Dollar Pummeled on Risk to Fed's Independence

[Redator]

Overview:  The US dollar was weak yesterday, but it has been pummeled today. It is down against the G10 currencies and all but the Russian ruble and Turkish lira among emerging market currencies. The proximate trigger of today's sell-off were news reports that a successor to Fed Chair Powell could be announced in a few months. The attempt to influence the Fed so directly does not set well with investors. In the Fed funds futures market, the odds of a July cut have crept up, but are around a 1-in-4 chance. However, there are now almost 63 bp of easing discounted before the end of the year. That is the most since early May. This, combined with the month/quarter end flows and the looming end of the respite from the so-called reciprocal tariffs (July 9) takes a toll. 

Most equity markets are higher. In the Asia Pacific area, China, Hong Kong, Australia, and South Korea were notable exceptions. Europe's Stoxx 600 is up about 0.25% near midday, after falling by nearly 0.75% yesterday. US index futures are 0.2%-0.4% higher. Benchmark 10-year yields are softer, though the two basis point rise in the Japanese government bond yield is the outlier. European rates are mostly 1-2 bp lower and the 10-year US Treasury yield is off a basis point to 4.28%. The expected year-end effective average for Fed funds is now 3.70%. This is the fifth session it is falling. It is 11 bp lower than at the end of last week. The US 10-year yield is also lower for the fifth consecutive session and is about 10 bp lower on the week. Gold prices are firmer, but the yellow metal continues to trade in Tuesday's range, as it did yesterday (~$3295-$3370). Similarly, August WTI also remains inside Tuesday's $64.0-$67.85 range. It was inside yesterday's range (~$64.50-$66.00), as well. 

USD: For the second time this week, the Dollar Index gapped lower today. Yesterday's low was about 97.65 and today's high is 97.60. The earlier gap (~98.27-98.35) created by Tuesday's low. DXY is fraying 97.00 in Europe, a new three-year low. Technically, there seems to be little to hang one's hat on until closer to 95.00. However, the intraday momentum indicators are stretched, and the lower Bollinger Band is near 97.40 now. The US has a busy economic diary today, and after yesterday's poor reception to the five-year note auction, the Treasury comes back today with a $44 bln of seven-year notes. May's goods trade report will draw interest. The postpone of the so-called reciprocal tariffs appears to have seen a surge in US imports, the mirror image of the strong exports reported by several Asian countries. May durable goods order were likely flattered by a surge in Boeing orders, but excluding aircraft and defense, orders are expected to have fallen for the second consecutive month. And more importantly for capex, shipment of those core durable goods also expected to have decline for the second consecutive month. With Q2 winding down, revisions to Q1 GDP will barely be noticed. After two days of Chair Powell's testimony, the Fed funds futures imply a little more than a 15% chance of a July cut, which is virtually unchanged since the US jobs report, though a smidgeon more than the day after the FOMC meeting concluded. September seems a more realistic time frame. 

EURO: The euro reached a marginal new three-year high of$1.1665 yesterday and fray the upper Bollinger Band. It has cut through $1.17 today like a hot knife in butter and reached almost $1.1745 in early European turnover. The upper Bollinger Band is slightly above $1.1690 now. There is little meaningful on the weekly charts until $1.19-$1.20. Meanwhile, with little fanfare, the US two-year premium over Germany from 213 bp at the start of last week to 193 now, the least since the end of April. It is narrowing for the fifth consecutive session. Similarly, the US 10-year premium has been whittled down to around 173 bp from 195 bp two weeks ago. It also has not been less since the end of April. After narrowing for the past five sessions, it has steadied today. 

CNY: The dollar fell to a new low since last November today near CNH7.1525. Its recovery began in the local session and reached CNH7.1660 in Europe. It would not be surprising to hear of state bank purchases of dollars. Nevertheless, the PBOC set the dollar's reference rate lower today (CNY7.1620 vs. CNY7.1668 yesterday). It has not set the dollar's reference higher for two consecutive sessions for three weeks. Separately, the Hong Kong Monetary Authority intervened to sell dollar and by Hong Kong dollars to defend the band. The Hong Kong dollar has been used as a funding currency and the intervention will also impact liquidity and firm HIBOR. 

JPY: While the euro and sterling rose to new three-year highs yesterday, the yen was the weakest among the G10 currencies, falling slightly against the US dollar. The greenback held above the 20-day moving average near JPY144.55 yesterday and recovered to almost JPY146. But the weaker greenback overwhelmed today and is reached JPY143.75, an eight-day low. Trendline support may be near JPY143.35 and the mid-June low was about JPY142.80, with the lower Bollinger Band around JPY142.65 today. Resistance is seen near JPY144.50. After buying the fourth most foreign bonds this year in the week through June 13 (~JPY1.57 trillion, or ~$10.9 bln), Japanese investors continued to buy foreign bonds last week. The MOF's weekly report showed they bought another JPY615.5 bln foreign bonds. Tomorrow Japan reports Tokyo CPI and retail sales. 

GBP: Sterling barely traded below $1.3600 yesterday and worked its way above $1.3670, setting a new three-year high. It also frayed the upper Bollinger Band, which comes in near $1.3700 today. Its gains have been extended to $1.3765 today. The next chart area of note is near $1.3830. Unlike the euro, sterling took out last week's low on Monday and has now risen above last week's highs. A close tomorrow above last week's high (~$1.3620) would be a bullish technical development. Some tried to link sterling's strength to reports that Shell was in "active talks" to acquire BP, but sterling's highs were recorded after Shell issued a denial. The euro-sterling cross was in a narrow range and settled little changed yesterday and remains subdued today. 

CAD: The greenback's session high yesterday was recorded as European markets were closing near CAD1.3755. It spent the North American afternoon mostly consolidating above CAD1.3720 in choppy turnover. It has backed off today and tested Tuesday's low near CAD1.3680. As is often the case in the falling US dollar environment, the Canadian dollar lags behind the other G10 currencies. The year's low was set on June 16 near CAD1.3540. Canada reports April GDP tomorrow. It is difficult to extrapolate the monthly GDP into the quarterly estimates. In Q1, the sum of the monthly GDP was 0.3% but the quarterly estimate of 2.2% annualized was about 0.55% quarter-over-quarter. A flat April would mean that the monthly prints showed a 0.1% contraction over the past three months. The median forecast in Bloomberg's survey is for a 1% annualized contraction in Q2. Monetary policy was front-loaded. The Bank of Canada has signaled its monetary easing cycle is nearly over. The swaps market is pricing in another cut late this year.

AUD: The Australian dollar has a three-day rally in tow, matching the longest in two months. It traded firmly in the upper end of Tuesday's range yesterday and reached the session high in late dealings to $0.6515. It has tested the more formidable resistance near $.06550 area. While the $0.6600 area may offer psychological resistance, the next important chart area is closer to $0.6700. Meanwhile, the Australia's two-year discount to the US is recovering after falling to a new 12-month low slightly more than 70 bp earlier this month. The discount now is slightly less than 60 bp. But the differential story does not appear to be critical now. The rolling 60-day correlation between changes in the Australian dollar and the Dollar Index has been hovering around 0.55 for the past two months. The 30-day correlation has been fairly stable around 0.70-0.75 since late last month. 

MXN: For at least the third time this year, peso demand emerged on knee-jerk dollar spikes higher. On Monday, the greenback spiked above MXN19.34. It reversed lower and fell slightly below MXN18.95 on Tuesday and below MXN18.90 yesterday. It is edged now toward MXN18.8665 today. The low since last August was seen 10 days ago near MXN18.8250. Below there, nearby support is around MXN18.80, and a break could target MXN18.60. It is an important day for Mexico. The May trade balance is due shortly and the outcome of the central bank meeting will be known later in session. Although Mexico reported two monthly trade deficits in the first four months of the year, it recorded a surplus of a little more than $1 bln compared with a deficit of $6.44 bln in the January-April 2024 period. Exports have risen by about 3.8% year-over-year through April, while imports have risen a little more than 0.5%. Chinese data shows it exported about 188k vehicles to Mexico between January-April 2025, making it the largest destination after auto exports to Russia dried up. The mostly small, energy efficient cars Mexico is buying from China do not face US competition. Nor are the cars Mexico exports to the US, Chinese made. To put the figures in perspective, note that Mexico exported 1.11 mln vehicles (mostly to the US) in the first four months of this year, which is little changed from the same period in 2024. Domestic Mexican car purchases were about 475k in the Jan-Apr period, giving China about a 40% market share. Meanwhile, Mexico CPI through the first half of June remains above the upper end of the 2-4% target range. Still, officials are more concerned about the faltering growth, and the central bank is widely expected to deliver another 50 bp cut today, which would being the overnight rate target to 8%. We expect it to signal a moderation of the easing pace going forward after four half-point cuts. The swaps market anticipates a terminal rate near 7.5%. 

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