Overview: A natural experiment of sorts unfolded yesterday. Heightened speculation, fanned in part by the White House itself, that after several threats, President Trump was going to fire Fed Chair Powell. Short-term rates fell but the curve steepened, the greenback sold off sharply, and stocks skidded lower. The main narrative is that seeing the carnage, like in early April, spurred the president to deny such intentions and the markets recovered even if not fully. The dollar has come back bid today but mostly inside yesterday's wide ranges. While both the UK and Australia reported disappointing employment data, sterling is the best performer in the G10, sporting a minor loss, while the Aussie has fallen to a new low for the month (~$0.6460). The greenback is firmer against most emerging market currencies, as well, and that includes the Chinese yuan, despite the PBOC setting the dollar's reference rate at its lowest level since early last November.
Equities are firmer. Most of the large bourses in Asia Pacific rose today, with the notable exceptions of Hong Kong and India. Europe's Stoxx 600 is snapping a four-day decline, and US index futures are posting small gains. Bond markets are mostly firmer, though the disappointing Australian labor report saw the 10-year yield tumble five basis points. Benchmark 10-year yields are 1-2 bp higher in Europe, including the UK Gilts. The 10-year US Treasury yield is up slightly to about 4.46%. Gold has surrendered the lion's share of yesterday's gains and looks poised to challenge the lows from Tuesday and Wednesday (~$3319-$3320). August WTI is consolidating quietly in a roughly $66.30-$67.00 range.
USD: The Dollar Index reached 98.90 in early North American trading yesterday before the speculation that Fed Chair Powell was about to be fired saw it reverse lower and fall to about 97.70, where the 20-day moving average is found. On Trump's denial, the Dollar Index recovered met the (61.8%) retracement of the drop, reaching ~98.50, which is also near the low seen in European turnover earlier Wednesday. It extended the recovery today to 98.80, leaving yesterday's high intact so far. The US has a packed economic diary today. First up are June retail sales. A small rise is expected after the first back-to-back decline since Oct-Nov 2023. Retail sales are a subset of consumption and real personal spending was flat in Q1 (4.4% annualized in Q4 24) and is contracting in Q2 with April and May data in hand. At the same time, June import and export prices will be reported. The Trump administration maintains there is not imported inflation, and we should not believe our lying eyes. Import prices rose at an annualized rate of less than 0.5% in Q1 after a 1.2% annualized rate in Q4 24. However, a 0.3% increase that the median economist forecast in Bloomberg's survey would translate into a 1.6% annualized rate in Q2. And this was partly evident in the CPI data that has already been released. Weekly jobless claims are due at the same time. They have fallen for the past four weeks, but are expected to have risen in the week ending July 12, which covers the week that nonfarm payrolls surveys are conducted. Business inventories may also draw more attention than usual. Many observers are concerned that after building inventories in Q1 25, businesses are thought to be drawing them down now. When this process is completed, many expected businesses to raise prices. Business inventories rose at an annual rate of 2.8%. They were flat in April, and are expected to be flat in May, too. Late today, the May TIC data will be reported. Despite the mainstream narrative's emphasis on the loss of American exceptionalism, and that lack of demand for US assets, the TIC data has shown a significantly different story. It showed that foreign investors bought a net $433 bln of US stocks and bonds in the first four months of this year compared with a little more than $28 bln in the first four months of 2024.
EURO: It took the White House trial balloon of firing Fed Chair Powell to halt the euro's five-day slide. Initially, like on Tuesday, North American participants showed their hand earlier to buy US dollars, even though the PPI was softer than expected. The euro was sold slightly through $1.1565, its lowest level since June 23. When news hit about Trump asking a closed-door session of Republican representative about firing Powell on Tuesday, and reportedly was encouraged to do so, and followed by an unnamed White House official saying it was going to happen, and a national newspaper reportedly claiming a letter to dismiss Powell had already been drafted, the euro rallied to $1.1720, a four-day high. Catching North American dealers wrongfooted may have exacerbated the move. When the White House walked back from the story, the euro pulled back to about $1.1610. The pullback was extended today to slightly below $1.1575, a little above yesterday's low, before catching a bid in early European turnover to probe above $1.1600.
CNY: The dollar traded above CNH7.19 briefly and barely yesterday for the first time since June 23. In the carnage, the greenback fell to new session lows, slightly below CNH7.17. It settled a little below CNH7.18. The technical picture has not changed, and the trend is sideways. It is trading quietly today between about CNH7.1780-CNH7.1865. The PBOC set the dollar's reference rate at CNY1.1461 (CNY7.1526 yesterday). This is the lowest dollar fix since early last November, and the lower fix today, the first this week, offsets in the full the small higher settings seen in the last three sessions. There seems to a consensus emerging that China is going to be one of the biggest beneficiaries of the disruption spurred by the Trump administration. In places, it is pulling back, China's is pushing ahead. It got access to Nvidia AI chips and other technology in exchange Beijing promising to maintain what it had been doing until very recently and that is provide rare earths and magnets to global manufacturers. China's dominance of the production and intellectual property (and extend the argument to drones and EV batteries) will give pricing power that will discourage private foreign producers. Moreover, in those areas, and others, in a reversal of fortune, China is worried about the theft of its IP.
JPY: The dollar reached almost JPY149.20 before reversing lower on the broad sell-off in the North American morning. It was sold slightly through JPY147 before stabilizing. On the rebound, the greenback recovered to almost JPY148.40, which was around the session lows in local trading and in Europe. The dollar found bids near JPY147.75 and recovered to around JPY148.80. There is a strong seasonal bias toward improvement in Japan's trade balance in June (failed to do so only once in the past 20 years), and this year is not an exception. May's nearly JPY639 bln trade deficit swung to a JPY153 bln surplus in June. In H1 24, Japan reported a cumulative trade deficit of JPY3.37 trillion. In H1 25 and a JPY2.22 trillion deficit. Separately, the MoF weekly portfolio flow data show Japanese investors have stepped up their purchases of foreign stocks and bonds this year compared with last year. For their part, foreign investors have bought more Japanese bonds this year than last year but fewer Japanese stocks.
GBP: Sterling snapped an eight-day losing streak yesterday. It was all about the dollar and market positioning, not something attractive about sterling per se. It traded about 1/10 of a cent below the June 23 low to about $1.3365, its lowest level since May 20, before resurging higher. It reached almost $1.3485. As soon as the buying was exhausted and the denial came out, sterling sulked back to $1.3400. It was unable to trade much above $1.3440 in the North American afternoon, and it has not traded above $1.3430 today, but held slightly above yesterday's low. After reporting an unexpected economic contraction in May and strong June inflation, the UK reported another soft employment report earlier today. The number of employees on payrolls fell for the fifth consecutive month in June, for an overall loss of about 143k positions. The unemployment rate ticked up to 4.7% from 4.6%. On the eve of the election last July, the unemployment rate was 4.2%. The weakening of the labor market is also reflected in the decline in average weekly earnings (with and without bonus payments and excluding the public sector). The swaps market continues to price in high confidence of a rate cut next month and another in Q4. The year-end base rate is seen at 3.72%, which is around six basis points higher than at the end of June. It is now at 4.25%.
CAD: The US dollar was bid to CAD1.3755 in early North American activity yesterday, a new high for the month. The trail balloon was like a lead zeppelin and the greenback tumbled to around CAD1.3680. It held today and the US dollar returned to almost yesterday's high in Europe today. A move above CAD1.3760 targets the CAD1.3800 area. Canada reports May portfolio flows today. In the first four months of 2024, foreign investors bought a net of about C$64 bln of Canadian stocks and bonds. In January-April this year, foreign investors were net sellers about C$15 bln of Canada's financial assets. However, one cannot simply go from portfolio flows to currency performance. In the first four months of last year, the Canadian dollar fell by almost 4% against the US dollar and rose by about 4.25% in the same period this year.
AUD: The Australian dollar was sold through $0.6500 in early North American activity yesterday, but held above the month's low (~$0.6485) and recovered in the broad US dollar sell-off to around $0.6565. The disappointing employment report saw the Aussie fall to almost $0.6460 to approach the (61.8%) retracement of the gains since the June 23 low. Australia grew about 2k jobs last month, about a tenth of what the median economist projected in the Bloomberg survey. The loss of 38.2k full time posts nearly offset in full the revised 41.9k increase in May (initially 38.7k). The unemployment rate jumped to 4.3% from 4.1%, a new cyclical high. Part of the increase could be explained by the rise in the participation rate to 67.1% from 67.0%.
MXN: The US dollar was bid in early North American trading yesterday and set the session high near MXN18.8480. Tuesday's high was near MXN18.8850. The "firing of Powell" meme drove the greenback to around MXN18.6780. The dollar is consolidating firmly today between about MXN18.7025 to MXN18.8200. A break of MXN18.65 would suggest the greenback's upside correction has run its course, but first the greenback looks poised to probe higher back and may test the MXN18.88 area.
Reviewed by Marc Chandler
on
July 17, 2025
Rating:
