Greenback Slips Ahead of June CPI

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Overview: The US dollar is trading somewhat heavier against the G10 currencies but the Scandis today, ahead of the US CPI report. Most emerging market currencies are also firmer. The last few CPI readings were softer than expected, but economists continue to look for firmer price pressures. Late yesterday, the US announced a 17% tariff on imports of Mexican tomatoes but apparently has signaled approval of Nvidia selling its H20 chips to China.

That decision helped lift Chinese tech stocks that trade in Hong Kong, but the CSI 300 itself managed only the most minor of gains. Most other bourses in the region rose. Europe's Stoxx 600 is posting a small gain after retreating in the past two sessions. US index futures point to a firm start. European benchmark 10-year yields are mostly 2-5 bp lower today and the US Treasury yield is not quite two basis points lower to slip below 4.42%. Japan's 30-year yield eased slightly while the 40-year bond yield rose 11 bp before settled up five basis points (~3.49%). Gold is firmer near $3355 but has held below yesterday's high (~$3361). August WTI extended its losses to almost $66.25, the lowest level since July 7, but recovered to a little above $66.80.  

USD: The Dollar Index extended its advance yesterday. The last session is settled with a loss was July 2. Not coincidentally, we would argue, the year-end implied yield in the Fed funds futures is about 3.84%, the highest since June 19. At the same time, the five-year breakeven, the difference between the conventional yield and the five-year inflation protected security reached almost 2.48% yesterday, the highest in nearly three months. Its streak will be challenged today. The 98.25 area in the Dollar Index corresponds to the (61.8%) retracement of the decline since June 23 remains intact. Initial support may be in the 97.50-70 area. The US June CPI is the data the most important high-frequency economic report this week, though PPI, retail sales and industrial output are also due in the coming days. Although the last three reports have come in lower than expected, many Fed officials are concerned that the impact of the tariffs is still yet to be seen. This explains why the Fed has unanimously stood pat this year. The headline and core rates are expected to rise by 0.3% to 2.6% and 2.9%, respectively. This would be new four-month highs. The market continues to scale back the chances of September rate cut. Around 65%, the lowest odds since late May. 

EURO: The euro approached $1.17 is all three geographic sessions yesterday, and disappointment that it held so some liquidation of euro longs that pushed it back to $1.1660. The $1.1640 area is the (50%) retracement of the rally since the June 23 low. It settled yesterday below the 20-day moving average for the first time since May 19. It has come back firmer today but still has not risen above $1.17. Eurozone industrial output rose 1.7% in May. It was a stronger than expected recovery from April's revised 2.2% decline (initially reported as a 2.4% drop). The year-over-year rate had been negative from May 2023 through February 2025 and is now up 3.7% year-over-year. The industrial production figures do not include construction but seem to reflect increased defense and infrastructure spending. Separately, German investor confidence, the ZEW survey show continued improvement. The assessment of the current conditions improved to -59.5 from -72. It is the best since June2023. The expectations component improved to 52.7 (from 47.5), it is the fourth consecutive gain and is at its best level since Russia's invasion of Ukraine in early 2022.

CNY: The dollar traded quietly yesterday (~CNH7.1670-CNH7.1760), within the range set at the end of last week. It remains within late Friday's range today and mostly inside yesterday's range. Nearby support is seen near CNH7.1630, and CNH7.1835 may offer resistance. Still, it looks comfortable in the broader CNH7.15-CNH7.20 range. The PBOC set the dollar's reference rate at CNY7.1498 (CNY7.1491 yesterday). China reported that the economy grew by 1.1% quarter-over-quarter in Q2. That turns into a 5.2% year-over-year expansion, slightly lower than the 5.4% reported in Q1. Retail sales slowed sequentially in June, but industrial output improved. The property market intensified. New and existing home prices declined faster, and property investment and property sales are contracted at an accelerated pace. Still, the data may be sufficient to take the pressure off this month's Politburo meeting to provide more support.

JPY: The firm US 10-year yield arguably helped the dollar extend this month's recovery to almost JPY147.80 yesterday, its best level since the June 23 high, which was a little north of JPY148.00. It edged a little higher today but has not sustained the upside momentum. The rolling 30-day correlation of changes in the dollar-yen exchange rate and the 10-year Treasury yield reached almost 0.70 at the end of last week, the highest since February. Still, Japanese bond yields are rising faster. The US 10-year premium over Japan has been trending lower since 316 bp peak on April 11. It was around 280 bp at the end of June and now it is near 284 bp. Meanwhile, Japan's very long-end (30- and 40-year) bond yields are jumping after trading quietly and sideway for most of June and early July. Over the past three months, the 30-year JGB yield is up 34 bp, while the Dutch and German 30-year yields are up around 37 bp, and Canada's 30-year yield is up almost 40 bp. The French 30-year yield is about 30 bp higher and the 30-year US Treasury yield is up a milder 15 bp. The 30-year UK Gilt yield is not up quite five basis points in the past three months. 

GBP: Sterling fell for the seventh consecutive session yesterday, matching the long losing streak since March 2020. It traded slightly below $1.3425 today, its lowest level since June 23, when it reached nearly $1.3370. Slightly above it is the trendline off the year's low that comes in near $1.3380. It found new bids and its losing streak may end today. The UK reports June CPI tomorrow. A 0.1% increase is expected, which will keep the year-over-year rate unchanged at 3.4%. The core rate looks steady at 3.5%, while services inflation may slow slightly to 4.5% from 4.7%. Still, it is the weak economy that is behind the market's confidence of a rate cut next month (90%+).

CAD: The US dollar remains stuck in a well-worn range roughly CAD1.3640-CAD1.3730 as it has for the past five sessions. The five-day moving average is above the 20-day, and the daily momentum indicators look constructive. The greenback settled above CAD1.3700, albeit barely, for the first time since June 25. Above there, the next target is near CAD1.3740, and then the more formidable resistance in the CAD1.3780-CAD1.3800 area. Canada will likely report its first increase in headline inflation since February today. It is seen rising 1.9% from 1.7%. The underlying core rates are expected to remain elevated at 3.0%. The market has a little less than a 20% chance of a cut at the end of the month and slightly less than 50% chance for the September meeting. Still, there is a 90% chance of a cut late this year.

AUD: The Australian dollar set the high for the year ahead of the weekend near $0.6595 and succumbed to profit-taking yesterday that pushed it down about a half of a cent from the high. Options for about A$600 mln at $0.6560 expire today. It settled poorly yesterday, and follow-through selling was limited to around $0.6540 today. Last week's low was closer to $0.6485, and a break could signal another cent pullback. Since the eve of last week's central bank meeting, the year-end rate projected by the futures market rose 22 bp by the end of the week to 3.29% before pulling back to ~3.23% yesterday. It is near 3.26% now. 

MXN: The dollar rose to a seven-day high against the peso yesterday, reaching almost MXN18.78. It is easy to attribute gains to the 30% tariff threat issued over the weekend. However, in the region, the Brazilian real and Chilean peso (not to mention the Argentine peso) did worse. The dollar trading with a heavier bias today and traded slightly below MXN18.68 in Europe. A close below MXN18.66 could boost the chance that the brief upside correction is over. The dollar jumped a little more than 2.5% against the Brazilian real last week to snap a five-week decline. For the last two sessions, the greenback has traded within last Thursday's range (~BRL5.5250-BRL5.6220). The five-day moving average is above the 20-day moving average and the momentum indicators are moving higher. The next upside target is near BRL5.66.

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