(Commentary resumes with the weekly outlook on June 21)
Overview: Yesterday's dollar buying seen in the North American afternoon appears to have exhausted the position-squaring adjustment amid speculation the US might enter more directly the hostilities with Iran and ahead of the outcome of the FOMC meeting. Follow-through buying to has been limited to a couple of G10 currencies, including the Swedish krona following the Riksbank's quarter-point cut and kept the door open to another reduction. The dollar's gains were also extended against the Swiss franc, whose central bank will likely bring its deposit rate to zero tomorrow. Emerging market currencies are more mixed. Asia Pacific currencies, but the Chinese yuan, were mostly lower while central European currencies are mostly firmer.
The large bourse in the Asia Pacific regions were mixed. Japan, South Korea, and Taiwan advanced, as did mainland Chinese markets. However, the Hang Seng, and mainland companies that trade there, alongside Australia and India were softer. Europe's Stoxx 600 is straddling unchanged, while US index futures are modestly higher. Benchmark 10-year yields are mostly slightly lower in Europe; the UK Gilts and Sweden's yield are almost three basis points lower. The 10-year US Treasury yield is slightly softer, near 4.38%. Gold remains uninspired and is trading softer but inside yesterday's range, unable to re-establish a foothold above $3400. August WTI remains elevated. It is at the lower end of today's roughly $72-$74 range.
USD: The Dollar Index rose to a four-day high in the NY afternoon yesterday, despite softer than expected May retail sales (-0.9%) and industrial production (-0.2%) and the softer US interest rate backdrop. It filled a small gap on the daily charts created on the lower opening last Thursday. It edged slightly higher today to about 98.85 but held below the 20-day moving average slightly below 99.00. DXY has not settled above this moving average for a month. A trendline from the early and late February highs, and the two bounces in May, comes in near there, as well. The session low was set a little before the European session near 98.50. The bounce in early European turnover took it to 98.70 before selling pressure re-emerged. Housing starts and weekly jobless claims are small appetizers before the FOMC meeting, which is the main focus. The Federal Reserve will not change policy, but it will update its Summary of Economic Projections and may update its quantitative tightening guidance. Last December and this past March, the median dot was for two cuts this year. There is some speculation that this may be reduced to only one cut. Given rise in weekly jobless claims (four-week moving average at its highest level since August 2023), and continued signs of a gradual slowing of job growth, and the willingness by several FOMC members to look through the potential price increases associated with the tariffs (though several months now CPI has been reported below expectations), we expect the median Fed view will be for two cuts. The Fed's balance sheet is still about 50% larger than at the end of 2019 in dollar terms ($6.67 trillion vs. $4.17 trillion), and as a percentage of GDP (~22.5% of GDP vs. 19.2%). However, we suspect reserves are getting too closer to where the Fed is comfortable, recognizing that they would likely prefer to err on more rather than less. Shortly after Chair Powell's press conference ends, the April TIC data will be published. Recall in April there was concern about large-scale foreign sales of US assets.
EURO: After stalling last Friday and Monday a little above $1.16 and unable to settle above there since it did so once two months ago, the euro was sold through last Thursday's low to near $1.1475 late in yesterday's session. It is as if the upside momentum faded and some late longs were moving to the sidelines, perhaps cautionary ahead of today's FOMC conclusion. Yesterday's low is holding today, but the upside was capped near $1.1525. A break of $1.1470 could spur another half-cent decline.
CNY: The dollar edged higher against the offshore yuan yesterday but remains within the range that has dominated recently. It held below CNH7.1940 and has not been above CNH7.20 for two weeks. It is in a narrow range today, roughly CNH7.1850-CNH7.1925. A move above CNH7.20 could see a return toward CNH7.2250 area. The PBOC has been guiding the yuan higher against the dollar in setting daily reference rate. The yuan has been fixed stronger in eight of this month's 12 sessions --coming into today--. Today, the reference rate was CNY7.1761 after setting it at a three-month low yesterday (CNY7.1746).
JPY: Position adjusting saw the greenback rise to almost JPY145.40 in waning hours of yesterday's session. It settled above JPY145 for the first time since May 16. It made a marginal new high for the month earlier today to near JPY145.45. It is straddling the JPY145 area in late European morning turnover. True to form, Japan's May trade balance deteriorated. In the past 20 years, it has not deteriorated in May only twice and they were exceptional years (2009 and 2020). The trade deficit rose to almost JPY638 bln from JPY115.6 bln. Merchandise exports fell 1.7% year-over-year, the first decline since last September, though less than economists polled by Bloomberg expected. Japan's import of good tumbled by more than expected, falling 7.7%, the third year-over-year decline this year and most since January 2024. Japan's trade surplus with the US fell to JPY451.7 bln from JPY780.40 bln, which accounted for almost half of the unadjusted widening of the overall trade deficit. Separately, Japan reported that core machine orders dropped 9.1% in April, the biggest decline in five years, underscoring the weak start to Q2. Foreign orders rose 6.8% in April, while domestic orders fell by 3.7%.
GBP: Sterling tumbled more than 1% yesterday, its largest loss since early April. It was the worst performer among the G10 currencies. Sterling fell to almost $1.3425 and settled below the 20-day moving average for the first time since mid-May. It held yesterday's low and recovered to around $1.3475. The five-day moving average may cross below the 20-day moving average for the first time since in a month in the coming days. It needs to re-take the $1.3520 area to repair the technical damage. The 0.2% increase in the UK's May CPI saw the year-over-year moderate to 3.4% from 3.5%. Service inflation slowed to 4.7% from 5.4% and core CPI slowed to 3.5% from 3.8%. Air fares and fuel costs eased but was offset by rising food prices, furniture, and household appliances. Goods inflation crept up and some retailers have indicated the intention to pass through the recent increase in payroll taxes. Even with last week's news that the output contracted by a more-than-expected 0.3% in April, the market understands that there is practically no chance that the Bank of England cuts rate at tomorrow's meeting. Still, in the swaps market, the odds of a cut at the next meeting (August 7) are near 80%, up from a little more than 50% at the end of May.
CAD: After setting an eight-month low on Monday (~CAD1.3540), the greenback snapped higher yesterday and reached a marginally new five-day high (~CAD1.3695). There has been no follow-through buying today, and the US dollar is consolidating, holding above CAD1.3650. A band of resistance is seen between CAD1.3685 and CAD1.3730. There has been a notable shift in expectations for the Bank of Canada. The current target rate of 2.75% was seen at near 2.35% at the end of May. Now it is almost 2.50%.
AUD: The Australian dollar unwound Monday's gains and fell to almost $0.6465 yesterday. After settling at its best level since last November on Monday, yesterday's close was the lowest since June 3. Yesterday's low held and the Aussie recovered to almost $0.6515. Australia reports May jobs data tomorrow. April was a strong month, and it is unlikely to have been repeated last month. Of the 89k jobs created in May, 59.5k were full-time positions. In the first four months of the year, Australia, on average grew almost 26k jobs (in the first four months of 2024, the average job growth was almost 32k). It averaged nearly 17k full-time positions a month this year compared with about 24k in the first four months of 2024. The unemployment rate has fluctuated over the past year, but it was at 4.1% in April 2024 and April 2025. The unemployment rate is flat, but the participation rate has risen to 67.1% in April 2025 from 66.7% in April 2024. The futures market is discounting almost an 85% chance of a cut in the overnight cash target (to 3.60%) at the next central bank meeting on July 8. Three quarter-point cuts are fully discounted before the end of the year.
MXN: The greenback recovered from MXN18.8250 on Monday, its lowest level since last August and reached a little above MXN19.05 yesterday. Last Friday's high was around MXN19.1030. It is consolidating in a tight range (~MXN18.9770-MXN19.0365). A near-term bottom appears to have been forged. A move above last week's high would be an early warning of the risk back toward MXN19.20, at least initially. Mexico's central bank meets next Thursday. The market and economists are inclined to see a 50 bp cut, even though inflation is above 4%, the upper end of the target range. Brazil's central bank meets today and is now widely seen standing pat with the Selic rate at 14.75%.
Reviewed by Marc Chandler
on
June 18, 2025
Rating:
