Dollar Bears Taking the Day Off?

[Redator]

Overview: The dollar's latest leg down began with the President Trump's heightened attacks on the Federal Reserve's conduct of US monetary policy on June 23. That move may be over. Perhaps helped by stronger than expected data yesterday and the rise in US rates. US rates have edged up further today, and the greenback is firmer against the G10 currencies. In a firmer US dollar environment, the Canadian dollar typically outperforms on the crosses and today is no exception. The Canadian dollar is off marginally. On the other hand, the yen is the weakest, off around 0.50%. Trump's protest that Japan does not buy rice from the US seems factually confused, but the end of the hiatus from the reciprocal tariffs is a week away and investors are on edge. Most emerging market currencies are also softer today, but foreign equity purchases and dollar sales by Taiwan exports saw the Taiwanese dollar surge. The central bank may have moved to cap its gains. The opposite took place in Hong Kong, where the HKMA intervened to cap the US dollar. 

Benchmark 10-year yields are mostly 2-5 bp firmer in Europe. German Bunds are a notable exception and the yield is flat. The 10-year Gilt yield has risen by five bp despite speculation that the BOE may reduce its sale of bonds from its balance sheet. The 10-year Treasury yield, which dipped below 4.20% yesterday for the first time in two months, is trading near 4.28% now. It has not traded above 4.30% in a week. Equities were mixed in Asia Pacific but are posting their first gain of the week in Europe. The Stoxx 600 is up almost 0.50% in late European morning turnover. US index futures are firm. Gold is consolidating in quiet activity after recovering by about $110 from Monday's low to Tuesday's high. For the sixth consecutive session, August WTI is chopping between roughly $64.50 and $66.50. 

USD: The combination of stronger than expected US data, Fed Chair Powell's warning of coming price pressures, and the backing up of US rates, saw the Dollar Index recover from early losses that carried it to the lowest level since February 2022 (~96.35). It is firm but holding below 97.00. We suspect it needs to resurface the 97.55 area to be notable, and even then, the 98.25 area may offer more formidable resistance. The data focuses squarely on the US labor market. While the employment component of the June manufacturing ISM weakened (45.0 vs. 46. 8), the May JOLTS report showed a larger than expected increase in job opening, a small increase in the quit rate, and a little decline in the layoff rate. Accommodation and food services accounted for the bulk of the increase in job openings in May and may reflect the discouragement of legal and illegal immigration. Today, attention turns to the Challenger Jobs Cuts, and the often more market-sensitive ADP private jobs estimate. In the first five months of the year, the ADP has estimated that private sector job growth averaged almost 103k. The BLS estimated that the private sector payroll growth average 117k in the January through May period. The average median forecast in Bloomberg surveys for private sector employment was near 137k in the first five months of 2024. ADP has been closer than economists to the government's estimate, on average. The June report is tomorrow due to Friday's holiday. It is expected to see a softening sequentially in job growth and hourly earnings, while the unemployment rate may tick up to 4.3% from 4.2%.

EURO: After reaching its best level since September 2021 (~$1.0830) in late European morning turnover years, the euro was sold back to almost $1.1760. Buying emerged on the pullback and it settled above $1.18. It extended its advance. The euro has not fallen since June 17. That winning streak is at risk today. It has barely traded above yesterday's settlement and looks poised to test initial support in the $1.1755-60 area. A break could spur a test on $1.165-$1.1700. An under-appreciated fact is that despite the eurozone's sluggish growth since Russia's invasion of Ukraine, the unemployment rate remains near the record low under monetary union. The May report out earlier today put it at 6.3%. It has been 6.2%-6.3% since last August.

CNY: The dollar recovered from CNH7.15, a new marginal low for the year to reach new session highs near midday in NY near CNH7.1650. It has edged a little higher today and is near CNH7.1680. Technically, it needs to re-establish a foothold above CNH7.1750 to be notable. After setting the dollar's fix 0.13% lower over the past two sessions, the PBOC increased it today by 0.02% to CNY7.1546 (CNY7.1534 yesterday). Separately, for the second time in two weeks, Hong Kong Monetary Authority was forced to intervene as the greenback approached the upper end of the band. It bought about HKD20 bln, around twice as much as last week's operation. However, one-month HIBOR was little changed at 0.73% despite the withdrawal of liquidity, which warns the pressure may continue. Caixin finishes its June PMI release tomorrow with the services and composite reports. Even if the services reading ticks down, the composite could rise back after the 50 boom/bust level after slipping below it (to 49 6) in May, which was the first sub-50 reading since the end of 2022.

JPY: The seven-basis point increase in the US 10-year yield yesterday from high to low was not sufficient to lift the greenback against the yen yesterday. But it appeared to help fuel a full nearly full yen recovery off the ~142.70 low. It has pushed slightly above yesterday's high in the European morning to around JPY144.25, supported by firmer US rates. A move above JPY144.75 would lend credence to ideas that the dollar's leg down from the June 23 high (~JPY148) is over. Part of the new US tariff threat (30-35%) against Japan is predicated on a misunderstanding of the facts. Japan, in fact, imported $300 mln of rice from the US in 2024 and is on track to import more from the US. Under the WTO agreement, Japan is allowed to import 770,000 tons of rice without tariffs annually. In May, reports suggest that the US accounted for about 3/4 of the imported tariffed rice. Japan sees the weekly MOF portfolio report and the final services and composite PMI tomorrow. The market is not often sensitive to these data points. Bloomberg economists continue to underscore the risk of a July BOJ rate hike. The swaps market is incredulous. It does not even have a single basis point discounted. The swaps market has a little less than 14 bp of tightening discounted for the remainder of the year, which is lower end of where it has traded since mid-May. It has not discounted more than 20 bp since early April.

GBP: Sterling reached almost $1 3790 yesterday, a level not seen since October 2021 near midday in London before being sold to a new session low slightly in front of $1.3700. It had already recovered to around $1.3740 before the government carried the closely watched vote in the House of Commons on disability reform. Sterling peaked in late dealing near $1.3750. It has come back offered today and has been pushed below yesterday's low (~$1.3700). Support is seen in the $1.3655-75 area. Prime Minister Starmer turned back the rebellion within his own party for the moment, but the political cost has yet to be paid. It was another reversal, and the government is caught between having to raise taxes or change the fiscal rule. Reeves looks to be increasingly in a no-win position. Adding to Reeves' challenge, the Office for Budget Responsibility admitted that the medium-term growth prospected were over-estimated (by an average of 0.3 percentage points at the two-year horizon and 0.7 percentage points after five years. On a cumulative basis over five years, the overestimation was 2.2 points on average. The slower the growth, the more potent the fiscal pressure.

CAD: The US dollar briefly traded below CAD1.36 before the North American open yesterday. Rather than sell the downside break, buying emerged and the greenback peaked near the middle of the session around CAD1.3665. It is firm today but holding slightly below yesterday's high. Monday's high was near CAD1.3700, and it may be the first test. The June manufacturing PMI will be released today. It is not a market-mover. It rose in the last five months of 2024 and fell in the first four months of this year. It rose in May, but at 46.1 remained well below the 50-threshold. In Bloomberg's survey (conducted June 20-25), the median forecast was for a 0.5% annualized contraction in Q2, which is an improvement from the 1% contraction seen previously.

AUD: The Australian dollar reached a new high since last November, a little below $0.6600 yesterday before the greenback's bounce pushed it back to almost $0 6560. It returned nearly to the highs in late North American dealings but has returned to $0.6560. A move below $0.6540-$0.6550 may signal the start of a consolidative/corrective phase. Australia reported a recovery in building approvals in May (3.2% vs. -4.1% in April, revised from -5.7%) and firmer retail sales (0.2% vs. flat in April, revised from -0.1%). The broader measure of consumption, household spending, which will be reported next week also picks up the slowing of the Australian consumer. The futures market has a little more than 85% chance of a cut at the July 8 central bank meeting, and slightly more than three cuts are fully discounted between now and the end of the year. The Reserve Bank of New Zealand meets next week, as well, but the swaps market has less than a 15% chance of a cut priced. 

MXN: The dollar's streak of recording lower highs and lower lows against the peso was extended to the sixth consecutive session yesterday. The greenback fell to almost MXN18.66, a new low since last August. Despite a recovery, the dollar's losing streak was extended for the seventh consecutive session. It is trading uneventfully in a narrow range, mostly between MXN18.73 and MXN18.7650. In the bigger picture, a break of the MXN18.60 area could signal a move toward MXN18.20 next. Mexico's auto sector is likely to come under more scrutiny as reports indicate that is has replaced Russia as the biggest destination for Chinese-made vehicles. There are also some concerns that China-based EV makers claim some vehicles are used though extremely low mileage and will export them to Mexico who will re-export them to the US. In Mexico, imported used cars face higher costs (tariff plus VAT, customs duties, and fees than new cars (not from the US or Canada). There are many barriers to then re-exporting those cars to the US. The US imposes safety and emissions standards, and imported used cars often require costly modifications to meet US rules. The Chinese vehicles Mexico imports are typically EVs priced 20-40% lower than comparable US, Japanese, or South Korean models, and load with popular features, such as panoramic sunroofs, large touchscreen computers, and driver assistance capabilities. 

Disclaimer