The war in the Middle East continues to hang over risk-taking appetites the sword of Damocles. There appears to have been little progress over the weekend, even though a US decision was expected after the meeting in the White House Situation Room at the end of last week. Reports suggest there have been a series of skirmishes over the weekend, and Israel intensified its assault on Lebanon. The US and Iran reportedly are proposing amendments to a draft deal. Both the Washington and Tehran apparently think they have the superior hand. Oil prices are 3-4% higher today.
The dollar is consolidating mostly within the ranges seen at the end of last week. The market continues to test the resolve of Japanese officials. The greenback is holding above JPY159 and has not settled below there since last Monday. Most emerging market currencies are beginning the week softer, but the Mexican peso is a notable exception and the PBOC set the dollar’s fix at a new multiyear low though the offshore yuan consolidated its recent gains. The first round of the Colombian presidential election saw the outsider De La Espriella finish ahead. Although a run-off will be held later this month, the results will likely be seen as market friendly.
Prices
G10
• The euro rose to about $1.1685 ahead of the weekend, its best level in a little more than two weeks amid hopes of an extended ceasefire in the Middle East. That is roughly the halfway mark of May’s range. It is trading inside last Friday’s range and has been confined to about $1.1640 to $1.1670 today.
• Confirmation that the BOJ bought JPY11.7 trillion between late April and late May had little impact on the market ahead of the weekend. The dollar settled above JPY159 for the fourth consecutive session and looks poised to do so again today. It has been pinned in a quarter-of-a-yen range above JPY159.25. There are about $1.3 bln in options struck between JPY159.25 and JPY159.27 that expire today. The yen was the weakest of the G10 currencies in May. It lost almost 1.7% after it appreciated around 1.35% in April.
• For the third time in about two-and-a-half weeks, sterling stalled near the 20-day moving average at the end of last week. It is found slightly below $1.3480 today. At last week’s high, near $1.3510, sterling approached the (61.8%) retracement of May’s decline. Overcoming it would lift the technical tone. So far today, it is in about a quarter-of-a-cent range below $1.3475. Options for about GBP650 mln at $1.3420 and almost GBP620 mln at $1.3450 expire today.
• Ahead of the weekend, geopolitical hopes offset the disappointing Canada’s Q1 26 GDP, which saw the second consecutive quarterly contraction and lifted the Canadian dollar to a six-session high. The greenback fell to CAD1.3770 after posting bearish key reversal in the previous session. It has mostly held above CAD1.3790 today and recorded session highs in European turnover near CAD1.3825. Options for about $785 mln at CAD!.3790 expire today. Last Friday’s high was about CAD1.3830 and last week’s high, the month’s high, was near CAD1.3870.
• Ahead of the weekend, the Australian dollar extended its recovery off the $0.7100 area to briefly trade above $0.7200 for the first time since mid-May. It settled at the 20-day moving average, found near $0.7185 today. It is trading between about $0.7170 and $0.7190 so far today. Options for A$725 mln at $0.7200 expire today.
EM
• With a couple of minor exceptions, the Mexican peso has been largely confined to the range set on May 20. Then, the dollar traded between about MXN17.26 and MXN17.43. Now it remains within last Friday’s range, which itself was in last Thursday’s range (~MXN17.3040-MXN17.4400). Colombia went to the polls over the weekend to elect a new president. The pendulum of political sentiment swung to the right. Still, ahead of the results, the dollar set a new high for the week against the Colombian peso near COP3710. The central bank meets at the end of June, and the swaps market is discounting 25 bp hike. It delivered two 100 bp hikes this year (January and March). May inflation is due at the end of the week and is expected to edge a bit closer to 6%. We look for the Colombian peso to outperform the Mexican peso in the coming weeks.
• The yuan’s march higher continues. It reached a new three-year high ahead of the weekend. The greenback fell to nearly CNH6.76 and CNY6.7660. The yuan has risen 3.15%-3.30% this year through May. It is the strongest currency in the region. Claims that the yuan’s strength would allow the other regional currencies to appreciate seem wide of the market. The only other Asian currencies to appreciate this year has been the Malaysian ringgit (~2.4%), the Singapore dollar (~0,75%) and the Taiwanese dollar (~0.20). Even the Hong Kong dollar has fallen (~0.70%). Yet, China’s price competitiveness is much larger than the modest yuan appreciation. The dollar is consolidating today between CNH6.7620 and CNH7.7685, while the PBOC set the dollar’s reference rate a marginal new low: CNY6.8167 (vs. CNY6.8176 before the weekend).
• The combination of apparently aggressive central bank intervention, the pullback in oil prices, and softer US dollar has spurred a short squeeze of the Indian rupee. The rupee posted its third weekly rise in the past four weeks for the first time in three months. A roughly two-month uptrend has been violated and the momentum indicators have are falling. The dollar initially was sold to INR94.73 today, a three-week low, before recovering to settle a little above INR95.01. The RBI meets at the end of the week, and officials do not seem prepared to hike rates to defend the currency. A surprise hike would likely extend the rupee’s recovery.
Other Markets
• Asia Pacific equities were mixed today after the regional MSCI index rose 8.3% last month. Chinese equities were lower, except an index of shares that trade in Hong Kong. South Korea and Taiwan extended their surge. Europe’s Stoxx 600 rose 2.4% last month but is slipping a little today. US index futures are firm. The S&P 500 rose 5.1% in May and the Nasdaq gained nearly 8.4%.
• Benchmark 10-year yields softened last week, encouraged by the decline in oil prices, which not only eased inflation expectations but an end to the Middle East war will take some pressure off central banks, even if the return to normalcy takes some time. The streak of declining US 10-year yields extended for the seventh consecutive session ahead of the weekend. It matches the longest decline since July-August 2024. Yields are firmer today. European rates are mostly 3-5 bp higher and the 10-year Treasury yield is up three basis points to almost 4.47%.
• The prospect for an extended ceasefire is good for gold insofar as it reduces the pressure on some oil importers and exporters to sell the yellow metal and softens interest rates. Gold reached a two-week high ahead of the weekend a little below $4600, though it settled closer to $4555 in the spot market. There has been no follow-through buying. Instead, gold is fraying $4500 in European turnover. Silver was less impressive. It traded quietly between ~$74.60 and $76.65, well-within the recent range. It is trading firmer today but has held below $76.30.
• July WTI fell by about 10.4% last week, easily the most since the war began. It settled below $87 for first time since April 21. The $84.70 area is the (38.2%) retracement of the war-inspired rally. However, the continued military strikes and the lack of resolution have lifted oil prices today (~3-4%). July WTI reached about $91.25 today and August WTI recovered to $94.65.
Data
• The final US manufacturing PMI is overshadowed today by the ISM manufacturing report. The ISM has lagged the PMI, but after stalling at 52.7 in April and another rise is expected to lift it to its best level in nearly four years. The US has gained about 16k manufacturing jobs this year after losing 108k in 2025 and 180k in 2024.
• Canada sees the May manufacturing PMI for the first time today. It bottomed last April at 45.3 amid the trade shock from the US. However, it recovered and reached a multiyear high in April of 53.3.
• Mexico’s manufacturing PMI and IMEF indices are expected to show an economy that continues to struggle to sustain forward momentum. Separately, Mexico reports April worker remittances, which remain an important source of capital inflows. Remittances averaged $4.82 bln in Q1 26, slightly better than the $4.75 bln average in Q1 25. There is a strong seasonal pattern for remittances to rise in March and May but are typically fall in April and June.
• The first pullback in the eurozone’s final manufacturing PMI in May was confirmed earlier today. It stands at 51.6 from the initial estimate of 51.4 after 52.2 in April. Separately, the unemployment rate remained at 6.3%, after the March series was revised from the EMU-era low of 6.2% to 6.3%. Money supply does not capture the market’s imagination the way it previously may have but the lending figures reported at the same time showed loans to households rose by 3.0% year-over-year, the same as in February, while lending to non-financial firms accelerated to 3.2% from 3.0%. Lastly, the ECB’s survey of one-year expectations was at 4.0% (unchanged from March) and three-year inflation expectation slipped to 2.9% from 3.0%.
• The UK’s final May manufacturing PMI stands at 53.9, up from the preliminary estimate of 53.7, which is where it was in April. It was 46.4 last May and 50.6 at the end of 2025.
• Australia’s final May manufacturing PMI is 50.7, up from the 50.2 initial estimate and down from 51.3 in April. It peaked at 53.0 last August and was at 51.6 at the end of 2025. The Melbourne Institute’s inflation gauge rose to 4.4% from 4.3% in April. It was at 3.5% at the end of last year, before the central bank’s three rate hikes. It is the highest since the end of 2023. Still the softer April CPI figures last week softened expectations for another rate hike this year. The futures market is discounting around an 80% chance of another hike this year. It reached about 71% before the weekend, the least since early December.
• Japan’s final May manufacturing PMI confirmed the preliminary reading of 54.5, which was a small pullback from April’s 55.1. It was at 49.4 last May and 50.0 at the end of last year. Japan’s Q1 GDP rose by 0.6% quarter-over-quarter, which was stronger than expected. It assumed capex slowed but today’s figures suggest it may have slowed more than anticipated. In any event, the forward-looking market anticipates weaker growth here in Q2 (~0.3%).
• China reported its May PMI over the weekend. There was little change since April. The manufacturing PMI is at 50.0 from 50.3 in April. The non-manufacturing PMI rose higher to 50.1 from 49.4. The composite stands at 50.5, up from 50.1, matching the highest of the year. The Rating Dog iteration of the manufacturing PMI, which runs hotter than the “official” one fell to 51.8 from 52.2. Separately, Beijing published new rules today that require closer scrutiny of overseas real investment, effective July 1.
Reviewed by Marc Chandler
on
June 01, 2026
Rating:
