The Greenback is Finishing the Month Quietly, while PBOC Fixes the Dollar at New Lows for the Year

[Redator]

Overview: The US dollar is consolidating in mostly narrow ranges against the G10 currencies. It is trading mostly softer against emerging markets currencies. The news stream features further progress of the US budget bill, which dropped the onerous "revenge tax" (Section 899), and there is talk of as many as a dozen trade framework agreements in the pipeline, ahead of the July 9 deadline. Canada dropped its threat on collecting funds today from its digital service tax, and this seemed to have jump started talks with the US. A deal is hoped for by July 21. China's PMI showed marginal improvement, and the PBOC set the dollar's reference rate at a new low since last November. 

After jumping more than 3% last week, the MSCI Asia Pacific equity index rose further today. Among the large bourses, Hong Kong, Taiwan, and India did not participate in the follow-through buying today. Europe's Stoxx 600 is paring last Friday's 1.1% gain, while US index futures are around 0.5%-0.7% better. Bond markets are firm. The JGB 10-year yield slipped slightly, while yields are softer in Europe. The UK Labour government made more concessions ahead of tomorrow's vote on disability welfare reforms to address the objections of around 120 Labour MPs. The 10-year Gilt yield is off almost two basis points, but the agreement seems to make Chancellor Reeves’ position untenable. The 10-year US Treasury yield is off a little more than two basis points to 4.25%. August WTI is consolidating in its recent range (~$64.50-$65.80). Gold first slipped to a new low for the month (slightly below $3249) before recovering to almost $3300, where it stalled. 

USD: The Dollar Index finished last week near session highs but still around the lows since March 2022. It looks weak but stretched. It settled inside the lower Bollinger Band (slightly below 97.10 today) after closing below it last Thursday. For high to low last week, it fell by about 2.4% and that was with a five-day drop arrested ahead of the weekend. It remains trapped in its trough today, unable to resurface above 97.30, so far. The year-end expected effective Fed funds rate also fell over those five sessions that DXY was falling and also steadied ahead of the weekend. The holiday-shortened week begins slowly with the Chicago PMI and Dallas Fed's manufacturing survey. The highlight is Thursday’s release of the June employment report. The slowing of the labor market is expected to be evident, with nonfarm payrolls slowing to around 116k from 139k in May, and the unemployment rate is seen ticking up to 4.3% from 4.2%. Auto sales are expected to have slowed further in June. It would be the third consecutive monthly slowing after the surge in March to beat the tariffs brought forward purchases. The last time US auto sales slowed for at least three consecutive months was in 2021. In terms of Treasury supply this week, there are no coupons being sold, only bills. Tomorrow, Fed Chair Powell is at an ECB conference where he will be on a panel with ECB's Lagarde, BOE's Baily, BOJ's Ueda, and Bank of South Korea's Rhee.

EURO: A late bout of profit-taking did not prevent the euro from extending its advance for the seventh consecutive session ahead of the weekend. It is steady to firmer today and has not posted a losing session since June 17. It reached a marginal new high since September 2021 (~$1.1755) and settled outside the upper Bollinger Band (~$1.1745 today) for the third consecutive session. It is trading mostly between $1.1710-50 today. The eurozone M3 money supply rose 3.9% in May year-over-year (same pace as April) and matches the strongest growth since late 2022. Credit growth to the private sector increased slightly (2.4% vs. 2.3%). Germany is among the leaders. Berlin projects this year's budget shortfall will be around 82 bln euros, up from 33 bln euros last year. The government estimates the deficit will rise to 126 bln euros by 2029. It is not just the result of increased military spending. Germany aims to boost infrastructure spending by 55% this year to 115 bln euros. The markets will be more sensitive to tomorrow's preliminary estimate of June CPI. France and Spain reported at the end of last week, and German and Italy did so today. German states CPI seems consistent with a 0.1%-0.2% rise in the harmonized measure, due shortly, which could see the year-over-year rate 2.1%-2.2%. Italy's CPI rose by 0.2% for an unchanged year-over-year rate of 1.7%. Separately, Germany reported an unexpected 1.6% drop in May retail sales (0.5% expected in Bloomberg's survey). April's revision to -0.6% from -1.1% offered little consolation. 

CNY: The dollar stabilized against the offshore yuan ahead of the weekend after setting a new low for the year last Thursday (~CNH7.1525). The greenback finished last week firmly, near CNH7.1715 and was little changed on the week (<0.15%). The US dollar is trading in last Thursday's range (~CNH7.1525-CNH7.1745). The reference rate was set at CNY7.1586 (CNY7.1627 previously). That is the lowest since last November. China reported its June PMI earlier today. It was little changed. The manufacturing PMI edged up to 49.7 from 49.5. It is the third consecutive month below the 50 boom/bust level. The non-manufacturing PMI was slightly firm at 50.5 from 50.3. It finished last year at 52.2. The composite PMI rose to 50.7. Lastly, there is talk swirling around about changes in Beijing, with some of President Xi's military appointments being replaced. 

JPY: The dollar was confined to the narrowest range in a couple of months before the weekend. It traded well within Thursday's range (~JPY143.75-JPY145.25), which may still have near-term significance; pointing the near-term direction. It remains in that range today. The dollar has been alternating between weekly gains and losses in a sawtooth pattern since mid-May that has left it net-net little changed. Japan's industrial output has disappointed this year. In the first four months, it rose by a cumulative 0.3%. It rose by 0.5% in June, which disappointed expectations. The median forecast in Bloomberg's survey was for a 3.5% surge. Capital equipment rose 5.6% and autos and parts rose 2.5%, while aircraft parts tumbled 16.3%. The highlight of the week is tomorrow's Tankan Survey. It will likely reflect the uncertainty over the US tariff policy. Sentiment is expected to have softened. A bright spot may be capex plans, which are expected to rise from 3.1% in the last survey. Anticipated capex averaged 9.3% last year, 10.9% in 2023, and 15.4% in 2022.

GBP: Sterling's four-day advance ended before the weekend. It still finished almost 2.0% higher on the week to record its third weekly advance in the past four weeks. After closing above the upper Bollinger Band for two consecutive sessions, sterling settled barely inside it ahead of the weekend, (~$1.3740 today). A break of $1.3680 could spur losses toward $1.3600 before the bulls are tested. The market paid little attention to the final look at Q1 GDP. That said, note, consumption rose by 0.4%, instead of 0.2% and business investment rose by 3.9%, not 5.9%, and both export and import growth was slightly less than initially estimated. The economy led the G7 growth in Q1 (0.7% quarter-over-quarter), but Q2 is a different story. It may be at or near the bottom. The median projection in Bloomberg's survey is for 0.2% growth and some work is needed to achieve that after April's monthly estimate showed a 0.3% contraction. 

CAD: Greenback found support near CAD1.3620 last Thursday and consolidating quietly until President Trump ended the trade talks with Canada over Ottawa's insistence on a digital tax. We suspect that Prime Minister Carney was pushing this to gain a new bargaining chit, and sure enough today, when the first payment was due, Canada withdrew the measure. In exchange, the US and Canada will resume negotiations, with an eye to reach an agreement by July 21. In reaction to new tariff threats, the US dollar rose to almost CAD1.3760, and Canadian equities were sold. The greenback was quickly pushed back and settled below CAD1.3700. It remains below there today and traded as low as CAD1.3655. Canada has a quiet week of market-sensitive data, and it does not release the June labor report until July 11. The markets do not put much weight on the PMI, though given the trade tensions with the US, May's merchandise trade balance will be of interest. However, it will be overshadowed by the US employment report at the same time on Thursday. 

AUD: The Australian dollar staged an impressive recovery off the $0.6375 low set amid elevated uncertainty after the US bombed Iran. The recovery stalled near $0.6565, a new high for the year. It consolidated ahead of the weekend and retreated back toward $0.6500. It is confined to a little more than a quarter-cent range between roughly $0.6525 and $0.6555. Australia reported private sector credit growth rose by 0.5% in May, after the 0.7% increase in April, which was the strongest since mid-2022. May retail sales and building approvals will be reported Wednesday, and both are expected to improve sequentially. They will be followed by May's merchandise trade balance, which is expected to have narrowed, and household spending. While the high frequency data may have headline risk, the market is very confident of a rate cut next week. It is 80% discounted in the futures market, which anticipates at least two more cuts this year. 

MXN: Less than 24-hours after the central bank cut the target rate by 50 bp for the fourth consecutive time, the Mexican peso rose to a new high since last August. Today, the dollar drew closer to the MXN18.80 area, which we have highlighted. A convincing break could target MXN18.60 next. On the upside, an initial bounce could carry the greenback toward MXN19.05. Even with last week's rate cut, the interest rate differential and weak greenback sentiment makes long peso carry trade against the dollar attractive. The swaps market is pricing in another quarter-point cut in the second half. This week's data, which includes May remittances, IMEF surveys, and domestic vehicle sales, may be more important to economists than market participants. Mexico has replaced Russia this year as the largest destination of Chinese auto exports, and reports suggest it has taken about a 30% market share. Preliminary data suggests Chinese brands outsold US brands in the first four months of the year, which partly reflects the adoption of inexpensive EVs.

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