Overview: The greenback is firm as the week winds down. Next week could be one of the most eventful of the year, with FOMC meeting, US and eurozone Q2 GDP, US PCE deflator and jobs data, and the August 1 "reciprocal tariff" extension deadline. The recovery in US rates has seen the dollar rise toward JPY148 from below JPY146 yesterday despite rising expectations that the Bank of Japan can raise rates again later this year. The UK's string of poor economic news continued today with a smaller than expected recovery in June retail sales (0.9%) after a 2.8% drop in May. After falling almost 0.55% yesterday, sterling is off another 0.35% today. Emerging market currencies are mostly weaker. The PBOC set the dollar's reference rate higher for the first time in four sessions.
Stocks and bonds are mostly heavier today. After Japan's Topix set a record high yesterday, it came off around 0.85% in a sea of red in the region. Among the large markets, only South Korea's Kospi eked out a gain. Europe's Stoxx 600, which rose for the past two sessions, is seeing its gains pared today (~-0.3%). US index futures are little changed. European benchmark 10-year yields are 4-6 bp higher. Yields are mostly 13-15 bp higher this week. Poor data has lent support to the UK Gilts and that 10-year yield is up about six basis points this week. The 10-year US Treasury yield is a couple basis points higher, near 4.42%, which is up about four basis points on the week. Gold was sold to a new low for the week (~$3343.25). It peaked this week on Wednesday near $3439 to record the high for the month. September WTI reached a high for the week around $66.75 earlier today but has come back off and is near session lows a little above $66.00. The US oil rig count has fallen for 15 consecutive weeks (to 422), and Baker Hughes estimate is due later today.
USD: The sixth consecutive decline in weekly jobless claims and the stronger-than-expected July composite PMI (54.6 vs. 52.9 in June), where growth in services offset the first sub-50 reading in manufacturing this year lifted the dollar on the back of firmer US interest rates. The Dollar Index rose for the first time since last Thursday. It briefly traded above 97.50 yesterday and reached slightly above 97.70 today. A band of resistance extends toward 97.80. That said, the five-day moving average is slipping through the 20-day moving average. Economists project a slowing of private investment in Q2 and Q3, and today's preliminary estimate of June durable goods orders and shipments are expected to slow sequentially. A drop in Boeing orders is going to see a large unwinding of the 16. 4% increase in May orders. Excluding defense and aircraft orders, durable goods orders may have eked out a small gain after a 1.7% surge in May. Shipments of those core orders, a proxy for capex, are expected to slow to half of May's 0.4% increase. A 0.2% gain would translate to 1.6% annualized gain in Q2 after a 5.6% annualized increase in Q1 and 2. 4% in Q4 24. Next week is among the busiest of the year, with the first estimate of Q2 GDP, the FOMC meeting, PCE deflators, the July jobs report and the next "liberation day" August 1 for US tariffs.
EURO: The euro has risen above the previous day's high and held above the previous day's low for the past five sessions. It reached almost $1.1790 yesterday, its best level since July 7 before stalling. It slipped below $1.1735 today. A break of $1.1730 could see $1.1700-20 probed in North America today. Still, the market took a hawkish message from the ECB which stood pat yesterday. The swaps market reduced the chances of a rate cut before the end of the year to about 60% from almost 90% at the close of Wednesday. The anticipated year-end target rate is the highest in more than three months. The US two-year premium over Germany has narrowed to about 197 bp, the least in about three weeks. The daily momentum indicators are also turning higher. Separately, the eurozone's M3 money supply rose by 3.3% in June, slowing from 3.9% in May, and the weakest growth since last September. It has been chopping between 3.7% and 3.9% this year. Before the pandemic, it rose 4-5% (2018-2019). Lending improved. Loans to businesses rose 2.7% (vs. 2.5% year-over-year in May) and to 2.2% households (2.0% in May). Lastly, as measured by the IFO survey, German expectations ticked up in July to 90.7 from 90.6, the highest since April 2023 and the current assessment improved to 86.5 from 86.2. The measure of the overall business climate reached 88.6 (from 88.4). It has not fallen this year, and the July reading is the best since last May.
CNY: The yuan rose to a new high for the year yesterday in both its onshore and offshore versions. Against the offshore yuan, the dollar's decline has seen it meet the (61.8%) retracement of the rally since last September. As the dollar did more broadly, it also recovered against the yuan from almost CNH7.1440 to CNH7.1565. It has extended its recovery today and it is knocking on CNH7.17 in the European morning. Above there, the next target is near CNH7.1730 and then CNH7.1800. The dollar is posting one of its biggest gains since the end of May today. After three days of lower dollar fixes, the PBOC set it higher today (CNY7.1419 vs CNY7.1385 yesterday). Some of the observers who argued that Beijing was going to devalue the yuan now call on it to allow faster appreciation. Note that the onshore yuan rose by nearly 0.60% in Q1 and 1.3% in Q2. China will report June industrial profits over the weekend. They fell 9.1% year-over-year in May, while the year-to-date, year-over-year measure contracted by 1.1%. We argue that China's model of capital is reminiscent in some important ways with what had previously been called the "Rhine Model”. Access to patient capital (banks instead of markets) encourages competition for market share rather than profits. The decentralized planning (local government) and the competition among provinces also provide incentives for over-investment and excess capacity in China. Many observers who focus on under-consumption insist on only considering it as a percentage of GDP. They tend to ignore or downplay the outright rise in consumption in China. A fair reading of the data recognizes that consumption is rising but investment has risen as fast if not faster. Also, the observers focusing on under-consumption conflate producer goods and consumer goods. Producer goods like steel or cement, for example, will not be absorbed by Chinese households.
JPY: The dollar reached session highs near midday in New York yesterday a whisker shy of JPY147.00. Follow-through buying today extended the gains to JPY147.90 today, the (61.8%) retracement of the pullback from last week's high (~JPY149.20). The US 10-year yield peaked about an hour after the sixth consecutive decline in US weekly jobless claims and about 15 minutes before the firm US PMI (outside of manufacturing). The US Treasury yield is firmer today. The rolling 30-day correlation of the changes in the exchange rate and the US 10-year yield (~0.70) remains near the upper end of its (five-year) range. Tokyo's CPI has not risen since April when it reached 3.4% year-over-year, its highest level since January 2023 when the multiyear high was recorded at 4.4%. It slipped for the second consecutive month in July and at 2.9% (vs. 3.1%), it is the lowest since February. The core measure, which excludes fresh food, also eased for the second straight month to stand at 2.9% (from 3.1%). At averaged almost 2. 4% in Q1 25 and nearly 3. 4% in Q2. The measure that excludes fresh food and energy was flat at 3.1%. Lastly, the swaps market has 21 bp of tightening discounted at the end of year. A week ago, it was 16 bp and at the end of June 14 bp were discounted.
GBP: Sterling's recovery stalled around 12/100 of a cent beyond the (50%) retracement of the leg down that began earlier this month from almost $1.3800. The disappointing PMI saw sterling slip through Wednesday low to nearly $1.3500 yesterday. It looked vulnerable, and the disappointing retail sales report today sent sterling to support near $1.3450. The risk extends toward $1.3400, though the intraday momentum indicators are stretched. UK retail sales bounced after a dramatic 2.7% decline in May. However, the 0.6% gain was half of what was expected and leaves UK retail sales lower in Q2 from Q1. Retail sales rose a cumulative 2.1% in Q1 and fell by 0.6% in Q2. This follows the unexpected 0. 1% contraction in May GDP (after a 0.3% decline in April's output). UK growth led the G10 in Q1 with a 0. 7% quarter-over-quarter expansion. The 0.1% growth economists penciled in for Q2 would likely put the UK toward the bottom of G10 performances in Q2.
CAD: The greenback put a low in nearly a three-week low on Wednesday near CAD1.3575 and reached CAD1.3645 yesterday. The US dollar gains have been extended to CAD1.3680 today. It has met the (50%) retracement of the leg lower from the July 17 high (~CAD1.3775). The next retracement (61.8%) is closer to CAD1.3700. Dragged down by autos and part, Canadian retail sales tumbled 1.1% in May, as StatsCan preliminary data warned. Yet, the data warns that the Canadian consumer has pulled back. Excluding autos, retail sales fell (-0.2%) for the third consecutive month. Statscan also reported that 32% of retailers indicated they were impacted by the trade tensions with the US, down from 36% in April. The most frequently cited impacts were price increases, increased cost for raw materials, shipping, or labor. and shifts in demand. Sales fell in 9 of the 10 provinces (Nova Scotia saw sales of building materials and garden equipment underpin the increase). The pessimism was contained by Statscan early estimate that sales rebounded 1.6% in June.
AUD: The Australian dollar's four-day rally ended yesterday but only after it set a new high for the year at $0.6625. The Aussie looks tired after rallying ~2.65% (~1. 7 cents) since the low on July 17 (~$0.6455). It has pulled back further today and is testing the $0.6555 area late in the European morning. Support is seen next around $0.6520-40. On July 17, the Aussie frayed the lower Bollinger Band and yesterday, it frayed the upper band (~$0.6620). The middle of the band and the 20-day moving average is about $0.6550 today. The net effect of this week's developments, including comments from Reserve Bank of Australia Governor Bullock is that the futures market scaled back thoughts of three cuts between now and the end of the year. A week ago, the futures market had a little more than 66 bp of cuts discounted for this year and now it is a little less than 60 bp. The pricing still seems too much and barring a significant downside surprise in next week's Q2 CPI, we suspect it can drift toward 50 bp.
MXN: After setting a new low for the year near MXN18.5250 on Wednesday, the greenback remained in the trough yesterday. It was unable to do more than poke above MXN18.59. It remains in a narrow range today (~MXN18.5250-MXN18.5735). The momentum indicators did not get over-extended but have turned down. A move into the MXN18.35-40 area looks reasonable. Mexico reported slightly softer than expected CPI for the first half of July. The headline pace slowed to 3.55% year-over-year. That is the lowest since the end of January. The year-over-year core inflation rate slowed for the first time since the first half of March. 4.25% pace compares with 4.38% in the second half of June. It has not been below 4% since the first half of May.
Reviewed by Marc Chandler
on
July 25, 2025
Rating:
