Week Ahead: US Liberation Day Redux after Jobs Data Reinforce Fed's Patience, and RBA to Cut

[Redator]

Fresh off judicial victories, and achieving a cease fire between Israel and Iran, the Trump administration is on the verge of closing its initial chapter in its dramatic changes of America's foreign economic policy. The 90-day hiatus since Liberation Day comes to an end in the week ahead. Ahead of it, President Trump has indicated letters will go out to individual countries to announce the new bilateral tariff that will be imposed on US importers of their goods. 

The impact of the tariffs so far seems limited, but there are some preliminary signs of pass through. In April and May, US import prices, excluding oil, rose by an average of 0.3%. In the previous four quarters, they rose by an average of 0.1%. Federal Reserve Chair Powell has been explicit. The tariffs are expected to boost US measured inflation in the coming months, and that if it weren't for the tariffs, the Fed would likely have continued to cut rates this year. At the same time, the continued resilience of the US labor market underscores salience of the Fed's patience. Still, a September rate cut remains the most likely scenario. In a light week of economic data, the Reserve Banks of Australia and New Zealand meet. The former is expected to cut, but RBNZ is expected to stand pat, even though its easing cycle is not over. 

US

Drivers: The bearish dollar narrative appears based on four factors. First is the adjusting of positions and hedges away from the over-weigh dollar and US equity exposure that dominated international portfolios coming into this year. Second, is the Trump administrations penchant for tariffs even on countries that enjoy free-trade agreements with the US or have trade deficits with America. The US has shown itself to be unreliable. Third, the administration's "imperial presidency" and belief that monetary policy should be accountable to the executive branch. Fourth, a recognition that the Federal Reserve will be resuming its rate cuts around the time other G10 countries finish their easing cycle, or nearly so. 

Data: The high frequency economic calendar is between last week's soft employment report and next week's CPI (likely ticked up) and retail sales (which fell in April and May). May's consumer credit is due, but despite elevated household debt stress levels, consumer credit rose by nearly $17.9 bln in April, more than the cumulative credit extended in Q1. The minutes from June's FOMC meeting will be released. Since then, many in the market seem to be giving less weight to the 9 officials that that one or no cuts this year would be appropriate and instead focused on the two governors that were open to the July cut. The June federal deficit will be reported at the end of the week. The budget deficit in the first five months of the year was almost $654 bln, down from $692 bln in the same period last year. Bloomberg's latest survey found the median forecast for this year's deficit to be 6.5% of GDP vs 6.9% last year. 

Prices: If the Dollar Index is correcting the last leg down that began from the June 23 high near 99.40, the first Fibonacci retracement (38.2%) is near 97.55. The high last week was slightly above 97.40. The next retracement (50%) is around 97.90 and the 20-day moving average is about 98.00. On the other hand, a break of the July 1 low by 96.40 could signal the next push lower. Meaningful chart support might not be seen until closer to 95.00.

EMU

Drivers: The euro is being bolstered by portfolio shifts and the shift in interest rate differentials. Germany's two-year discount to the US fell by nearly 25 bp in the past couple of weeks and is below 190 bp for the first time in almost three months. However, it jumped back by almost 12 bp after the US jobs data, the biggest rise in nearly three months and returned to around 205 bp. It finished the week near 2.08%, the highest in two-and-a-half weeks. Germany's 10-year discount fell to near two-month lows around 160 bp and recovered to almost 176 bp before the weekend. 

Data: The eurozone economy struggles to maintain upside momentum after it grew by 0.6% quarter-over-quarter in Q1. The median forecast in Bloomberg's survey sees growth stagnating in Q2 and barely growing in Q3. The 0.2% decline in German factory orders reported at the end of last week does not auger well for Monday's industrial production. Yet for the last seven months, German industrial output has been alternative between monthly gains and losses and the swings have been mostly more than +/- 1%. For the pattern to hold, Germany industrial output must rise in May after a 1.4% decline in April. German industrial output rose a cumulative 1.2% in the first four months of the year. Italy, in contrast, which is often portrayed as the weak man in Europe, has reported a 2.9% cumulative rise in industrial production in Jan-Apr. It reports May figures on Thursday. Germany and France report May's trade balance. In the first four months of the year, the German surplus has averaged 17.5 bln euros (22.5 bln average in the year ago period). France has reported an average monthly shortfall of almost 7.1 bln euros (~6.2 bln in Jan-Apr 2024).

Prices: The (38.2%) retracement of the euro's leg up from the June 23 low (~$1.1455) is near $1.1685 and the (50%) retracement is near close to $1.1640. The momentum indicators have not turned lower, but they appear poised to do so in the coming days. On the upside, initial resistance may be around $1.19 but the $1.20 level is more important. 

PRC

Drivers: The PBOC is moderating the pace of the yuan's appreciation. Its chief tool is setting the dollar's daily reference rate. The dollar is allowed to move 2% from fix but rarely does. Trading platforms also reject prices that are or imply a move outside of the band. Since this year's dollar high was seen on April 10 slightly above CNY7.35, officials have gradually allowed the greenback to fall a little through CNY7.16, a 2.6% decline. Officials appear to be trying to slow the pace of the yuan's appreciation.

Data: Most of China's high-frequency data do not have a fixed schedule but the CPI and PPI do. They will be released early Wednesday in Beijing. We argue that the deflation in producer prices is a symptom of over-investment, while the deflation in consumer prices is partly a reflection of this (see autos, for example), but also the decline in food prices. June lending figures will likely be released during the week. Through May, aggregate lending is up about 25% year-over-year, but it seems to not have been translated into stronger activity. It is running harder to stay in the same place. 

Prices:  A broader dollar recovery will do the heavy lifting for Chinese officials. The CNH7.15 area may hold, and the dollar could work its way back to CNH7.1750, and possibly CNH7.20. The onshore yuan trades inside the offshore range (~CNY7.1550-CNY7.19).

JAPAN

Drivers: The yen was the weakest G10 currency in Q2, rising by about 4.1% against the US dollar. The Bank of Japan's ability to continue to normalize monetary policy has been stymied by the weaker growth profile and the uncertainty surrounding the impact of US tariffs. The role of US tariffs and threats to the Federal Reserve's independence has seen the relationship between US yields and the yen loosen. The rolling 30-day correlation of changes in the exchange rate and 10-year Treasury yields was in the 0.50-0.70 area throughout Q1 25 and spent most of April and May below 0.30. In June, it reached almost 0.50 and is now around 0.40. As the exchange rate's correlation with US rates improved, its correlation with the Dollar Index slackened. It was above 0.90 for most of May and eased to nearly 0.80. It had fallen to a three-year low in February slightly above 0.20.

Data:  Japan reports May labor earnings first thing Monday. Japan previously surprised economists my reporting a decline in May retail sales (-0.2% vs. median forecast in Bloomberg's survey of a 0.3% increase). Adjusted for inflation, on a year-over-year basis, labor earnings have fallen every month this year. Consider April. Real cash earnings for 2% lower year-over-year. In April 2024, they were down 1.2% year-over-year and in April 2023, real cash earnings were 3.2% less than the previous April (2023), when they were down 1.7% year-over-year. Japan also reports its May current account. Japan runs a current account surplus but a trade deficit. In April, the current account surplus was JPY2.26 trillion (~$15.6 bln), with an almost JPY33 bln trade deficit. Japan also reports June PPI. It eased by 0.2% in May for a 3.2% year-over-year pace. Producer prices may have peaked at 4.3% in February and March.

Prices: The greenback’s gains after the jobs data reached the (50%) retracement target of the dollar's reversal on June 23 when it poked briefly above JPY148. That retracement objective was JPY145.35. The next retracement (61.8%) is near JPY146.00, and the band of resistance may extend toward JPY146.20. On the downside, the JPY144.00 offers the first level of support and below that is the JPY143.50-65 area. 

UK

Drivers: The UK economy may go from the strongest in the G7 in Q1 to the weakest in Q2. Labour, which won a landslide election a year ago, is being torn by the shift to the right by the Starmer government, which has been forced into a series of policy reversals. A government shake-up is a normal course of events, but it may be resisted until after the summer. Sterling appreciated more than 6% in Q2 and reached its best level since 2021. Sterling's strength is a function of the US dollar's weakness. Sterling's inverse correlation with the Dollar Index in near 0.88, the upper end of where it has been since before Covid. 

Data: The UK reports May GDP and the details. The economy contracted by 0.3% in April, March's 0.2% expansion in full and beginning Q2 on soft footing. The median forecast in Bloomberg's survey is for a 0.1% expansion in May. In April, contractions were reported in industrial production (-0.6%, led by a 0.9% decline in manufacturing), services (-0.4%) and an almost doubling of the trade deficit (-GBP7.03 bln vs.-GBP3.7 bln). 

Prices: The Starmer-Reeves drama spurred a tumble in sterling from a multi-year high on July 1 near $1.3790 to slightly below $1.3565 the following day. In so doing, sterling met the (50%) retracement of the rally from the June 23 low (~$1.3370). The momentum indicators are turning lower. Provided the $1.3700-10 area hold, sterling could move toward the (61.8%) retracement, which is about $1.3530. A break of that could see a push into the $1.3470 area.

CANADA

Drivers: At the end of January, the rolling 30-day correlation between the Dollar Index and the greenback's exchange rate against the Canadian dollar was below 0.20. It increased steadily and reached nearly 0.80 in the second half of May. It remains 0.70. Prime Minister Carney created a bargaining chit over the digital tax, and it seemed to be cathartic. US-Canada trade talks got more energy, and a deal is hoped to be finalized by July 21. 

Data: The highlight of the week comes at the end, with the June employment report. Canada's labor market is steadily weakening. The unemployment rate was 5.70% at the start of 2024 and 6.60% this past January and reached 7% in May. The participation rate was 65.6% in January 2024 and 65.3% in May 2025. Canada created about 60.7k jobs in the first five months of the year (vs 165k in the Jan-May 2024 period). Of those jobs, almost 43k were full-time positions (55.4k in the first five months of 2024).

Prices: The Canadian dollar was the second strongest G10 currency last week, rising by about 0.65% against the US dollar. It was edged out of the top spot by the Swiss franc, after the Swiss appear to have won a carve out from the expected US tariff on pharma. The Canadian dollar often trades better in a firm US dollar environment than a weak one. It dipped below CAD1.3560 to appear the year's low near CAD1.3540 set in the middle of last month. Below there, the CAD1.3500 area may offer a respite. The momentum indicators have turned down and the five-day moving average is below the 20-day moving average, yet the unfolding of corrective forces could signal greenback upticks into the CAD1.3650-80 region. 

AUSTRALIA

Drivers: The Reserve Bank of Australia is seen to be the most dovish G10 central bank in H2 25, with at least three rates cuts fully discounted. Yet, the Australian dollar reached a seven-month high in late June. Here, too, it is more about the US dollar. Changes in the Australian dollar and the Dollar Index inverse correlation is a little more than 0.75. It is not beyond around 0.80 in a year. In early February, before the US tariff bludgeon was threatened, the inverse correlation was less than 0.35.

Data: The Reserve Bank of Australia and New Zealand meet on July 8 and 9, respectively. There is little doubt in the market's mind that the RBA will deliver the third quarter-point rate cut of the year. It will bring the cash target rate to 3.65%. The futures market has at least two more rate cuts discounted for this year. The RNBZ is a different story. It cut its cash rate by 125 bp in three moves starting last August and delivered another 100 bp of cuts in this year's three meetings. The swaps market is pricing in almost a 25% chance of cut, which might underestimate the risks. The RBNZ is more likely to surprise than the RBA.

Prices: The Australian dollar buyers hesitated in front of $0.6600. The momentum indicators are stretched but do not rule out another push higher. Still, ahead of the weekend, it posted its lowest close of the week (~$0.6550). If the Aussie is retracing the rally since June 23 (~$0.6375) it must convincingly break $0.6535 to target a little above $0.6500 where the (38.2%) retracement is found. The 20-day moving average is closer to $0.6520. The next retracement (50%) is around $0.6480.

MEXICO

Drivers: Despite the fact that Mexico's inflation is above upper end of the 2-4% target, the central bank delivered its fourth consecutive half-point rate cut in late June, the Mexican peso hardly wobbled and may a new 10-month low within 24-hours of the decision. Even with the rate cut that brought the target rate to 8%, the carry against the dollar is sufficient to maintain one of the most lucrative trades of H1. The total return (currency plus interest rate pick-up) returned more an 16% in H1. Moreover, the three-month implied peso volatility is about 10.00%, lower than Scandis and Japanese yen in the G7 space, 

Data: Mexico reports June vehicle production and exports but the highlight is the June CPI and industrial production, which illustrate the conflicting forces the central bank and investors are navigating. Based on the CPI for the first half of June, the risk is that for the month as a whole, headline and core CPI edge higher, with more distance between it and the 4% threshold. Industrial output eked out almost a 0.1% gain in April. Vehicle production fell by 4.6% in April before rebounding by nearly 11% in May. The 24-month rolling correlation between changes in industrial output and vehicle production is mostly positive, as one would suspect, it was negative since early 2024, but turned positive, albeit slightly earlier this year.

Prices: The dollar posted a break outside down day after the US employment report. It traded om both sides of last Wednesday's range and settled below its low on Thursday. Ahead of the weekend, the greenback extended its decline to about MXN18.6150, the lowest since last August. We have identified the MXN18.60 area as the next immediate target and have suggested a break could signal a move toward MXN18.40. We suspect it could draw closer to MXN18.20 in the slightly longer term. Resistance is seen in the MXN18.82-MXN18.85 area. 

                                                                                   

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