USD Steadies after Yesterday's Surge, but Does it have Legs?

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Overview: The dollar has steadied today after yesterday's jump. Asia and Europe do not seem to be as enthusiastic about the dollar as North America seemed to be yesterday. President Trump indicated that sectoral tariffs on semiconductor chips and pharmaceuticals could be announced as early as August 1. He also said that there will be more bilateral deals announced. The greenback is mostly a little softer against the G10 currencies, with the Scandis the notable exception, unable to find much traction. Emerging market currencies are softer except for central Europe, the Chinese yuan, and the Mexican peso. The PBOC set the dollar's reference rate higher today for the third consecutive session for the first time in two months. 

Equities are under pressure. Nearly the all the large bourses in the Asia Pacific region but Taiwan, India, and Singapore slipped. Europe's Stoxx 600 is weaker for the fourth consecutive session, and US index futures are nursing small losses. Japanese 30- and 40-year bond yields pulled back after yesterday's jump and were off around 10 bp. Most European benchmark 10-year yields are slightly softer. The 10-year Gilt is a notable exception and is a couple basis points higher after the unexpected rise in June CPI. The 10-year US Treasury yield is almost a basis point lower near 4.47%. Gold is trying to end a two-day $31 slide. It is up by around $17 now to $3341. August WTI extended its pullback that began after Monday's high ($69.65) and fell to a seven-day low to approach $66. 

USD: The Dollar Index extended its advance and yesterday's 0.6% gain was the most in nearly a month. DXY has not fallen since July 2. Again, greenback's gains were buttressed by higher US interest rates and the implied year-end rate in the Fed funds futures market is up against its highest level since February. DXY overshot the 98.25 retracement target we have been anticipating. It is consolidating quietly in a narrow range (~98.45-98.65) today. Although consumer prices rose last month, producer prices are expected to have softened. A 0.2% rise in the headline and core will bring the respective year-over-year rates to 2.5% (from 2.6%) and 2.7% (from 3.0%). June industrial output figures will also be reported. Starting with a small rise in January, it alternated between gains and losses on a monthly basis. The sawtooth pattern is expected to continue as June's production is seen rising by 0.1% after falling 0.2% in May. Later in the session, the Beige Book will be released in preparation for the FOMC meeting later this month. It has taken on more significance during Powell chairmanship but given the practically no chance of a change in rates this month, the Beige Book is unlikely to have more than momentary impact. The earnings season kicked off yesterday in earnest with several large financial institutions reporting. The greenback's decline may help boost the dollar value of foreign earnings (while the opposite may be true in Europe).

EURO: The euro was sold yesterday and settled below its 20-day moving average and the five-day moving average has fallen below the 20-day moving average for the first time in nearly two months. The five-day decline in tow is the longest since March. The euro was punched pushed below $1.16, but it is largely holding today but has not been able to retake $1.1630. The eurozone reported a seasonally adjusted 16.2 bln euro trade surplus in May. The average monthly surplus in Jan-May is about 18.9 bln euros, up from 17.1 bln average in the first five months of 2024. Although some observers still talk in terms of larger trade surplus should translate into currency appreciation, it does not hold up in practice, and this includes China too, in the same way that a large and persistent trade deficit in the US, UK, and Australia for example, does not always weigh on their respective currencies. Given that size of the foreign exchange market and capital flows relative to trade flows, we put more weight on what moves capital than goods in our understanding of the movement of exchange rates. That, of course, is more complicated as often purchases of foreign fixed income are hedged.

CNY:   If the PBOC was trying to moderate the dollar's decline, it was helped by the broadly stronger dollar after yesterday's US CPI. The greenback had found support in recent days in the CNH7.1660-80 area. It approached the month's high yesterday a little above CNH7.1880. There is little above there until CNH7.20, which the dollar has not traded above since June 3. Still, the greenback subdued within yesterday's range, confined so far to a CNH7.1785-CNH7.1860 range. The PBOC set the dollar's reference rate at CNY7.1526, the highest since July 8. It was the third consecutive higher fix, which the PBOC has not done since late May. 

JPY: Of this month's 11 sessions coming into today, the dollar has risen against the yen in seven sessions and in four of them the gain was more than 1%, including yesterday. The pace has pushed the dollar above the upper Bollinger Band (~JPY148.80 today). The greenback traded below JPY145 early last week and rose slightly above JPY149 yesterday, its best level since early April. The 10-year Treasury yield approached 4.50%, for the first time since June 11 and the 30-year yield poked above 5% for the first time since the end of May. The JPY149.40 area corresponds to the (50%) retracement of this year's decline. The dollar edged up to almost JPY149.20 today before stalling. Initial support may be around JPY148.50, and then JPY148. The Bank of Japan indicated it will provide dollars to Japanese banks using Japanese government securities under a repo facility (Funds-Supplying Operations against Pooled Collateral). The repos are preventative in the sense that it may head-off trouble that could arise from the maturing of dollar-denominated obligations in what appear to be large-scale carry trades (yen was borrowed to purchase USD assets). The BOJ's action may reduce the pressure on Japanese financial institutions from dumping Treasuries or scrambling to secure dollar-funding the market. The cross-currency basis swap has widened slightly to around -33 bp. There does not seem to be much strain presently, which is why it seems preventative in nature.

GBP: Sterling's losing streak extended to eight consecutive sessions yesterday. It approached the June 23 low (~$1.3370). That is also near the trendline, drawn off the January, February and April lows. It is pinned near yesterday's lows and has been capped ahead of $1.3420. A break may find the next support area near $1.3330. The UK's June CPI was firmer than expectation, complicating the outlook for policy. The headline rate rose 0.3% in June (0.1% expected), lifting the year-over-year rate to 3.6% from 3.4%. The jump in utility prices in April exaggerated price pressures. At an annualized rate, the CPI rose at a 6.8% pace after 2.4% in Q1. In the press, businesses link the price increases to the rise in the payroll tax and minimum age. Core price inflation accelerated to 3.7% from 3.5% and inflation in consumer services was unchanged at 4.7%. Despite the firm inflation reading, the market remains highly confident that disappointing growth (contractions in both the April and May monthly GDP) will spur the Bank of England into action next month (~87% probability according to indicative pricing in the swaps market). with a rate cut following another in Q4.

CAD:  As is often the case in a firm US dollar environment, the Canadian dollar did relatively well yesterday and its minor loss (<0.10%) was the least among the G10 currencies. While the greenback was firm it remained within the range seen last Friday (~CAD1.3650-CAD1.3730). Nearby resistance is seen in the CAD1.3740-60 area. It remains firm now, holding above CAD1.3700, though not rising much above CAD1.3725. Canada's June CPI did not change the underlying picture very much. Headline inflation firmed, as anticipated, to 1.9% from 1.7%, while the underlying core readings remained elevated with the average of the two creeping up to 3.05% from 3.0%. Passenger cars and furniture prices rose, and this could be linked to tariffs, while airfare also rose and was the largest contributor to the increase. Excluding energy, Canadian consumer inflation is 2.7% year-over-year. A rate cut this month did not look particularly likely before the data and less so afterward. Indeed, the odds of another cut this year have been shaved. The swaps market sees the year-end target rate around 2.58%-2.60%, the highest in four months.

AUD: The Australian dollar recorded the high for the year last Friday, slightly shy of $0.6600. Yesterday's sell-off it to slightly below $0.6510. It is holding above it today but met resistance around $0.6635. A break of $0.6500 targets this month's low near $0.6485. But that could be the neckline of a double top pattern, and a break could spur another cent decline. Moreover, the momentum indicators did not confirm last week's high, leaving a bearish divergence in its wake. Australia reports the June employment report tomorrow. The market anticipates a fairly steady report, with the unemployment rate and participation rates flat at 4.1% and 67.0%, respectively. Overall job growth is seen bouncing back by around 20k after losing 2.5k jobs in May. In the first five months of the year, Australia's overall job growth has slowed to an average of around 18k from almost 32k in the same period in 2024. Full-time job creation has held in better. It has averaged about 20.5k a month this year after 24.5k in the Jan-May 2024 period. 

MXN: The dollar rose for the third consecutive session yesterday against the Mexican peso, which matches its longest advance since the end of Q1. The roughly 0.6% gain was the largest since June 20. It and the Colombian peso were the weakest in the region yesterday, while Brazil, Peru, and Chile rose. It recorded a bullish outside up day. It traded on both sides of Monday's range and settled above Monday's high. The dollar settled above the 20-day moving average for the first time since June 23. However, there has been no follow-through dollar buying and the greenback is consolidating at the upper end of yesterday's range. It has held below MXN18.8450 (yesterday's high was near MXN18.8850). The US tomato tariff is only the latest move, and given the lack of available substitutes it is hard to see how this does not impact domestic US prices and breadth consumer choices. Mexico provides an estimated 70% of US tomatoes, up from 30% a couple years ago, according to industry estimates. President Sheinbaum hopes that the tomato tariff can be folded into the broader trade negotiations. Around one in nine Mexican workers are employed in the agriculture sector. In the past disruptions to the sector, such as corn, led to migration to the US.

 

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