The Euro and Sterling are Threatening to Break Lower, while a Record Current Account Surplus Does not Prevent the Yen from Challenging Intervention Levels snbchf.com

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Marc Chandler
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The Euro and Sterling are Threatening to Break Lower, while a Record Current Account Surplus Does not Prevent the Yen from Challenging Intervention Levels

The lack of progress in re-opening the Strait of Hormuz has not prevented oil prices from stabilizing or risk-appetites improving today. Equities and bonds are trading with a firmer bias. The Trump-Xi meeting tomorrow is key talking point today. Ahead of it, the PBOC set the dollar’s reference rate at a new three-year low. US Treasury Secretary Bessent was in Tokyo earlier this week and today, Japan reported a record current account surplus, flattered by its largest trade surplus in five years. The dollar, which is firmer against most G10 currencies, is hovering near JPY158, where the BOJ is thought to have intervened a week ago.

Although economic theory puts emphasis on interest rate differentials, we find that the dollar is frequently sensitive to the direction of US interest rates. And the market is continuing to move against a Fed cut this year. The futures market appears to be discounting about a 35% chance of a hike this year. It was still pricing in a chance of a cut at the end of last month. In addition, the momentum indicators continue to favor an upside break for the greenback out of the recent consolidation.

Prices

G10

• The euro fell from the upper end of its recent range, near $1.18 on Monday, to the lower end of the recent range slightly below $1.1725 yesterday and frayed $1.17 in the European morning today. It remains within the range recorded in the middle of last week (~$1.1690-$1.1800). Options for 1 bln euros at $1.17 expire today and another 1.6 bln euros tomorrow. The intraday day momentum indicators were oversold ahead of the North American open. Initial resistance is seen in the $1.1720-30 area.

• Despite US Treasury Secretary Bessent and Japanese officials show a solid front, the lack of US comments around recent intervention is in stark contrast with the type verbal intervention in January. The yen lost a little more than 0.25% yesterday as the greenback reached JPY157.75, a four-day high. The gains have been extended to JPY157.90 today. The high from last Wednesday when the BOJ is believed to have intervened was JPY158. The often-cited conditions for intervention, like a one-way market, high-volatility, and/or the speculative move did not seem to exist. One -month implied vol was at the low for the year before the April 30 intervention and the dollar fell in three of the four weeks before the intervention. It is true that speculators had amassed the largest net short yen position in the CME futures market since July 2024 (around when Japan intervened previously). But the bearish outlook for the yen was based on macroeconomic fundamental factors. Oil prices were elevated. The BOJ has remained reluctant to normalize monetary policy. The pendulum of market expectations had swung against Fed easing. Speculators participated in the move to be sure, but they were reading the same tea leaves as other market participants.

• The fight over the leadership of the UK’s Labour Party has seen interest rates surge this week in an environment in which global interest rates have risen. However, unlike Monday, when sterling was resilient in the face of the Gilt sell-off, sterling traded heavily yesterday and was among the worst performing G10 currencies. It frayed the $1.3500. There are around GBP330 mln of options struck that that expire today. It may take a break of $1.3450 to boost the chances that the high is in place and a correction is at hand. The initial target may be in the $1.3350-$1.3400 area.

• In a firm US dollar environment, the Canadian dollar was among the best among the G10 currencies yesterday, second to the Norwegian krone. The greenback did manage to take the out recent highs (~CAD1.3715) and reached CAD1.3725 before returning the CAD1.3700 area late in the North American afternoon. Although the US dollar did not sustain the break higher, the momentum indicators suggest it likely will. It is straddling the CAD1.37 area in quiet turnover today. Options for about $340 mln at CAD1.3715 expire tomorrow.

• The Australian dollar remains within the range it carved last Wednesday (~$0.7180-$0.7280). It has held above $0.7200 since that range was set. Options for almost A$1 bln expire there today (and another A$800 mln tomorrow). The signal from the momentum indicators is not quite as strong as with the Canadian dollar, but the risk is on the downside.

• Although the Mexican peso rose to its best level in a little more than three weeks on Monday, it has stalled. At the end of April, the greenback peaked near MXN17.60 and fell to around MXN17.16 Monday. It is trading in a narrow MXN17.2040-MXN17.2465 range so far today. The price action looks more like bottom pattern is being forged. This could set the stage for another run at the MXN17.50-60 area.

• The yuan remains strong. In the run-up to the Trump-Xi meeting, the first in nine years, Beijing is still guiding the yuan higher through the daily fix. It was set at its lowest level in three years yesterday (CNY6.8426). Given the greenback’s gains, it is not surprising that the fix was set a little higher today (CNY6.8431). Against the offshore yuan, the dollar has fallen to a new three-year low near CNH6.7880. The dollar has not settled above its five-day moving average against the yuan this month. It is found a little below CNH6.7955 today.

• The Indian rupee continues to fall into uncharted waters. The US dollar rose to a new record high for the second consecutive session. It reached INR95.8050. India raised tariffs on gold and sliver imports from 6% to around 15%. The next psychological target is INR96.

Other Markets

• Equities are enjoying a firmer tone today. Most of the large bourses in the Asia Pacific region advanced with the exception of Taiwan and Australia, though many smaller ones fell. Europe’s Stoxx 600 is up about 0.4% after losing 1% yesterday. In the US, the S&P and NASDAQ futures are recouping yesterday’s losses.

• Benchmark 10-year yields played a little catch-up in the Asia Pacific region and rose around three basis points (Japan, and the Antipodeans). European rates are mostly 1-2 bp lower. 10-year Treasury yield is off almost a basis point to nearly 4.46%.

• Gold traded on both sides of Monday’s range yesterday but settled well within it and slightly above the 20-day moving average. After bouncing off $4500 early last week, the yellow metal is trading broadly sideways. It is trading quietly today between about $4686 and $4727. Silver continued to outperform gold. In the past five sessions, gold has risen by about 3.2% and silver, ~18.3%. It traded above $87 yesterday for the first time in two months and extended its gains marginally to $87.80 today.

• Like several of the currency pairs, June WTI has trading within last Wednesday’s trading range (~$88.65-$102.70). With the impasse in the war, oil frayed the top of the range yesterday and settled near session highs. It has held above $100 today and capped near $102.25. June 2027 WTI is near $77.00. The discount peaked in late April near $33.75.

Data

• On the heels of yesterday’s CPI, the US reports April PPI today. A 0.3% rise in the both the headline and core rates will lift the year-over-year pace to 4.8% (from 4.0%) and 4.3% (from 3.8%), respectively. In response to the firm CPI reading, the US two-year breakeven rose by almost six basis points to about 2.94%. It is down 5-6 bp since the end of last month. The 10-year breakeven edged up a basis point yesterday to 2.49%. It is up less than a single basis point this month.

• The eurozone’s Q1 GDP was confirmed today at 0.1%, and 0.8% year-over-year. Aggregate March industrial production rose 0.2%. Although German industrial output shank for the second consecutive month, it rose in Spain (2.3%), France (1.0%), and Italy (0.2%). Disappointingly, February’s 0.4% gain has halved in revision.

• Australia’s Q1 wage price index (0.8% quarter-over-quarter, the same as in Q4 25, for a 3.3% year-over-year pace, down from 3.4%) was of little significance. Although the market anticipates a pause in the central bank’s tightening cycle, another hike is fully discounted by the end of Q3.

• Japan’s current account surplus tends to improve in March (16 of 20 years), and this year was no exception. The current account surplus rose to JPY4.68 trillion, a record high, from JPY3.93 trillion in February. The bulk of the improvement took place on the trade. The trade surplus on the balance of payments accounting, surged to JPY830.5 bln from JPY267.6 bln. The trade surplus was the largest since March 2021.

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About 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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