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What Happened Today in a Few Bullet Points

  1. The most important thing to appreciate is that the market has moved to price not one but two cuts next year.  The first is priced into the September Fed funds futures and the second is in the Dec Fed funds futures.  This I in response to weaker than expected data that have elevated recession fears.  The Atlanta Fed GDPNow puts Q2 growth at -2.1%.  Banks have revised down their forecasts, but none of the 59 economists in the Bloomberg survey have forecast a negative number.  The June employment report is the data highlight and the median forecast in Bloomberg’s survey is at 273k.  The year-over-year pace of average weekly earnings is expected to have slowed for the third consecutive month.
  1. The euro fell to almost $1.0365 ahead of the weekend but remained above $1.04 on Monday.  The ECB meets July 21. Most expect a 25 bp hike, but the focus is on the tool/efforts to prevent divergence of European interest rates, which the ECB argues disrupts its transmission mechanism of monetary policy.  Meanwhile, on another front, Germany reported its first monthly trade deficit in 21 years in May as exports fell (0.5%) and imports rose (2.7%).  A trade shortfall of 1 bln euros was recorded instead of a 1.6 bln euro surplus that was expected.  Some have blamed the Germany trade surplus for a number of world ills, including the US trade deficit.  Ironically, the German trade deficit is a reflect of problems (higher energy prices, weaker demand abroad).
  1. The US 10-year yield fell 25 bp last week, the most since March 2020.  The yen was the only major currency to gain (albeit slightly) to rise against the dollar.  The CFTC data showed that for the seventh consecutive week, the net short yen position was reduced.  It now stands at the lowest of the year at a still substantial 52.6k contracts (less than half of the mid-May peak).  It is the longest bout of short covering since 2019.  The dollar toyed with its 20-day moving average on Monday (slightly below JPY135) for the second consecutive session.  It has not closed below this moving average since the end of May.  Japan has Upper House elections on Sunday, July 10.  A Yomiuri newspaper polls projects the LDP and its partner, Komeito Party will secure 65-80 of the 125 seats in contention.
  1. The US dollar peaked before the weekend near CAD1.2965 before pulling back. It continued to unwind its gains on Monday, and at one point, dipped briefly below CAD1.2840.  The Bank of Canada’s quarterly survey, released on Monday, found business and executive inflation expectations are still rising.  The market has 75 bp hike nearly fully discounted for the July 13 central bank meeting.  That said, the BA futures have 33 bp cut discounted in Q4 2023, but the chances of a Q3 2023 move as in the US, is seen at a little better than 70%.  The highlight of the week is the jobs report on Friday.  In May, Canada reported blowout numbers, creating !135k full-time jobs.  The unemployment rate stands at 5.1%, the lowest since the mid-1970s when the time series began. The US dollar has not settled below its 20-day moving average (~CAD1.2865) since June 9. The CAD1.2800 area is important technical support, and a break could see CAD1.2680-CAD1.2730.
  2. At the end of last week, the Australian dollar fell to new two-year lows (~$0.6765).  It recovered to closed around $0.6815, and to almost $0.6890 on Monday.  Early tomorrow, the Reserve Bank of Australia will hike the policy rate (cash rate).  It has 40 bp of tightening discounted.  That implies 100% confidence of a 25 bp move and a 60% chance of a 50 bp hike instead of 25 bp.  The final composite (and services PMI) will be reported shortly before the central bank’s decision.  The composite PMI downshifted in May to 52.9 from 55.9.  The preliminary estimate was at 52.6.
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Marc Chandler
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.
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