US Dollar Extends Recovery; Tariffs Loom but now August 1

[Redator]

Overview: After last week's US jobs data and anticipation of a firm CPI reading next week, US interest rates have firmed, and the dollar begins the new week on a firm note. Meanwhile, US tariff letters from the White House may begin being delivered today. Initially, it was signaled that some letter would go out before the weekend. In any event, July 9 may have lost some of its sting as the reciprocal tariffs are now said to go into effect on August 1. The US has struck deals with UK, Vietnam, and partially with China. Several Asian countries are thought to be close to deals. The greenback is firmer against all the G10 currencies, but the Swedish krona, which was underpinned by the stronger than expected preliminary June CPI. The US dollar is also trading firmer against nearly all the emerging market currencies. 

After falling by almost 0.3% last week, the MSCI Asia Pacific Index traded heavily earlier day. Nearly all the large bourses in the region slipped. South Korea and Singapore were notable exceptions. Europe's Stoxx 600 fell nearly 0.5% last week and is firm today. US index futures are softer, with the S&P futures off almost 0.5% and the Nasdaq futures down around 0.6%. Benchmark 10-year yields are mostly 1-2 bp higher in Europe. UK 10-year Gilts are unwinding more of last week's jump and the yield is off 1.5 bp. Swedish bonds have been punished by the higher inflation read and are up over five basis points. The 10-year Treasury is firm near 4.35%. The US sellers $58 bln three-year notes tomorrow, $39 bln 10-year notes on Wednesday and $22 bln 30-year bonds on Thursday. Gold is about 0.8% lower, trading near a five-day low below $3310 in Europe. August WTI initially fell on the OPEC+ 548k barrel a day increase in output in August (up from 411k barrel increases in May-July). It found bids slightly below $65.50 after gapping lower and is now back into last Thursday's range, near $67.00. 

USD: The Dollar Index traded in an exceptionally narrow range ahead of the weekend (~96.85-97.10). The multiyear low set last week was a little above 96.35. It breached 97.40 after the better-than-expected jobs data but did not sustain the upside momentum. It is knocking on the area in the European morning. A move above the 97.55 area could spur a move toward 97.90, where the 20-day moving average is found. DXY has not settled above the 20-day moving average since May 19. The US has a light economic diary this week. After the stronger than expected employment data, it will be hard to rebuild any meaningful speculation of a hike later this month. The focus is on the tariff letters, some of which may be delivered today. Treasury Secretary Bessent and Commerce Secretary Lutnick have suggested the July 9 deadline was extended to August 1. And a firm CPI reading next week may lead to more doubts about a September cut. The US 10-year yield slipped below 4.20% on July 1, a two-month low and recovered to almost 4.36% ahead of the long holiday weekend. Near-term risk may extend to 4.45%-4.50%. The US two-year yield rose from slightly below 3.70% to 3.90% after the employment report. There looks like potential back to 4.0% if not slightly above.

EURO: The euro set its multiyear high last week near $1.1830. It is consolidating and fell slightly below $1.1720 after the US jobs data. It is posting an outside day, trading on both sides of last Friday's range. The consolidative phase could morph into a correction on a break of $1.1685, arguably encouraged by the wider US interest rate premium. The eurozone reported the one notable release this week earlier today. May retail sales fell by 0.7%, nearly offsetting in the full the cumulative monthly prints in the first four months of the year (0.9%). The June composite PMI rose to a three-month high, but consumption seems to be struggling, though that is a larger economic category than retail sales. The reason many economists expect the eurozone economy to have stagnated in Q2 after expanding by 0.6% in Q1 stems from less government spending not consumption. German factory orders disappointed before the weekend (-1.4% month-over-month vs 0.2% median forecast in Bloomberg survey), but the upward revision in the April series (1.6% from 0.6%) offered compensation. However, earlier today, German reported a 1.2% surge in May industrial output after a revised 1.6% decline in April (initially -1.4%). It rose by a cumulative 2.6% in Q1.

CNY: The dollar held barely above CNH7.15 last week and in the recovery on the back of the employment data, reached about CNH7.1740. It has edged up to about CNH7.1785 today to take out the 20-day moving average for the first time in two weeks. The next nearby target is around CNH7.1925. The PBOC set the dollar's reference rate at CNY7.1506, a new low since last November (CNY7.1535 before the weekend and CNY7.1586 last Monday). This week's main economic report from China is Wednesday's price data. China may end a four-month period in which CPI had fallen on a year-over-year basis. It has been down 0.1% year-over-year, March through May, and may be flat in June. The disinflation in goods prices may not be so much a function of demand as it is over-investment and the market-share focused competition. The decline in food prices does not appear to have been triggered by a decline in demand. More assuredly than CPI ending a deflationary phase is that producer prices remain mired in its. The last time Chinese producer prices rose on a year-over-year basis was September 2022. Even if it moderates to -3.2% from -3.3% as the median forecast in Bloomberg's survey projects, it would be the second lowest print since July 2022.

JPY: The dollar reached a five-day high against the Japanese yen after jump in US rates in response to the June US jobs report. The gains have been extended today to almost JPY145.50, to meet the 50% retracement (~JPY145.35) of the greenback's slide since the June 23 high. The next retracement (61.8%) is near JPY146. That seems reasonable provided the JPY143.50-65 support area holds. Ahead of the weekend, Japan reported a 4.7% year-over-year surge in household spending (-0.1% in April). It was nearly 4x more than the median forecast in Bloomberg's survey. Earlier today, Japan reported a disappointing 1% rise in labor cash earnings in May from a year ago. The median forecast in Bloomberg's survey was for a 2.4% rise. Last May they had risen by 2%. However, when adjusted for inflation, real earnings were 2.9% below May 2024, when they had fallen by 1.3%. Japan reports May's current account tomorrow. The May surplus is expected to have widened, as it has for four of the past five May's. That said, the trade deficit may have widened. The trade balance typically deteriorates in May (16 times in the past 20 years). The median forecast in Bloomberg's survey is for a JPY524.4 bln deficit after a JPY32.8 bln shortfall in April. The swaps market sees virtually no chance of a rate hike at the BOJ meeting at the end of the month and has about 12 bp of tightening discounted before the end of the year. 

GBP: Sterling peaked last week near $1.3790, the best level since October 2021. The political drama drove it slightly below $1.3565 a day later. This met the (50%) retracement objective (~$1.3580) of the rally from the June 23 low (~$1.3370). It consolidated in the last two sessions and has approached last week's lows today. The next retracement (61.8%) is closer to $1.3530, and provided it holds below the $1.3700 area, it seems to be a reasonable initial target. In an otherwise quiet economic diary for the UK, the highlight is the May GDP report at the end of the week. It follows a 0.3% contraction in April. Economists will be looking for confirmation that after a 0.7% quarterly expansion in Q1, UK growth slowed to around 0.2% in Q2. 

CAD: The greenback came within spitting distance of the year's low against the Canadian dollar set in mid-June near CAD1.3540. It reached nearly CAD1.3555, last week's low after the US jobs report on July 3. The US dollar stalled and recovered to about CAD1.3615 before the weekend. It has extended its gains into the CAD1.3685 area today. In the CAD1.3650-60 area, the greenback met the (38.2%) of the US dollar's fall since June 23 and the 20-day moving average. The (50%) retracement is a little above CAD1.3700. The Ivey PMI, on tap today, typically does not elicit much of a market reaction, and it will likely confirm what we already know. The Canadian economy is struggling and might have contracted in Q2. The data highlight of the week comes at the end in the way of the June jobs report. It will likely what a continued slowing of the labor market. Canada added about 60.5k jobs in the first five months of the year compared with a 165.5k in the Jan-May period last year. Of those jobs, almost 43k this year have been full-time positions. In the same year ago period, Canada added 55.5k full-time jobs. The unemployment rate has risen to 7% in May from 5.70% in January 2024 and 6.3% last May.

AUD: The Australian dollar ran into determined sellers as it approached $0.6600 last week. It buckled today; taking out $0.6535 and nearing the (61.8%) retracement of its rally since the June 23 low found near $0.6480. The focus is on tomorrow's central bank decision. The futures market seemed fickle last Tuesday and Wednesday and shied away from a rate. However, confidence was regained in the last two sessions. A cut is nearly fully discounted again. A quarter-point cut brings the cash rate target to 3.60%. The futures market is pricing in a year-end rate near 3.05%. New Zealand's central bank meets on July 9. The swaps market sees about a 13% chance of a hike. If there is a surprise, it will be that the RBNZ cuts. It has already cut 100 bp this year, after 125 bp last year. Its cash rate target is 3.25%. Inflation looks stable at around 2.5% and growth looks to have slowed after the 0.8% quarterly expansion in Q1. The labor market is colling. Swaps are implying almost a 70% chance of a cut at the next meeting (August 20). The break of the $0.6030 area, last week's low and the (38.2%) of the rally from June 23 has already sent the New Zealand dollar through the (50%) retracement (~$0.6000) and targets the (6.18%) target near $0.5975.

MXN: The US dollar recorded a bearish outside session despite the employment report and firmer US rates. It traded on both sides of Wednesday's range and settled below Wednesday's low. Follow-through selling before the weekend saw the greenback slip a little closer to the MXN18.60 target as it continued to fray the lower Bollinger Band (~MXN18.60 today). The next target on a break of MXN18.60 may be near MXN18.40. The dollar has come back bid today and it is trading near MXN18.73 in European turnover. Initial resistance is seen in the MXN18.80-83 area. Mexico starts the week with June auto/light truck production and export figures. May production rose by nearly 11% to 358.2k, leaving it off nearly 30% from May 2024. Yet the average through the first five months is nearly the same as the Jan-May 2024 period. In May, vehicle exports jumped almost 17.2% to 301.1k vehicles (yes, 84% of output was exported). Exports have fallen considerably less than production and are off 18% in the first five months year-over-year. The market will give more attention to the CPI. Headline and core most likely remained above the 4% upper end of the target range, but if it appears to be accelerating, it may boost the chances that after four half-point cuts, the central bank may stand pat at the next meeting on August 7. 

 

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