Dollar Stabilizes after Yesterday's Shellacking but Finds Little Traction

[Redator]

Overview: The US dollar has steadied today after yesterday's shellacking that saw it fall to new multiyear lows against the euro and sterling and 10-year lows against the Swiss franc. The news stream is somewhat more supportive today, with trade deals said to be in the works, in addition to the confirmation/clarification of an agreement with China. The US got an exemption from the OECD's Pillar 2 corporate tax reform, and the onerous "revenge tax" of Section 899 of the budget proposal will be dropped. There is talk that the postponement of the so-called reciprocal tariff may be extended for the current deadline of July 9. While the greenback has steadied it has found little traction and remains largely pinned near yesterday's lows.

Equity markets have responded more favorably. Most of the markets in the Asia Pacific region advanced less by the more than 1% gain in Japanese indices. China, Hong Kong, South Korea, and Australia were exceptions. Europe's Stoxx 600 is up nearly 1%, and if today's gains are sustained, it would be the first back-to-back advance in three weeks. US index futures are up 0.2%-0.3%. Benchmark 10-year yields are firmer. The two basis point rise in the JGB put the yield at a new high for the week near 1.43%. European yields are mostly less than one basis point higher, but enough to lift the 10-year German Bund yield to a new high for the week (~2.57%). The 10-year Treasury yield is about three basis points higher at 4.27%. It is off nearly 8 bp this week. Gold has broken down to a new low for the week, near $3282. It is also a new low for the month. August WTI continues to chop inside Tuesday’s range (~$64-$67.85). It is inside yesterday's range as well (~$64.65-$66.40). 

USD: Neither the US-China deal, the other ten trade deals that the Commerce Secretary, nor the likely dropping of the so-called "revenge tax" in the budget, have been sufficient to give the dollar much of a lift. The Dollar Index is pinned near the three-year low set yesterday around 97.00. It has been as high as about 94.40 today, but it is back hovering by its lows in late European morning turnover. There is much attention on today's PCE deflator, but economists have a good handle on it after the CPI and PPI were released earlier this month. The Fed targets the headline PCE deflator, though many journalists insist on calling the core rate the preferred measure, though it is not clear what that means. In any event, the headline and core measures are seen rising by 0.1%, which would lift the year-over-year rates to 2.3% (from 2.1%) and 2.6% (from 2.5%), respectively. More importantly, we suggest, is the slowing of consumption. Note that in yesterday's Q1 GDP update, consumption growth was chopped to 0.5% from 1.2%. In April, monthly personal consumption rose by 0.2% and the median forecast in Bloomberg's survey is for a 0.1% gain. It follows an erosion of consumer confidence, rising household debt stress levels, and a slowing in job growth. Adjusted for inflation, through May, real consumption is rising at half of the pace seen in the first five months of 2024. Ahead of the data, the Fed funds futures market is discounting about a 21% chance of a July cut. A week ago, there was around a 16% chance. At the end of May, before Governors Waller and Bowman put July on the table and President Trump's public criticism of Chair Powell and indication he could name a successor six months before the end the Chair's term ends, the market was discounting a 28% chance of a July cut.

EURO: Talk of option-related demand may have helped explain euro's surge through $1.17 yesterday. Between yesterday and July 1, the DTCC showed nearly six billion euros in options were expiring. The euro peaked in early European trading near $1.1745. It approached in the NY afternoon but stalled. Today it has mostly traded in around a 20-tick range in either side of $1.17. The upper Bollinger Band is near $1.1710 today. A break of $1.1680 could see short-term momentum traders move to the sidelines, which could send the euro back to the $1.1650 area, where there are 2.1 bln euros expiring Monday. Coming into today, according to Bloomberg prices, the euro has not fallen since last Tuesday June 16, its longest advance in nearly a year. France and Spain reported June CPI ahead of next week's estimate of the aggregate figures. France's harmonized measure CPI rose by 0.4%, twice what was expected but the year-over-year rate rose to 0.8% from 0.6%. Spain's rose by 0.6% and the year-over-year rate rose to 2.2% from 2.4%. The eurozone's June CPI is expected to increase by 0.2% for an unchanged year-over-year rate of 1.9%. 

CNY: Yesterday saw the dollar fall to a new low for the year (~CNH7.1525) and recover slightly above CNH7.17 in early European turnover. The greenback drifted lower and was fraying the CNH7.16 area in late turnover. It has steadied today and has traded within yesterday's range. The PBOC set the dollar's reference rate at CNY7.1627 (CNY7.1620 yesterday and CNY7.1695, a week ago). Squeezing HK liquidity through its intervention to defend the peg, the HKMA may have helped reduce some upside pressure on the yuan by discouraging short HKD/long yuan plays. China reported May industrial profits fell 1.1% in in the first five months of this year compared with the Jan-May 2024 period. Separately China confirmed the trade agreement with the US. The lifting of some US sanctions and renewed supply of ethane will take place after the rare earth and magnet shipments begin, according to reports. 

JPY: With only shallow bounces, the dollar fell from almost JPY146 on Wednesday to JPY143.75 yesterday. The driver was the general weakness of the greenback and the decline in US rates. The greenback settled below the 20-day moving average (~JPY144.55) for the first time in two weeks. It is trading quietly today in the narrowest range of the week (~JPY144.20-JPY144.80). Tokyo price pressures eased slightly more than expected this month. The headline CPI rose 3.1% year-over-year compared with a 3.4% gain in May. The core measure, which excludes fresh food, eased to 3.1% from 3.6%. Excluding fresh food and energy Tokyo's CPI also slipped to 3.1% from 3.3%. This can be expected to be largely duplicated on the national level. The chances of a rate hike at the end of the July central bank meeting remain negligible, according to the swaps market. Some surveys are beginning to detect a push of the anticipated rate hike into 2026. Japan also reported May retail sales. They unexpectedly fell (-0.2%) compared with expectations for a 0.3% increase. It followed a 0.7% rise in April. The cumulative rise in retail sales in Q1 was 0.4%. In GDP terms, Japanese consumption has been more stable that government spending and private investment. The Japanese economy contracted by 0.2% at an annualized pace in Q1 and looks to have done only slightly better in Q2. Separately, Japan reported a steady unemployment rate in May (2.5%) but a decline in the job-to-applicant ratio to 1.24 from 1.26. This matches the lowest since early 2022. 

GBP: Sterling's four-day advance is on the line. It rallied four cents off Monday's low that saw it approach $1.3370 on Monday. It settled above the upper Bollinger Band yesterday (~$1.3725 today). Above the $1.3770 seen yesterday, the $1.3840 could be next. It did not trade below $1.3700 in North America yesterday, where GBP560 mln options expired. It is trading mostly between $1.3720 and $1.3750 so far today. A break of $1.3700could spur some position adjusting that takes sterling to $1.3650 and better support. 

CAD: The Canadian dollar's 0.7% gain yesterday was the largest this month. The US dollar was turned back from almost CAD1.38 on Monday and slipped below CAD1.3620 yesterday. It is holding above CAD1.3625 today and has been capped near CAD1.3650. Options for $875 mln expire at CAD1.3600 today. This year's low was recorded on June 16 near CAD1.3540. Despite the Canadian dollar's gains, it is a laggard. The only G10 currency to do worse this month is the yen, which has fallen by about 0.2%, while the Loonie has risen by around 0.7%. Year-to-date, it is up 5.4%. It is the least of the G10. The Australian dollar is a close second. It has appreciated almost 5.8%. 

AUD: The Australian dollar reached a seven-month high yesterday, almost $0.6565. It was the culmination of a four-day rally. It surged 3% from Monday's one-month low (~$0.6375) to the new high yesterday. It frayed its upper Bollinger Band, which is found near $0.6550 today. A break of $0.6540 could see $0.6520. Yesterday's low was near $0.6500. The Aussie's rally does not reflect a change in view on monetary policy. The futures market is the most confident of a cut at the July 8 meeting (~95%). Moreover, the market has been boosting the magnitude of this year's rate cut for the past five sessions. It is now anticipating 81 bp of cuts between now and the end of the year, up from 74 bp a week ago. 

MXN: The peso took yesterday's anticipated rate cut in stride. As widely expected, Banxico delivered its fourth consecutive 50 bp rate cut. The central bank has not finished the easing cycle but signaled a more moderate pace going forward. And for good reason, it has cut the overnight rate target by 200 bp this year and inflation is north of the 2-4% target range, even if it does not appear to be still accelerating. Yesterday's session low for the dollar was recorded in the European morning near MXN18.85. It reached a low after the rate cut of slightly below MXN18.86. Today, the greenback is in a roughly MXN18.86-MXN18.8950 range. The range may be extended a little to the upside today, but peso buying does not appear exhausted. 

Disclaimer