Overview: Israel attacked Iranian nuclear enrichment site
and apparently targeted scientists and top Revolutionary Guard leadership. Reports
suggest that that no increase in radioactivity has been detected. The US
quickly indicated that while it was informed of the attack, it did not
authorize it. President Trump did warn of a possible strike, but the press
reports made it seem as if a strike was not imminent. The dollar is stronger
against all the G10 currencies and most emerging market currencies; However,
the gains have been limited, and some will question the dollar's safe haven
status. Equities are heavier, with most European bourses off 1.0-1.5%, while US
index futures are off the equivalent. Asia Pacific bourses were off by
less.
Bond markets have not benefitted. European 10-year benchmark yields are mostly 2-4 bp higher. The 10-year US Treasury yield is off a single basis point to near 4.35%. Gold, which the ECB estimated earlier this week to have replaced the euro as the second most important reserve asset after the dollar, is up a little more than 1% in late European morning turnover near $3386. July WTI is up about 7.5% near $69.
USD: Israel's strike on Iran has seen the Dollar Index
recoup yesterday's losses that had seen it fall to a new three-year low in
early North American turnover yesterday near 97.60. However, it has not been
able to take out yesterday's high near 98.50, which will lead to talk about it
losing its safe haven status, but strong conclusions will require some time.
For release today, only the preliminary University of Michigan's consumer
sentiment is due. A small improvement in confidence and a slight decline in
inflation expectations are expected. In the tightening cycle, Fed Chair Powell
pointed to the University of Michigan survey and sometimes, even the
preliminary report; now, less so. The NY Fed's survey has not been as alarmist.
Another way to get a handle on inflation expectations is derived from the
market, such as the difference between yield on conventional instruments and
the inflation-protected securities. The one-year breakeven, for example, is
near 2.50%, the low for the year. The 5-10 year breakevens are a couple of
basis points around 2.30%.
EURO: The euro reached roughly $1.1630 in early North
American dealing yesterday. It has not been this high since October 2021. It
settled above it its upper Bollinger Band yesterday but was sold to about
$1.1510 on Israel's strike and has held above yesterday's low near $1.1485. The
eurozone industrial output fell sharply in April (-2.4%) and the trade surplus
was halved to 14 bln euros (from a record surplus of nearly 29 bln euros in
March). This is broadly consistent with the return to a slower growth
trajectory after the 0.6% quarter-over-quarter expansion in Q1 25, which
matched the strongest growth since Q2 22. However, the median forecast in
Bloomberg's survey anticipates growth slowing to 0.1% in Q2 25 and Q3 25. The
swaps market has slightly more than a 10% chance of a rate cut next month, but
it rises to almost 60% for the September meeting, 75% for the October meeting,
and it is nearly completely discounted before the end of the year.
CNY: The broadly weaker US dollar was threatening to end the
yuan's consolidative phase. The greenback was turned down on Wednesday after
briefly trading north of CNH7.20. It fell back toward CNH7.1715 yesterday. The
broad but modest dollar gains lifted the greenback to almost CNH7.19 today. The
PBOC set the dollar's reference rate lower for the fourth consecutive session
(CNY7.1772) and below CNY7.18 for the first time since April 1. China reported
May lending figures that were in line with expectations. Early Monday, it will
release May real sector data. The economy appears to continue to struggle to
extend momentum.
JPY: The dollar was turned back on Wednesday after
setting a new high for the month near JPY145.45. It reached almost JPY143.20
yesterday. The dollar initially fell to around JPY142.80 a new six-day low
today on Israel's strike but recovered to almost JPY144 in the in the European
morning. After becoming de-coupled from US 10-year yield, the traditional
driver, the rolling 30-day correlation is rising, and slightly above 0.40, it
is at highest in about two months. Last week, Japan's 0.7% annualized
contraction in Q1 was revised to a more modest -0.2%. Still, Q2 has begun off
poorly. Earlier today, Japan revised down April's 0.9% contraction in
industrial output to -1.1% and the tertiary industry index (services) may eked
out a modest 0.3% gain (after March's 0.3% decline was revised to -1.0%). The
BOJ meets next week, but despite the firm inflation readings, seems to be in no
hurry to raise rates. Indeed, the focus may not be on interest rate policy but
on the BOJ's bond purchases. The BOJ has slowed its bond purchases, but this
may have contributed to the volatility of the long end of the curve. It will
reportedly consider making smaller reductions from the current pace of JPY400
bln (~$2.8 bln) a quarter. Some think the pace could be halved to JPY200 bln.
At the end of March, the BOJ's balance sheet was about 118% of GDP, the
smallest since May 2020. It peaked in 2022 near 133% of GDP.
GBP: Sterling set a new three-year high yesterday near
$1.3625. The gains were despite weak jobs data and an unexpectedly large
contraction in April's GDP, which boosted confidence of a rate cut in August
(not next week). It made a marginal new high earlier today, slightly above
$1.3630 before selling off to take out yesterday's low by about 1/100 of a cent
(according to Bloomberg pricing). Sterling's weakness, however, is evident
against the euro, where it has fallen to new lows since early May. The euro reached
almost GBP0.8550, which corresponds to the (50%) retracement of the euro's
losses since the April 11 high near GBP0.8740. It is consolidating today.
CAD: After reversing lower on Tuesday from around
CAD1.3730, the greenback fell to CAD1.3600 yesterday, its lowest level since
last October. and dipped briefly below it in early trading before Israel's
strike. It recovered to about CAD1.3650 before consolidating. Canada reports
manufacturing and wholesale sales and capacity utilization figures. These do
not capture the attention of the market, even in the best of times. Next week's
highlights include April portfolio flows and retail sales. The swaps market has
a little more than one cut discounted by the end of the year, which is
currently seen as the end of the easing cycle.
AUD: The Australian dollar recovered from an eight-day low
in early European turnover yesterday (almost $0.6475) to reach the $0.6535 area
in the North American afternoon. Israel's military operation drove it to nearly
$0.6455. It has subsequently recovered almost $0.6500 and is consolidating in
the European morning above around $0.6480.
MXN: After falling to its lowest level since last August on
Wednesday (~MXN18.9120), the greenback consolidated yesterday between
approximately MXN18.8560 and MXN18.98. The peso is one of the only emerging
market currencies that trades 24-hours a day. It is sometimes, therefore used
as a proxy for other emerging market currencies, especially in a risk-off
event. The dollar spiked to around MXN19.08 but is hovering now near MXN19.00.
In the recent past, such spikes were not sustained. Meanwhile, the above 4%
inflation reported for May appears to have spur some disagreement about the
central bank's leadership. Deputy Governor Heath argued for a pause, while
Governor Rodriguez continued to advocate for a 50 bp cut. The central bank
meets on June 26. A compromise might be a 25 bp cut and that is what the swaps
market appears to be discounting as the most likely scenario.
Reviewed by Marc Chandler
on
June 13, 2025
Rating:
