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The Greenback Consolidates while Sustaining Break against the Yen

The Greenback Consolidates while Sustaining Break against the Yen

Overview: The dollar is sporting a softer profile today against all the G10 currencies but the Swedish krona. The Riksbank sounded more dovish than previously, signaling the possibility of a cut in each of the last three meetings of the year. The dollar has sustained its push above JPY160 against the Japanese yen. Most emerging market currencies are also firmer, with the notable exception of Türkiye and South Africa. Türkiye is expected to keep its one-week repo rate steady today at 50%, while the Czech central bank is seen delivering a quarter-point cut. (to 5.0%). The central bank of Mexico meets later today and will hold the interest rate target at 11.00%. 

Equities are under pressure today. All the large bourses fell in the Asia Pacific region but India. The losses were led by a 2% slide in the Hang Seng and a nearly 2.4% drop in the index of mainland shares that trade there. Europe's Stoxx 600 is off for a third consecutive session, which if sustained, matches the longest losing streak of the year. US index futures are trading lower. Bond markets are also under pressure. The 10-year JGB has risen for six straight sessions, and a little above 1.07% it is approaching the year's high set at the end of May near 1.10%. European benchmark yields are more 2-3 bp higher. The US 10-year Treasury yield is firm a little above 4.33%, after increasing by eight basis points yesterday, the most in nearly three weeks. Gold found support below $2300 and is trading firmer after falling in three of past four sessions. August WTI has been chopping between $80 and $82 for the past five sessions and looks poised to push higher. It has not been above $82 since late April.

Asia Pacific

The two key developments are the dollar holding above JPY160 and the continued decline in China's 10-year yield to fresh 20-year low near 2.20%. Chinese officials appear increasingly concerned about the decline in rates, and reports suggest the PBOC has threatened to sell some of its bond holdings. Japanese officials have put the market on notice it is prepared to intervene, if necessary, at any time. Some market participants played down the risk of material intervention until after the US PCE deflator tomorrow. The April and May intervention took place in thin markets, and if this is to boost the impact, intervention early Monday, is also a risk. Japan 's May retail sales rose twice as much as economists expected (1.7% vs. 0.6%) but April's 1.2% gains was revised to 0.8%. Tomorrow, Japan reports May unemployment and Tokyo's June CPI. China reported May industrial profits rose 3.4% year-to-date, year-over-year, down from 4.3% in April. In May 2022, the comparable figures were -18.8%. China's prowess for producing goods is not the same as generating profits. Maximizing profits may require reducing production and capacity.

After bumping up against JPY160 for the previous three sessions, the dollar was bid above it in the European morning yesterday and peaked a little north of JPY160.80 in North America. It has held yesterday's high so far today and consolidated above JPY160.30. The dollar has risen in 11 of the past 13 sessions. Yesterday's move was arguably facilitated by the first back-to-back increase in the US 10-year yield in nearly three weeks, though the market seemed to have been itching to challenge Japan's resolve when yields were softer. Some of the dollar buying may have been related to the $2.1 bln of JPY160 options expire tomorrow. The dollar reached levels not seen since 1986, making chart resistance meaningless. The higher-than-expected monthly Australian CPI (4.0% in May, the highest since last November, the third consecutive increase) which boosted market odds of a rate hike, failed to push the Australian dollar outside of its one-cent-range. The gains to nearly $0.6690 were not sustained, and the Aussie spent most of the North American session in around a 10-tick band on either side of $0.6650, the midpoint of the range. It is firm today but inside yesterday's range. Given the dollar's broad strength, and especially its move against the yen, Chinese officials will have to make more of an accommodation. It set the dollar's reference rates at CNY7.1270 (CNY7.1248 yesterday). It was the seventh day of a higher dollar fix, matching last year's longest streak. The dollar traded to almost CNH7.3080 against the offshore yuan, a new high for the year yesterday and is consolidating today, straddling CNH7.30. Chinese officials claim to desire exchange rate stability. On its CFETS index, the yuan has been in less than a 5% range for the past 18 months. 

Europe

Neither M3 nor the EU's confidence surveys are much of a focus for the market in general and specifically now. The French election, and the possibility that the outcome spurs fresh economic challenges to not only France, which was downgraded by S&P to AA- before the EU Parliament election, but the eurozone more broadly. The euro, which was trading near $1.09 at the start of the month, was sold to a new low since early May yesterday near $1.0665. It is in about a quarter-of-a-cent range below $1.07 today. Meanwhile, it will surprise no one that Sweden's Riksbank stood pat after it delivered its first rate cut last month (to 3.75% from 4.0%). The government claimed victory in the anti-inflation fight earlier this week. May inflation was a little higher than expected, but nothing particularly worrisome. Indeed, the Riskbank suggested that it could cut rates two or three times during H2 24, which is exceptionally aggressive given that there are three meetings left this year. Previously it signaled two cuts. The market was a bit more dovish than the central bank. Yesterday, the swaps market had two more cuts fully discounted this year and about a 30% chance of a third. The odds of a third cut have fallen to about 10% today. 

The break of the June euro low failed to trigger a new round of selling. After the low was set the euro recovered to around $1.0695 before consolidating in a narrow range in the North American afternoon. It is probing the 1.07 area  in the European morning, and may extend its recovery in North America today. Resistance is seen around $1.0720. Given the proximity of the French election and the range of unfavorable outcomes, the euro is arguable proving itself resilient. It set a nine-day high against the Swiss franc (~CHF0.9600) and settled at its best level against sterling since June 7 (slightly above GBP0.8460). The euro is trading at its best level against the Swedish krona since June 10 (~SEK11.3440) and settled above its 20-day moving average, which it has not done since mid-May. The euro traded higher against the central European currencies as well. After knocking on $1.27 on Monday and Tuesday without much penetration, it was if the sterling bulls gave up. Sterling fell slightly below $1.2620 yesterday for the first time in five weeks and nicked the lower Bollinger Band. It made a marginal new low today, a little below $1.2615, but has recovered to the $1.2650 area.  Nearby resistance is in $1.2670 area. A couple retracement targets converge near $1.2600. A break would look ominous. Lastly, we note that the Czech central bank is expected to cut its repo rate shortly to 5.0% from 5.25%. It would be the fifth cut in the cycle that began last December. The last three cuts were for half of a point. 

America

Out of the slew of US economic data today, weekly jobless and claims and May durable goods orders. Jobless claims are elevated and the four-week moving average, used to smooth out some of the noise, is at its highest level since last September. San Fran Fed President Daly earlier this week warned that the labor market is near an inflection point. The June nonfarm payrolls will be released on July 5. The early call is for around 185k, which if true, would produce the lowest quarterly average (~207k) since Q2 20. The lack of new orders for Boeing will weigh on durable goods orders, which may have fallen for the first time since January. Other reports include another look at Q1 GDP, May goods trade and inventories, pending home sales and the Kansas Fed's manufacturing survey. The Atlanta Fed's GDP tracker will be updated after the reports from 3% as of June 20. The median forecast in Bloomberg's monthly survey is 2%. Mexico reports its May trade balance (a smaller deficit than April's $3.75 bln shortfall is expected) and later in the session, the central bank will almost certainly announce it stood pat, leaving the overnight target at 11.0%. The swaps market is discounting a rate cut later this year, likely in Q4. President-elect Sheinbaum confirmed yesterday that the forums for judicial reforms will start today. 

The US dollar approached the lower end of its range against the Canadian dollar on Tuesday. It reached CAD1.3625 and has not closed below CAD1.36 since April 5. Yesterday's recovery to almost CAD1.3710 yesterday met a retracement objective of the decline from the June 14 high (~CAD1.3780). It is consolidating today after making a marginal new high. Emerging market currencies were out of fashion yesterday, and as has been the case recently, Latam currencies leading the way. The dollar rose to its best level since November 2022 against the Brazilian real (~BRL5.5260). The greenback extended its recovery off Monday's low against the Mexican peso (~MXN17.8750) and reached above MXN18.36 yesterday, which met the (38.2%) retracement objective of the dollar's decline since approaching MXN19.00 on June 12. The dollar is consolidating in a tight range around MXN18.31 in quiet turnover so far today.



 

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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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