Overview: The capricious nature of the US tariffs, the tone in which they were announced, while still allowing time (August 1) to negotiate is the main talk. More tariff announcements are expected today. The dollar's upside correction was cut short, and it is weaker against nearly all the world's currencies. The jump in long-end Japanese government bonds (9-15 bp) has not helped the yen, which is the only G10 currency struggling to find traction against the greenback today. Among emerging market currencies, only the Taiwan dollar and Turkish lira are a little softer.
Equities have done surprisingly well today, while bonds have been sold. Nearly all the bourses in the Asia Pacific region advanced, though not Taiwan. Malaysia and Thailand, subject to the first round of tariff announcements fell by nearly 0.5%. Europe's Stoxx 600 is little changed, and US index futures are narrowly mixed, with the S&P 500 and Nasdaq futures slightly higher. Benchmark 10-year yields are mostly 4-5 bp firmer, pushing the UK Gilt yield back to last week's high. The Reserve Bank of Australia caught the market leaning the wrong way as it stood pat. The Australian dollar is the strongest among the G10 currencies (~+0.80%) and the 10-year yield jumped eight basis points. The 10-year US Treasury yield is three basis points higher, a little above 4.41%. The 30-year yield is approaching the 5% threshold. Gold is softer but within yesterday's range and August WTI is consolidating after posting an outside up day yesterday to post a 1.4% gain. It is on the $67-handle today and sporting a softer tone.
USD: The dollar was bid before, but news of 25% tariffs on South Korea and Japan announced in a smug letter, sent the greenback higher. The Dollar Index met the (38.2%) retracement of the leg lower from June 23. The next retracement (50%) is near 97.90. But the Dollar Index is consolidating today in a narrow range (~97.18-97.45). The US tariffs developments dominate the discussions. More letters are expected today. Meanwhile, there are a couple of ways to measure inflation expectations. The first is simply to ask people. That is what the University of Michigan does, for example, and so does the Federal Reserve. The Fed's survey results are due today. In May, one-year expectations were at 3.2%, the three-year was at 3.0% and the five-year was at 2.6%. The University of Michigan's survey for the one-year outlook stood at 5.0% in June, down from 6.6% in May and 6.5% in April. The second was to get a handle on inflation expectations are from indicative pricing in the markets. Here the difference between the inflation-protected security and the conventional note is understood as a metric of inflation expectations. The one-year breakeven peaked in March near 4.15% and is slightly above 2.6% now, having found a base near 2.50% recently, the lowest since last November. The five-year breakeven peaked in February almost at 2.75%. It has been chopping mostly between about 2.30% and slightly above 2.40% since the end of May. Meanwhile, although consumer debt stress levels are elevated, consumer credit is expanding at a faster rate than last year. Through April, consumer credit rose by $34.6 bln. In the first four months of 2024, US consumer credit rose by about $28.8 bln. Borrowing is projected to have increased by around $10.5 bln in May 2025. Last May it rose less than $6 bln.
EURO: The broad dollar rally on the back of the 25% tariffs on South Korea and Japan, and other tariff announcements, pushed the euro to a six-day lows near $1.1685, meeting the (38.2%) retracement of the rally since June 23. The euro held above $1.1700 today. It reached $1.1765 before consolidating. Germany and France reported May trade figures earlier today. Germany's May trade surplus rose to 18.4 bln from a revised 15.7 bln euros (exports and imports fell) and brings the average this year to 17.8 bln euros. In the first five months of 2024, the average monthly trade surplus was 22.5 bln euros. France reported a 7.77 bln euro deficit in May. The average monthly shortfall is about 7.08 bln euros, up from the first five months of last year (~6.24 bln euros). The aggregate figure for the eurozone as a whole will be reported on July 16. Through April, the average monthly surplus was 19.3 bln euros, up from an average of 18.8 bln euros in the Jan-April 2024 period.
CNY: The greenback rose to a two-week high against the offshore yuan, pushing a little above CNH7.1800. It settled above the 20-day moving average (~CNH7.1765) for the first time since June 18. There was no follow-through buying, and instead the dollar was set back to slightly below CNH7.17. The PBOC set the dollar's reference rate at CNH7.1534 (CNY7.1506 yesterday). Note that PBOC has not set the dollar's fixing higher in two consecutive sessions in a month. The dollar's decline, which boosted the value of the PBOC's non-dollar reserves, and the rally in government bonds (e.g., US, UK, Japan, Italy, but not German and French bonds) helped lift China's reserves by almost 1% to $3.317 trillion, the highest level since the end of 2015. For the eighth consecutive month, the PBOC continued to boost its gold holdings, which some argue is understated. That said, it appears to have bought 70k troy ounce last month. The first thing tomorrow, China reports CPI and PPI. The CPI has been -0.1% year-over-year from March through May. Deflation remains evident in producer prices. The last time producer prices were higher on a year-over-year basis was in September 2022.
JPY: Rising yields and the greenback's rally after the tariff announcement lifted the dollar to near JPY146.25 yesterday and to almost JPY146.50 today, a two-week high. It is not clear what Japan's reciprocal tariff was set at 25%, while the April 2 calculation was 24%. In any event, the dollar overshot the (61.8%) retracement of its decline from the June 23 high. The next interesting chart area is around JPY146.75. The trendline connecting the May and June spikes comes in today near JPY147.90. The US dollar frayed the lower Bollinger Band last Tuesday has approached the upper band now (~JPY146.55). Turning to Japan's data, in four of the past five years, Japan's current account surplus widened in May. However, over the past 20 years, the seasonal performance in May is less robust. The current account widened 12 times. It widened in May 2025 to about JPY2.82 trillion from JPY2.26 trillion in April. Yet, the trade balance deteriorated. The deficit rose to about JPY522 bln from almost JPY33 bln in April. The seasonal pattern is stronger for the trade balance than the current account. The trade deficit typically deteriorates in May from April (16 of the past 20 years). The disappointing May labor earnings (nominal and real) reported yesterday saw the market continue to scale back the prospects of BOJ tightening this year. The swaps market has about 10 bp of hikes discounted, the least in nearly two months. It has not had 20 bp priced in for nearly three months.
GBP: Sterling retreated yesterday but held last week's low (~slightly below $1.3565). Recall that the $1.3580 area corresponds to the (50%) retracement objective of the rally from the June 23 low. The (61.8%) retracement is closer to $1.3530. Initial resistance in the $1.3650 area was tested. The British economic diary is light until Friday's May GDP. The median forecast in Bloomberg's survey projects a 0.1% expansion after the 0.3% contraction in April. Weak growth exacerbates the looming difficult fiscal choices facing the Labour Government. The tightening of the Starmer-Reeves alliance does little to signal how it will cope. The Office for Budget Responsibility has more poor news for the government with today's assessment, which paints a picture of a vulnerable UK economy. The Bank of England's financial stability report will be released tomorrow. The 10-year UK Gilt yield was near 4.45% before last week's Labor MP revolt was turned back by the government's climb-down on disability assistance. It returned to last week's highs, near 4.64%.
CAD: The greenback bottomed last Thursday, slightly below CAD1.3560. It reached CAD1.3685 yesterday, which met the (50%) retracement of the greenback's decline from June 23. The (61.8%) retracement is a little above CAD1.3700. It pulled back to CAD1.3640 today. Canada reports the IVEY PMI shortly. It was below the 50 boom/bust level in April and May. It averaged 52.14 in Q1 25 and 55.78 in Q1 24. It seems broadly in line with economists’ anticipation that the Canadian economy contracted slightly in Q2 (median forecast in Bloomberg's survey is for a 0.5% annualized contraction) after a 2.2% expansion in Q1. The highlight of the week is Friday's jobs report. The median forecast in Bloomberg's survey is for a no net increase in employment and a tick up in the unemployment rate (despite expectations that the participation rate was steady at 65.3%) to a new cyclical high of 7.1%. It was at 6.4% in June 2024.
AUD: The Reserve Bank of Australia surprised the market. It stood pat in the face of high expectations for a cut. For the first time, the RBA revealed how the nine-person board voted (6-3 to hold steady). Governor Bullock explained the difference was over timing not direction of travel. With yesterday's sell-off, the Australian dollar nearly met the (61.8%) retracement of the rally from the June 23 low, but the central bank surprise lifted the Aussie back to almost $0.6560. The futures market has around an 85% chance of an August cut. The swaps market has a terminal rate of near 3.0% (3.85%) now. The Reserve Bank of New Zealand meets tomorrow. The swaps market does not expect a cut (almost 13% chance), but its easing cycle does not look complete. There is about a 2/3 chance of a cut in August and a slightly more than a 90% chance of a cut in October. The next cut will bring the cash target rate to 3.0%. The market recognizes the risk that the terminal rate is 2.75%.
MXN: The dollar made a marginal new low since last August early yesterday and drew closer to MXN18.60 support. The broad recovery saw it spike slightly above MXN18.77 before pulling back to the middle of the session's range. It has not traded much above MXN18.6725 today and held above MXN18.61. The slow start to Mexico's economic reports this week ends tomorrow with the June CPI and Friday's industrial production. Yesterday, Mexico reported vehicle production edged up in June (0.8%), and that is what is up on the year in H1 25 year-over-year. Vehicle exports jumped 10.1% month-over-month in June, but in H1 25, they are down about 3.2% compared with the first half of last year. For the record, US vehicle sales in H1 25 were about 4.7% higher than H1 24. Mexico's headline and core CPI likely held above 4%, the upper end of the target range. After cutting rates aggressively in recent months, Banxico is seen pausing at its next meeting (August 7). After approaching BRL5.40 at the end of last week, the lowest the dollar has been since last September and October, it gapped higher yesterday and reached almost BRL5.4835. The (50%) retracement of the leg down from June 25 is a little higher. The 20-day moving average is around BRL5.4960 and the dollar has not settled above it since June 2.
Reviewed by Marc Chandler
on
July 08, 2025
Rating:
