There seems to be a nervous calm in the foreign exchange market. The US dollar is mostly in narrow ranges around little changed levels. The euro, for example, is in about a 15-tick range and the greenback is confined to less than a quarter of a yen range. Despite the slightly stronger than expected May UK GDP (0.1%) sterling is among the heaviest of the G10 currencies and is testing $1.35 late in the European morning.
The news stream is light. The eurozone reported its first monthly trade deficit in a little more than three years. Weekly portfolio flow day showed Japanese investors bought the most foreign bonds last week since May, while they continued to buy foreign stocks. The US reports June retail sales are expected to have risen by about 0.4% excluding autos and gasoline. Two Fed Presidents (Logan and Schmid) speak during the session. Governor Jefferson speaks tonight. The blackout period ahead of the FOMC meeting begins this weekend.
Prices
G10
• The US two-year yield has fallen by about 15 bp in the past two sessions, the biggest two-day decline since last August. The euro recovered from slightly below $1.1380 on Tuesday to almost $1.1485. It finally rose above the high recorded in response to the soft US jobs data on July 2 ($1.1475). It is in a narrow range today of about $1.1460-75. Options for nearly 2 bln euros at $11.475 expire today. The next target is in the $1.1500-10 area. If the euro has forged a base, initial potential may extend into the $1.1600-50 band.
• The yen seems largely sidelined, confined largely to a range set five days ago. The dollar traded in a little more than a half a yen range yesterday and is in less than a quarter yen range today mostly above JPY162. We are struck by the divergence between Japanese retail accounts that have established a large net short dollar position and the most recent Commitment of Traders, which showed a substantial net short yen position. A nearly two-week up trendline comes in near JPY161.90 today.
• Some linked sterling’s strength to speculation that Monday when the UK gets its 7th PM in the decade since the Brexit referendum Home Secretary Shabana Mahmood will be named Chancellor of the Exchequer. Her centrist and fiscal discipline appeals to investors. However, the market may be getting a little ahead of itself, after all, Reeves, the current chancellor, was also regarded as moderate and fiscally conservative. Sterling rose about 1.1% yesterday to almost $1.3560, its best level in two months. Even with the slightly better than expected May GDP, sterling has not been able to advance further today. It is trading between about $1.3505 and $1.3545. As we previously noted, the $1.3500 area marks the halfway point of this year’s range. Options for about GBP940 mln expire there today.
• Helped by the continuing narrowing of the US two-year premium over Canada, the Canadian dollar extended its recent gains yesterday and reached its best level in a month. The US dollar was sold to CAD1.4025. The US two-year premium narrowed slightly yesterday and approached 130 bp, the smallest since June 11. The greenback has held on to most of yesterday’s gains and has been confined to about CAD1.4035-CAD1.4055 range so far today. Options for $645 mln at CAD1.4050 expire today. If the US dollar is “correcting” the two-month advance, the (38.2%) retracement is near CAD1.3980 and the 50% is about CAD1.39. For the second consecutive session, the greenback settled below the lower Bollinger Band (which comes in near CAD1.4055 today).
• The Australian dollar reached $0.7020 yesterday, its best level since June 22. The five-day moving average crossed above the 20-day moving average on Tuesday for the first time in two months. It is in a little more than a 10-tick range around $0.7000. The next target is around $0.7535 and then $0.7575. It approached the upper Bollinger Band yesterday (now ~ $0.7015) but held below it.
Emerging Markets
• Lower US rates, a broadly softer dollar, and firm equities helped lift the Mexican peso yesterday to its best level since June 22. The dollar was sold to about MXN17.3575 and the five-day moving average crossed below the 20-day moving average for the first time in a month. The next target is in the MXXN17.20-MXN17.25 area, though a consolidative tone is evident today and the greenback has risen to almost MXN17.42. While the Mexican peso gained about 0.30% yesterday, the Colombian peso rose by about 1% to a new high since early 2020. The US dollar traced out a large outside down day, trading on both sides of Tuesday’s range and settling below its low. The peso has risen almost 16% since the mid-May (presidential election was at the end of May).
• The broadly weaker dollar was also reflected in the offshore yuan, which rose to its best level since June 18. Recall, that the previous day, at the conclusion of the FOMC meeting, that the greenback recorded a three-year low near CNH6.7540. The dollar is holding above about CNH6.7650 today. The PBOC shaved the dollar’s fixing today by the slightest among possible. (CNY6.7909 vs. CNY6.7910 yesterday). Year-to-date only the onshore yuan has risen by about 3.25% against the US dollar, the most among the emerging market currencies. Only two G10 currencies, the Australian dollar and Norwegian krone have done better.
• The Indian rupee continued to grind lower today. It reached a new low since May 22. The dollar reached nearly INR96.3740. The dollar’s record high (May 20) was about INR96.9650. It may not have been helped by the swing of the current account into deficit in May (-$2.0 bln vs. +$700 mln a year ago). In April, India recorded a current account surplus of $4.7 bln.
Other Markets
• US equity indices closed firmer yesterday. The S&P 500 is within striking distance of the record high from June 2 (~7621). The Nasdaq settled at its best level so far this week. It settled near 26265 yesterday and its record high from June 1 was 27190. US index futures are trading heavier today. The large Asia Pacific bourses fell today, with the notable exception of Hong Kong and the mainland shares that trade there. South Korea’s Kospi slid nearly 6.4%. Europe’s Stoxx 600 is off nearly 0.5%, which more than offsets the net gain over the past three sessions.
• The 10-year US Treasury yield fell for the second consecutive session yesterday, the first back-to-back decline this month. The yield was turned back from above 4.60% at the start of the week. Gilts caught a late bid yesterday amid speculation about the next Chancellor of the Exchequer. However, yields are 1-3 bp higher in Japan, Europe, and the US today.
• Gold traded quietly yesterday. If recovered from the lows, a little below $4018 and reached session highs after punching through $4080. It is lower today and reached almost $4023 before stabilizing. Silver traded a bit heavier than gold and could not quite get into positive territory in the North American afternoon. It languishes in its recent trough and slipped to a new low for the month slightly below $56.60.
• August WTI traded sideways yesterday within Tuesday’s range. The consolidation looks constructive. An off-ramp to the conflict seems increasingly elusive. It is within yesterday’s range today and little changed in late European morning turnover near $79.50. For a currency strategist with a sense of history, bombing Iran into submission seems fraught with risk and not a high probability success strategy. And, even if the US and Israel can prevent Iran from acquiring nuclear weapons, the lessons from Ukraine and now Iran may boost the desire of other countries to get the capability. The longer-term goal of non-proliferation is being put at risk, more so that China, a nuclear power, testing a submarine launch missile, as it did recently.
Data
• US June retail sales likely slowed after a strong May but were likely skewed by the drop in gasoline prices. The median forecast in Bloomberg’s survey anticipates a 0.2% increase after a 0.9% jump in May. Excluding autos and gasoline, a 0.4% rise is expected after a 0.5% gain in May. May business inventories are due. The rebuilding of inventories in Q1 was important. It was the largest quarterly increase since Q2 24. The projected 0.3% increase would maintain the Q1 pace. Lastly, June pending home sales were unlikely to have sustained May’s heady 3.8% jump. A small decline would not be surprising.
• Canada reports June housing starts. They are expected to have declined, which would be the first back-to-back decline since February-March last year. Through May, Canadian housing starts are running about 2.8% the year ago pace.
• The eurozone reported that the May trade balance fell into deficit (~5 bln euros) on a seasonally adjusted basis, the first monthly shortfall since April 2023. In the first five months of the year, the average monthly surplus was about 2.6 bln euros. In the Jan-May 2025 period, the average monthly trade surplus was about 16.7 bln euros.
• The UK eked out 0.1% growth in May after it contracted by 0.1% in April. The three-month pace slowed to 0.7% from 0.8%. Industrial production contracted by 0.5% after April’s 0.2% decline was revised to flat. However, manufacturing output rose by 0.1% after a revised 0.5% increase in April. Construction output remained weak (-0.8% vs. a revised 0.1 decline in April. It initially rose by 0.1%). The 0.3% increase in services was the key to May’s growth. activity stabilized (0.1% vs. -0.2%) and the trade deficit narrowed. The Bank of England meets on July 30, but it still seems too early for a hike. The swaps market has a little more than 14 bp discounted for the following meeting (Sept 17), which is down from almost 19.5 bp on Monday.
• Japan’s weekly portfolio flow report (through July 10) showed Japanese investors bought slightly more than JPY1 trillion of foreign bonds last week, the largest haul since early May. They bought a small amount of foreign equities (~JPY200 bln) for the fourth consecutive week.
Reviewed by Marc Chandler
on
July 16, 2026
Rating:
