Greenback Catches a Bid

Overview: The dollar has caught a bid ahead of the US retail sales and industrial production figures. It is higher against all the G10 currencies but the Swiss franc. The SNB meets Thursday. It surprised many by cutting rates in March and the same logic (low inflation, move ahead of the ECB, stronger franc) may apply now. A hawkish hold by the Reserve Bank of Australia has not done much for the Australian dollar, which is little changed on the day. The greenback held last week's high against the yen near JPY158.25, the highest it has been since the intervention in late April. Most emerging market currencies are firmer against the US dollar, but a few central European currencies dragged lower by the softer euro. Hungary is expected to cut rates shortly and it may be the last one for some time. 

Benchmark 10-year yields are mixed in Europe and the premiums over German bunds has narrowed a little today. The 10-year US Treasury yield is up a little more than a basis point to approach 4.30%. The S&P 500 and NASDAQ rallied to new record highs yesterday, helped big tech names, and this helped boost Asia Pacific shares today. Hong Kong was an exception. It slipped fractionally. Europe's Stoxx 600 is up nearly 0.5%, while US index futures are narrowly mixed. Gold continues to trade within last Friday's range (~$2301-$2337). August WTI rose by a little more than 2% yesterday and stalled near $80. The upper end of where it has been since the end of April. It takes a break of the $77 area suggest a high is in place. 

Asia Pacific

The Reserve Bank of Australia left its cash rate target at 4.35%, where it has been since last November's 25 bp hike. Again, a rate hike was discussed, and RBA Governor Bullock said that the central bank was "increasingly alert to the upside risks." She had previously indicated that demand was running above capacity. The quarterly inflation report at the end of next month has added importance. And July 1, the individual income tax rate will be reduced to 16% from 19% (for incomes A$18.2k-A$45k) and 30% (vs 32.5%) for incomes between A$45 and A$135k. Higher incomes will see no tax reduction (though that starts at A$135k vs A$120k previously). Yesterday, the odds of a rate cut this year, as reflected in the futures market was a little below 70%, up from around 10% at the end of May. This has been completely unwound today. On Wednesday, when US markets are closed, Chinese banks will set the loan prime rates. Without a cut in the PBOC's Medium-Term Lending rate, banks have little incentive to cut their prime rates. Japan will reports its May trade figures. The trade balance almost always deteriorates in May and economists expect a dramatic worsening this year (median in Bloomberg's survey is for a JPY1.3 trillion compared with a JPY462.5 bln shortfall in April). However, exports likely surged by around 12.5% year-over-year, which would be the strongest since November 2022. The anticipated 9.5% rise in imports would be the most since January 2023.

Arguably helped by the rise in US rates, the dollar reached session highs yesterday in North America near JPY158. The dollar's gains were extended to almost the pre-weekend high, following the disappointment with the BOJ's reluctance to reduce its bond purchases, near JPY158.25, its highest level since the intervention in late April. Support around JPY157.50 was successfully tested earlier today. Despite the RBA's hawkish hold, the Australian dollar is little changed. It is near the middle of its roughly $0.6600-$0.6630 range. The Australian dollar was sold marginally below the pre-weekend low (~$0.6590) in early North American trading yesterday but steadily recovered amid the risk-on mood and managed to recover back to almost $0.6620. There are almost A$765 mln options at $0.6700 that expire today. Separately, the Australian dollar appears to be forging a bottom against the New Zealand dollar after falling about 2.7% in the month through June 5. The convincing move above NZD1.08 could signal an initial recovery toward NZD1.0920. The weakness of the yen and rise in US rates makes it more difficult for the PBOC to steady the yuan after it has edged lower for three of the past four weeks. The PBOC set the dollar's reference rate at CNY7.1148 (the high for the year was set at CNY7.1174 five months ago today). By setting a high fixing rate, the PBOC limits the pace of the greenback's appreciation (yuan depreciation). The average in the Bloomberg survey is CNY7.2509 (CNY7.2568 yesterday). The dollar had been bumping against CNH7.2750 area in the offshore market. and reached CNH7.2765 today. It has only closed once above CNH7.2750 this year and that was on March 22. 

Europe

In a light week for economic data from the eurozone, Germany's June ZEW investors survey was reported. The takeaway is that sentiment remains weak even if not quite as weak as it had been. The assessment of the current conditions unexpectedly deteriorated to -73.8 from -72.3 in May. It bottomed in February at -81.7. It is the first pullback after three consecutive monthly gains. Still, it has more work to do to simply reach last June's -56.5 reading. The expectations component is rose for the 11th consecutive month but fall short of projections at 47.5 (up from 47.1). The eurozone reports April's current account and construction output on Wednesday. Spain, which accounts for about a quarter of China's imported pork is particularly vulnerable to the anti-dumping investigation opened by China against the EU, seemingly in retaliation for EU's auto subsidies. The UK will report May's CPI on Wednesday. A 0.4% month-over-month increase would allow the year-over-year rate to slow to around 2.0% from 2.3% in April. That would match the lowest read since April 2021. However, the base effect works against in next couple of months when the UK's CPI rose by 0.1% in June 2023 and fell by 0.4% in July. Moreover, a 0.4% month-over-month gain translates into a 5.2% three-month annualized rate from 2.4% in Q1 24 and less than 1% in Q4 23. Core CPI is seen moderating to 3.5% from 3.9% and service inflation is expected to slow to 5.5% from 5.9%. Turning to producer prices, a small monthly rise and an unfavorable base effect could see output producer prices rise to 1.7% (from 1.1% in April). The median forecast in Bloomberg's survey calls for a 0.3% decline in input producer prices, which would translate into a 0.2% decline year-over-year (from -1.6% in April). Meanwhile, Hungary's central bank is expected to continue cutting its base rate. A quarter point cut would suggest it is nearing a pause after cutting rates since last October. Its first four cuts for 75 bp each and then in February cut by 100 bp. It returned to 75 bp reduction in March and slowed to 50 bp steps in April and May to bring the base rate to 7.25%. On Thursday, the Bank of England, Norway's Norges Bank, and the Swiss National Bank meet. The market expects all three to standpat. If there is a surprise, we suspect the SNB is the most likely candidate. It surprised many in March with a quarter-point cut, and the same logic that led us to anticipate it, says it can go again. EU harmonized inflation stood at 1.5% in May and the Swiss measure of core inflation was at 1.2%. The Swiss franc has appreciated around 2.8% against the dollar since late May and nearly 3.6% against the euro. The swaps market another quarter point cut nearly fully discounted by the ECB for October and a nearly 70% chance of a cut in September, which is the next time the SNB meets. 

The euro trended gently higher in the North American session and posted session highs in late dealings, a little shy of the pre-weekend high (~$1.0745). It stalled slightly in front of there today. We suspect that this was largely a function of short-covering by momentum traders in the spot market rather than bottom-pickers making a stand. The selling eased near $1.0715. The pre-weekend low was slightly below $1.0670. In the futures market, in the week that covers the first couple of sessions after Macron's call for snap elections, the net long speculative euro position was cut for the first time in seven weeks. It was reduced by about a third. According to Bloomberg, sterling fell within 2/100 of a cent of the pre-weekend low (slightly below $1.2660) to resurface above $1.2700 in late North American dealings. There is scope for modest gains ahead of Wednesday's CPI, which may be the low print for some time. It reached $1.2715 in early Asia Pacific activity, stopping short of chart resistance in the $1.2735-60 area. In the futures market, speculators seemed more concerned about EMU politics than British. The next long sterling position was extended for the sixth consecutive week through last Tuesday, June 11. Meanwhile, the euro rose to a four-day high against sterling (~GBP0.8460) and looks poised to recover further if it can take out the GBP0.8470 area.

America

The US reports May retail sales and industrial production figures today. Both were flat in April and likely ticked higher in May. Our working hypothesis has been that while the US economy is slowing, the April data overstated the case. Manufacturing output fell by 0.3% in April and may have recouped it in full in May. The Atlanta Fed's GDP tracker will be updated later today from 3.1% on June 7. The median forecast in Bloomberg's monthly survey is for 2.1% annualized growth in Q2. There are also at least six Fed officials that will speak today. However, there does seem to a loose consensus that it will take a couple of months of softer inflation data to boost confidence. Recall that in the latest Summary of Economic Projections, four officials anticipated not cuts this year, seven said one cut and eight thought two cuts would be appropriate. US markets are closed tomorrow. On Thursday, Mexico is expected to report a soft April retail sales and president-elect Sheinbaum is expected to name part of her cabinet. She also said that surveys show 77%-83% support judicial reform. Canada reports April retail sales on Friday and a strong recovery is expected to bounce back strongly after a 0.2% decline in March (-0.6% excluding autos).

The slow grind lower of the Dollar Index and recovery in US stocks helped the Canadian dollar edge higher, and for the second consecutive session, the greenback settled near session lows (~CAD1.3720). There was a marginal extension of the US dollar losses to about CAD1.3710 before it recovered back to almost CAD1.3760. Even a break below CAD1.37, however, might not signal that the coast is clear. Support is seen near CAD1.3660 and then CAD1.3600. The US dollar has not closed below CAD1.3600 for more than two months. In the futures market, speculators grew their net short Canadian dollar position by the most in six years last week through June 11 (almost 38k contracts). It stands at record of 129.5k contracts. For the second straight session, the US dollar recorded an inside day against the Mexican peso. It traded about 10 centavos above and below MXN18.53. She also said that surveys show 77%-83% support judicial reform. Despite news that the US was suspending imports of Mexico's avocados to protest the treatment of inspectors, did not stand in the way of a firmer peso today. In Europe, the dollar is testing yesterday's lows. In the week through June 11, speculators in the futures market cut their net long peso position by about 4.5%. It was the first reduction in five weeks. The Bolsa also snapped a three-day decline to rise by a little more than a third of 1%. The dollar briefly traded to a new one-month high against the Chilean peso, briefly rising to almost CLP941.50. The central bank is expected to deliver another 25 bp rate cut later today. Lastly, Brazil's central bank meets tomorrow and is seen on hold 325 bp beginning last August (to 10.5%). The swaps market is pricing in a hike as the next move. 

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