There is newfound hope in Tokyo that an agreement with the US may be struck ahead of the G7 summit in mid-June.
Prices: After setting a six-month low in late May near CNH7.1615, the US dollar has entered a consolidative phase. The upper end of the range is around CNH7.2250. It finished last week on a firm note near CNH7.1900. Against the onshore yuan, the greenback can test the 20-day moving average (~CNY7.20), which it has not traded above for more than a month.
UK
Drivers: Two considerations appear to be helping elevate sterling. First, the market pulled back from the aggressiveness it had been discounting Bank of England monetary policy. The year-end rate, reflected in the swaps market, has risen by more than 30 bp in the past month. Second, is the broad weakness in the greenback. The inverse correlation between changes in sterling and the Dollar Index is near -0.90. That said, given the weight of the euro in the Dollar Index, it is hard to disentangle the correlation with the euro from the Dollar Index.
Data: The UK issues its monthly labor market report and April GDP. The UK economy grew by 0.7% in Q1 to lead the G7, but it looks set to slow to a crawl for the next few quarters. Moreover, there is little chance that the data will prompt a re-think of the low odds given to a change in the base rate at next week's Bank of England meeting.
Prices: Sterling set a three-year high last week near $1.3615. The momentum was not sustained and after the US jobs data, sterling approached $1.3500. For the first time last week, ahead of the weekend, sterling settled below its five-day moving average (~$1.3545). Nearby support is seen near $1.3490 and then $1.3435, where the 20-day moving average is found. Sterling has not settled below the 20-day moving average since May 16.
Canada
Drivers: The movement of the Canadian dollar seems more sensitive to the general direction of the US dollar (DXY) than interest rates, S&P 500 (risk), and oil. The correlation of differences with the Dollar Index is almost 0.75 and 0.68 for the past 30 and 60 sessions, respectively. The correlation with gold is a close second, around 0.62 and 0.55 for the 30- and 60-day periods, respectively.
Data: After the jobs report and Bank of Canada meeting last week, the economic diary turns quiet. April building permits, manufacture sales, and the Q1 capacity utilization rate are on tap. The swaps market has downgraded the chances of a July cut to about 30% from nearly 65% at the end of last week. The year end rate is seen near 2.50%, up from less than 2.20% in late April and 2.35% at the end of May.
Prices: The US dollar recorded a new seven-month low last week around CAD1.3635. In the 14 weeks since the end of February, the greenback has posted weekly advances only four times. It is likely a near-term low is in place. That said, the momentum indicators have not turned. Initial resistance may be encountered in the CAD1.3725-50 area. Clearing that could target CAD1.3800-30.
Australia
Drivers: The rolling 30-day correlation between changes in the Australian dollar and Dollar Index are a little less than 0.75 a little higher than the correlation with the Canadian dollar (~0.65) and gold (~0.60). However, over 60 sessions the correlation is near 0.70 with the Canadian dollar, 0.60 with gold, and 0.55with the Dollar Index.
Data: It is an exceptionally quiet week. The economic calendar features consumer and business confidence surveys. The futures market is discounting about an 80% chance of a cut at next month's central bank meeting, up from about a 2/3 chance at the end of last week and the previous week. The current overnight cash target rate is 3.85%, and the futures market sees it near 3.09% at the end of the year, up a couple of basis points last week.
Prices: The Australian dollar made a marginal new high for the year on June 5 slightly below $0.6540. It settled above $0.6500 for the first time since the end of last November, but there was no follow-through ahead of the weekend. It settled slightly below $0.6500 again. A break of $0.6480 could spur a return to the $0.6445-50 area initially. Better support is around $0.6400, which the Aussie has not settled below since May 12.
Mexico
Drivers: The Mexican peso's resilience appears to reflect the broad dollar weakness and the favorable interest rate differential. With Mexico's central bank cutting rates aggressive, the carry not as large as it was but with a falling dollar, the total return in the first five months of the year was near 11.75%. Mexico's 10-year peso bond yield has fallen 110 bp this year to 9.30%. It 10-year dollar bond yield is off nearly 30 bp to a little below 6.35%.
Data: Mexico reports May's CPI and April industrial production. Given the CPI for the first half of May, market participants should be prepared for a firm CPI reading that lifts the headline above 4%, the top of the target range. The core rate at 3.93% at the end of April and 3.97% in mid-May could have also exceeded the 4% threshold. Nevertheless, given the growth downgrade, the central bank is still likely to deliver a 50 bp cut later this month.
Prices: The dollar ground to a new low against the peso since last September, a little below MXN19.10 before the weekend. Despite the dollar's broader gains, it settled below the previous session's low (~MXN19.14). The lower Bollinger Band is near MXN19.08. The momentum indicators are turning down from mid-range. The greenback has held up above MXN19.00 late last August and there seems to be little in the way of re-test on it.
Reviewed by Marc Chandler
on
June 07, 2025
Rating:
