Overview: The dollar is mostly a little firmer against the G10 currencies, though the euro and Swiss franc are notable exceptions but barely. US and Chinese negotiators have reportedly reached a joint understanding of the Geneva Agreement, but the impact on the foreign exchange market appears marginal at best. The dollar's consolidative tone against the major currencies seen in recent days remains intact. On the other hand, most emerging market currencies are firmer. Here the South Korean won is an exception. It is off 0.5% despite the sixth consecutive rally in the Kospi, which has lifted it to three-year highs.
Indeed, the large Asia Pacific bourses rallied today with more than 1% gains in an index of mainland Chinese companies that trade in Hong Kong, South Korea, and Taiwan. Europe's Stoxx 600 is slightly firmer after posting small losses for the past two sessions. US index futures are slightly lower, ahead of the May CPI and the $39 bln sale of 10-year notes. Benchmark 10-year yields are 2-3 bp firmer in Europe, though the UK Gilt, which outperformed yesterday on disappointing labor market developments, is underperforming today, with a 6 bp increase today. That leaves it off about 4 bp since the end of last week. The 10-year Treasury yield is a couple of basis points firmer near 4.50%. Gold is firm but holding below yesterday's high near $3350. July WTI is little changed in a narrow range near $65.
USD: There has been hardly a market reaction to the tentative deal worked out between the US and China in London over the past two days. The details are not known but appear likely to result in an unwinding of some US export restrictions. It already appears to have resulted in China granting six-month export approval for magnets to US automakers. The Dollar Index continues to trade quietly in the 98.35-99.40 range is dominating here in the first part of June. It is in a roughly 98.95-99.20 range today. The issue for short-to-medium term participants is if the consolidation is a bottoming pattern or a nesting pattern before the next leg lower. We are watching the 20-day moving average near 99.60 and the down trendline drawn off the January, February and May highs that comes in around 99.45 today. The US CPI is session's highlight, and arguably the most important high-frequency economic report of the week. Economists generally expect a small rise in the year-over-year headline and core rates to 2.4% and 2.9%, respectively, from 2.3% and 2.8%. Surveys find that many businesses have already raised prices due to the tariffs. A 0.2% month-over-month increase in May, would bring the annualized pace this year to about 2.4%. With a stable unemployment rate, there is practically no chance that the Federal Reserve will comply with the White House demand for an immediate rate cut. Indeed, it might not be appreciated in Washington, but a rate cut now would likely be seen as an erosion of the Fed's independence and lead to higher rather than lower medium and longer-term interest rate. Accepting that the president cannot fire the Federal Reserve chair for a disagreement over policy, the White House has indicated that the president will soon name Powell's successor. His term as Chair, ends next May. This would seem to be an unprecedented move, but it could backfire. Few Fed decisions have faced dissent from regional presidents or governors. The "shadow" chair could end up agreeing with the Fed decisions, or she/he could go out on the limb and favor the White House position, giving rise to fears of the politicalization of future Fed policy. Separately, May's budget balance is due. The deficit in the first four months of the calendar year was almost $338 bln. In the first four months of 2024, the deficit was slightly more $345 bln. In Q1 24, the budget deficit was about 5.8% of GDP. In Q1 25, was almost 7% of GDP. Stronger growth in Q2 will see the deficit as a percent of GDP retreat. Doge over-promised and under-delivered.
EURO: The euro traded on both sides of Monday's range yesterday, but settlement was little changed, which neutralizes the potential technical signal. Moreover, the single currency remains in the range set last Friday (~$1.1370-$1.1455). So far today, it is holding above $1.1400 and set session highs near $1.1445 in late European morning turnover. Although we share with the consensus that the dollar will continue to trend lower, in the near-term we continue to suspect there is room for it to bounce and for the euro to come off. The US unemployment rate is steady, the best of eurozone growth this year is likely behind us, a hawkish hold from the Fed next week and the risk that the dot plot shows only one cut this year rather than two that was anticipated last December and again in March. The non-commercials (speculators) in the futures market have nearly the largest gross and net long euro position of the year, and the interest rate differential still pays one to be long dollars.
CNY: The dollar continues to consolidate against the Chinese yuan. The dollar peaked against the offshore yuan two months ago slightly shy of CNH7.43. By late May, it had fallen to almost CNH7.16, despite the apparent consensus that China would devalue the yuan to minimize the impact of the US tariffs. The greenback is in a CNH7.11825-CNH7.1900 range today. We have been anticipating this consolidative phase that extends toward CNH7.2240-65 area. The PBOC set the dollar's reference rate at CNY7.1815 today (CNY7.1840 yesterday), its lowest fix in two months. China has demonstrated its leverage through rare earths and magnets. Many did not learn the lesson when China cut Japan off in late 2010, but the US (and Europe) seemed to have learned quickly this time. Some auto assembly lines in the US and Europe had to be halted due to the lack of magnets. In exchange, the US is likely to ease some of its recently announced export controls and may reduce the "fentanyl" tariff. We have consistently suggested that it would be easier for China to replace US demand and work around the chip bans than it is for the US to replace the goods (including rare earths and magnets) in the short- to medium-term, it gets from China. Beijing knows this as much as Zelensky knew of the pending drone attack on Russia from inside Russia as he was being dressed down in the Oval Office.
JPY: The greenback did not settle above JPY145 yesterday, after straddling that area in NY afternoon to record the high for the month, so far. Still, the close was the highest since May 16. And for the fourth consecutive session today, the dollar is recording higher lower. It has approached resistance near JPY145.30. A close above it improves the technical tone and would likely coincide with the momentum indicators turning higher, too. Such price action would target the JPY146.00-30 area next. As the market's reaction to President Trump's social media pronouncements, and the tariffs are off the top pages (export controls are the key now), the yen's exchange rate is becoming more sensitive to US 10-year rates again. The rolling 30-day correlation had fallen below 0.10 in May and is now back to almost 0.40.
GBP: Sterling was sold to almost $1.3455 in response to the disappointing employment report and the swaps market bring forward the next rate cut. It recovered to about $1.3535 in the North American morning and hovered around $1.35 (mostly below) after European markets closed. Sterling is consolidating today between $1.3465 and $1.3510. A close below the 20-day moving average (~$1.3475), which it has not done in nearly a month, weakens the technical tone. More weak economic news is in the pipeline. The median forecast for tomorrow's April's GDP report is for a 0.1% contraction, which would be the first since the back-to-back decline in output last September and October. Recall that the UK economy was the strongest in the G7 in Q1 with a 0.7% quarter-over-quarter expansion. A contraction in April is a poor way to begin the quarter, for which the median forecast in Bloomberg's survey sees 0.2% growth in Q2 and Q3.
CAD: The US dollar traded on both sides of Monday's range yesterday and the close was slightly above Monday's low. However, there has been no follow-through dollar selling today and it is trading near session highs (~CAD1.3685) in Europe. The greenback remains mired in the narrow consolidative range that has dominated this month (~CAD1.3635-CAD1.3745). Still our bias is to see CAD1.38 before CAD1.36. Beginning last November, Canada's building permits have alternated month between increases and declines. True to form after a 4.1% decline in April, economists project a modest gain in May (median forecast in Bloomberg's survey is for a 2.0% increase).
AUD: The Australian dollar continues to gyrate near its best levels of the year, still shy of the retracement objective near $0.6550. For the third session, the Aussie is in a roughly $0.6490-$0.6535 range. The news is light, but the momentum indicators are constructive. Overcoming the $0.6550 area could signal an advance toward $0.6625 and then $0.6700. For its part, the New Zealand dollar is trading around its equivalent retracement as the $0.6550 area in the Aussie (~$0.6040). It is in about a $0.6025-$0.6060 range today. The Reserve Bank of New Zealand's monetary cycle is nearly over. The swaps market has one more cut discounted for later this year. Nevertheless, the Australian dollar looks poised to appreciate against the New Zealand dollar.
MXN: The dollar traded quietly against the peso yesterday, holding above the nearly 10-month low seen Monday slightly below MXN19.03. However, dollar sellers emerged on the bounce to almost MXN19.10 and it settled little changed and near the middle of the session's range around MXN19.06. It is holding above MXN19.03 today. Reports suggest that Mexico and the US are near an agreement to reduce the 50% steel tariff and combine it with a quota, in a similar type of deal that was struck in Trump's first term. Today sees Mexico's April industrial output. A minor 0.1% gain is expected after a sharp 0.9% drop in March. It crystallizes the pressure on the central bank. The CPI reported earlier this week was firm with both the headline and core rates above 4% but the economy is weak. The economy expanded by 0.2% in Q1 after contracting by 0.6% in Q4 24 (quarter-over-quarter). The median forecast in Bloomberg's survey is for a flat performance in Q2.
Reviewed by Marc Chandler
on
June 11, 2025
Rating:
