Greenback Breaks Higher, Stocks and Bonds Lower

The US dollar has extended its gains against most currencies today. What is seen as a successful US-China summit and a swing in expectations for Fed policy are aiding the greenback. The anticipated year-end effective Fed funds rate has risen by a dozen basis points this week and the two-year Treasury yield is up 16 bp this week and is the fourth week it has risen. With the Trump-Xi meeting over, the US is seen turning its attention back to Iran, where a fragile ceasefire has frozen the conflict. Crude oil prices are at their highest in more than a week. Bond yields are sharply higher and equities lower.

The UK political drama continues to play out. It has weighed extra om UK stocks and bonds and sterling, which is among the worst performing currencies in the G10 this week. Meanwhile, the market has taken the yen to its lowest level since the apparent April 30 intervention. The market has become increasingly confident that the BOJ will hike rates next month.

Prices

G10

• Unable to resurface above $1.1720 yesterday left the euro bears in controls. The euro was pushed to $1.1665 and settled the North American session below the 200-day moving average (~$1.1685 today) for the first time in a little more than a month. Follow-through selling took it to almost $1.1615, to extend its losing streak into the fifth consecutive session. A band of support is seen in the $1.1580-$1.1600 area and there are 2.4 bln euros of options at $1.1600 that expire Monday. Initial resistance may be around $1.1660.

• North American participants seemed particularly unimpressed with US Treasury’s support for the “anti-volatility” stance attributed to Tokyo. They sold the yen aggressively and took the dollar to almost JPY158.40, its highest level since what appears to have been intervention on April 30. And that was after an inexplicable sharp drop to new session lows around 9:30 AM ET yesterday (~JPY157.30). We suspect the price action reflected nervousness of short-term yen shorts. The dollar’s gains have been extended to slightly more than JPY158.65. Options for $1 bln at JPY158 expire today, and there are options for nearly $4.5 bln at JPY159 that expire Monday.

• Sterling fell for the fourth consecutive session yesterday. It settled last week at $1.3630, its highest settlement in nearly three months and it was flirting with the upper Bollinger Band. Yesterday, it slipped below $1.3400 in New York afternoon dealings on news that Greater Manchester Mayor Burnham is once again trying to maneuver to secure a parliament seat to challenge Prime Minister Starmer. A similar attempt earlier this year was rebuffed. Sterling settled below its lower Bollinger Band (comes in today near $1.3395) and the 200-day moving average (~$1.3425). The five-day moving average has fallen below the 20-day moving average. Sterling sulked to almost $1.3325 in Europe today. The $1.3400 area offers initial resistance.

• The Canadian dollar continues to leak lower. The greenback rally in tow is rising for its eighth consecutive session today, its longest advance since October 2024, and at its best level in about a month. It is probing resistance CAD1.3760, and a convincing break could signal potential to CAD1.3800-20.

• The Australian dollar finally broke out of the range set on May 6 (~$0.7180-$0.7280). It has reached $0.7140 and has initially held above this month’s low (~$0.7135). Although the next technical target is closer to $0.7100, it could bounce toward $0.7180 or so. There are around A$400 mln options at $0.7150 that expire today and A$625 at $0.7170 that expire Monday.

• The Mexican peso consolidated this week until today and today’s sell-off has seen the peso reach its lowest level since May 5. The greenback has been confined to about a MXN17.16-MXN17.28 range and shot up to almost MXN17.4030 today. A move above MXN17.4250 could signal a move toward the recent highs (~MXN17.54-MXN17.58).

• The dollar ground lower against the offshore yuan yesterday and slipped a little closer to CNH6.7800 before returning to little changed levels. The greenback jumped to CNH6.8140 today, a seven-day high. It will likely settle above the five-day moving average (~CNH6.7935) for the first time this month. The PBOC set the dollar’s reference rate slightly higher today at CNY6.8415 (CNY6.8401 yesterday and CNY6.8502 last Friday). Since the end of last September, there have only been three weeks that the dollar’s fix has not fallen.

• Higher oil prices and risk-off sentiment sent the Indian rupee to new lows. The dollar reached INR96.1425. The rupee lost about 1.6% this week, which appears to be the largest weekly loss in many years.

Other Markets

• Equities are being crushed today. Practically all bourses are lower. The Nikkei and China’s CSI 300 fell more than 1%, but it was the high-flying South Korean Kospi that suffered the most. It was tagged for more than 6%. Europe’s Stoxx 600 is off nearly 1.5%, nearly giving back the gains of the past two sessions. The Nasdaq futures are off 1.4% and the S&P 500 futures are down almost 1%.

• Benchmark 10-year yields are jumping. The 10-year JGB yields rose almost nine basis points, while European rates are mostly 7-10 bp higher, but the 10-year Gilt yield has soared more than 14 bp. The 10-year Treasury yield is up nearly six basis points to 4.54%.

• After trading quietly yesterday, gold has been sold aggressively today. The yellow metal has been drifting within Tuesday’s range (~$4638.60-$4773.55) and has been sold to almost $4532 today. It has not traded below $4500 since the end of March. Silver stalled on Wednesday near $90 and disappointed longs seemed to cut yesterday, driving the below $84 at its worst. Follow-through liquidation saw $76.85 today. It is stabilizing in late European morning turnover.

• June WTI has moved sideways in recent days. The $97 area marks the low end of the range, while around $102.50 marks the top. It has broken higher today and reached $105.30, its highest level since May 5. The contract high was set at the end of April slightly below $111.

Data

• The US reports April industrial production figures today. The Trump administration wants to bring manufacturing back to the US. That is one of the goals of the tariffs. Manufacturing output rose by an average of 0.1% a month in 2025 and is off to better start this year. It rose by an average of 0.3% a month in Q1. It sounds impressive, but recall that in Q1 25, manufacturing output rose by an average of 0.5% a month. And note that here too, AI-related goods appear to dominate. Moreover, as is widely appreciated, manufacturing output is highly automated. The manufacturing sector lost almost 100k jobs last year. The first quarter saw the manufacturing sector gain about 18k jobs, it was the first quarterly increase since Q4 22. The Empire State manufacturing survey for May is due, and although it may have softened, the Atlanta Fed’s tracker sees the economy re-accelerating in Q2 (3.7%).

• Canada is expected to report a modest increase in April housing starts, and another solid gain in March manufacturing sales. But it is the portfolio capital flow report that may draw the most attention. The foreign demand for Canadian bonds and stocks slowed considerably last year (C$118.25 bln vs. C$193.25 bln in 2024). Demand surged to C$46.8 bln in January but slowed to a crawl in February (~C$6.2 bln).

• Japan’s April PPI rose 2.3%, a multiple of the 0.8% projected by the median response in Bloomberg’s survey. The year-over-year pace jumped to 4.9% from a revised 2.9% (from 2.6% initially). Machine tool orders rose 45.1% year-over-year in April, accelerating from 28% in March.

• China reported $184.1 bln Q1 current account surplus, down from $243.8 bln in Q4 25 and $163.6 bln in Q1 25. Like other Chinese data, many market observers are skeptical of its veracity.

• India’s April goods trade deficit widened to $28.4 bln from $20.6 bln in March. India’s surplus narrowed with the US to $3.2 bln from $3.7 bln and its trade deficit with China widened to $10.2 bln from $10.1 bln.

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