While what has been dubbed China Shock 2.0 as the Chinese model moves into higher value-added goods is important, the most immediate challenge facing investors is the double shock from the US in the form or tariffs and war. And both are impacting the capital markets today. More clashes between the US and Iran have been reported, which are underpinning oil prices and lifting bond yields. At the same time, the US is threatening new tariffs of at least 10% on imports from 60 trading partners over how goods allegedly from forced labor are handled. This levy would ostensibly apply to Canada, Mexico, the EU, Taiwan, and UK, while China, Japan, India, South Korea, Brazil, and Switzerland would face a 12.5% tariff. A public comment and review period is planned to run into early July before implementation.
The US dollar is firmer against most of the G10 currencies. The two exceptions are notable. The Norwegian krone is the strongest and may be helped by the gains in oil prices. The yen is the other exception. While comments by BOJ Governor Ueda saw the swap market lift the chances of a rate hike later this month, officials said little new about the weakness of the yen. The greenback tested JPY160 without moving above it, which is its best level since the late April intervention. It is hovering a little below it ahead of the North American session.
Prices
G10
• Unable to make much headway above $1.1650 yesterday, the euro succumbed to selling pressure and fell to slightly through $1.1615 in the North American afternoon yesterday. Monday’s low was a little above $1.1605, and it has been retested today. Coming into the North American session it does not look like a low is in place. Last week’s low was near $1.1585, and May’s low was closer to $1.1575, which met the (61.8%) retracement objective of the euro’s rally from the mid-March low (~$1.1410), which is also the low for the year. Options for 1.3 bln euros at $1.1625 expire today.
• The dollar rose against the yen and got nearly as close to JPY160 as it could without trading it. It is the highest since the April 30 intervention. Recall that last March, the greenback breeched JPY160 but there was no material intervention. The dollar continues to hover near JPY160 even after BOJ Governor Ueda comments seemed to suggest a hike this month. The swaps market is pricing in nearly 22 bp of a hike compared with 19.5 bp in the past three sessions. The market remains wary of intervention and there are options for $660 mln at JPY160 that expire today.
• Sterling fared better than the euro over the past couple of sessions. It approached the upper end of its recent range against the dollar as it pushed briefly above $1.3480 yesterday to approach the pre-weekend high. Sterling frayed the 20-day moving average (~$1.3470 today) but failed to settle above it. It has come back softer today and recorded the session low a little before the European markets opened today, slightly above $1.3435. Options for almost GBP415 mln at $1.3440 expire today.
• The Canadian dollar recovered from three-day lows but continues to look vulnerable. The US dollar reached nearly CAD1.3855 in the European morning and was sold to about CAD1.3815 in early North American turnover yesterday and recovered toward CAD1.3845. Last week’s high was near CAD1.3870 but the greenback posted a key downside reversal afterwards and it looked like the kind of price action one would associate with a top after a month-long rally. Still, it has edged to almost CAD1.3860 today and a push above CAD1.3870 could signal CADF1.3900 next, while the April high was closer to CAD1.3950.
• The Australian dollar traded firmly but within Monday’s ~$0.7135-$0.7190 trading range yesterday. It tested and held support near $0.7170 in North America. The Aussie is trading within yesterday’s range today.
EM
• The Mexican peso rose to a six-session high yesterday but remains within the consolidative range than it has been forged in recent weeks. The US dollar trended lower since peaking Monday near MXBN17.40. It was sold a little below MXN17.2650 yesterday before recovering back toward almost MXN17.31. It is trading quietly between above MXN17.28 and MXN17.3150. The dollar held above BRL5.00 and reached the session high (~BRL5.0225) in the afternoon. The market largely shrugged off the US threat to impose a 25% tariff on Brazilian goods in 30 days after an investigation found unfair trade practices. There are two mitigating factors. First, exports to the US account for around 2% of overall Brazilian exports. Second, the US is excluding among the most important imports from Brazil, including coffee, beef, some fruits, and aircraft parts. The post-election surge of the Colombian peso continued yesterday, and the dollar set a marginal new low for the year (~COP3530.65) but recovered and settled at COP3579.
• The dollar made a marginal new three-year low against the offshore yuan yesterday near CNH6.7580. The five-day moving average of the close is near CNH6.7670 today and the greenback has not settled above it in two weeks, though it is poised to do so today. The dollar reached a four-session high today near CNH6.7760. The yuan is near three-year highs against the trade-weighted basket the PBOC says it monitors. The PBOC set the dollar’s fix at CNY6.8184 today (CNY6.8187 yesterday).
• The dollar gapped higher against the Indian rupee today and reached INR95.80, an eight-session high. Reports suggest that the government will soon announce steps, like tax changes, to encourage foreign investment in the sovereign bond market.
Other Markets
• The S&P 500 and Dow Industrials made marginal new highs yesterday, but the NASDAQ did not. Equities are mixed today. The MSCI Asia Pacific Index reached set a fresh record high as it rose for eighth session of the past nine today. Most of the large bourses rallied today, with Hong Kong and India notable exceptions. Also, we note that pressure on Indonesia continues and the equity market tumbled a little more than 4% today to five-year lows. The poor macro backdrop and fear of a downgrade weighs on sentiment. Europe’s Stoxx 600 set its record high on the eve of the US and Israel attack on Iran at the end of February. It is off about 0.4% through the European morning today. Nasdaq futures are slightly firmer, while S&P and Dow futures are softer.
• The recovery in oil prices yesterday saw European bonds trim their earlier gains and the 10-year US Treasury yield was flat near 4.45%. It is near 4.48% now. Benchmark 10-year yields are up 3-4 bp today in Europe. The 10-year JGB yield, which tumbled nearly 11 bp yesterday and rose 6.5 bp today (to 2.62%).
• Gold was confined to Monday’s range yesterday and hovered mostly above $4480 in the North American afternoon. It was sold to a four-session low today near $4439 but is above $4455 as the North American session is about to begin. Silver reached a four-session high near $77 yesterday but settled around $75.25. It has a softer profile today, trading between about $74 and $76.
• July WTI held support near $90 yesterday and reached $94, the session high in late turnover. News that Hezbollah was rejecting a partial ceasefire and reports of continued Israeli strikes in southern Lebanon may have helped put a floor under the crude. The continued strikes during the ceasefire and the apparent lack of progress in the negotiations lifted the contract to $97 today, a seven-session high. It is pressing against the high in late European morning turnover.
Data
• In a packed US economic calendar today, the highlight is the ADP private sector jobs estimate, which the median forecast in Bloomberg’s survey is for 120k after 109k in April. The final services and composite PMI will be overshadowed by the ISM services index. Similarly, the preliminary durable goods orders steal most of the thunder from today’s factory orders report. We know that without Boeing and defense orders, durable goods orders contracted. Lastly, late in the session the Fed’s Beige Book, prepared for the June 16-17 FOMC meeting, will be released.
• Canada is expected to report a small quarter-over-quarter gain in productivity (0.3% after a 0.1% decline in Q4 25). Canada unexpectedly reported a contraction in Q1 26 GDP, the second consecutive quarterly decline in output. The May services and composite PMI are due and were both a little below the 50 boom/bust level in April.
• The eurozone reported that April PPI rose 0.6% on the month and 4.9% year-over-year, surging from 2.0% in March. Separately, the May final services and composite PMI were somewhat with the preliminary estimates but still below the 50 boom/bust levels. The services PMI stands at 47.7 rather than 46.4, confirming the second reading below 50 (47.6 in April). The composite PMI stands at 48.5, better than the flash reading of 47.5, but still the third consecutive decline (48.8 in April).
• The UK’s final May services PMI stands at 49.3, confirming the first sub-50 reading since April 2025, though better than the initial estimate of 47.9. The composite is at 49.7, up from the flash reading of 48.5, but down sharply from 52.6 in April. It is also the first reading below 50 since last April.
• Australia’s economy grew by 0.3% in Q1 26 after it expanded by 0.9% in Q4 25. The year-over-year pace was steady at 2.5%. The final May PMI warns that activity may be slowing in Q2. The services PMI is at 48.7 compared with the initial estimate of 47.7. It averaged 51.8 in Q1 26 and 52.1 in Q4 25. The composite PMI stands at 48.7 (47.8 initially) after averaging 51.6 in Q1 26 and 51.9 in Q4 25. Private credit expansion continues apace, rising 0.7% in April the same as in March.
• Japan’s final May services PMI was confirmed at 50.0 (51.0 in April). It was the third consecutive monthly decline. It was at 51.0 in May 2025. At 51.1, the final May composite also fell for the third month after peaking at 53.9 in February before the Middle East war began. The composite PMI averaged 53.3 in Q1 25, its best quarterly performance in several years.
• China’s RatingDog services and composite PMI unexpectedly ticked higher. The services PMI is at 54.4 from 52.6 in April. It was at 50.7 in April 2025 and finished last year at 52.0. The composite eased to 54.0 from 53.1. It was at 51.1 in April 2025 and 51.3 at the end of 2025. Recall that the “official” composite rose to 50.5 in May from 50.1 in April. The manufacturing PMI had slipped (50.0 vs. 50.3), and the non-manufacturing PMI edged up to 50.1 from 49.4. The composite improved to 50.5 from 50.1.
• India’s services PMI rose to 59.8 from 58.9 and the composite rose to 59.3 from 58.1. This is the highest composite reading since last November. The RBI meets at the end of the week. The consensus is that it stands pat, but some speculation of a hike has been creeping into the market.
Reviewed by Marc Chandler
on
June 03, 2026
Rating:
