## United States
Ahead of the weekend, Moody’s downgraded the US credit rating, removing its last AAA among the three major rating agencies. This decision mirrors moves made by S&P 14 years ago and Fitch two years past. While the downgrade didn’t introduce any new revelations, it has instigated selling in US dollars and assets across Asia and Europe. The 30-year bond yield has surpassed 5% and the 10-year yield hovers around 4.50%. After gaining more than 5.25% last week, the S&P 500, which had its second-best week of the year, seems to be on the verge of breaking its five-day winning streak, with a lower opening anticipated. The US dollar has depreciated, with nearly all G10 currencies increasing by at least 0.5% against it, although the New Zealand and Canadian dollars are lagging. Emerging market currencies, too, are largely firmer, except for the Philippine peso and Taiwanese dollar.
The hike in US Treasury yields has sparked a global bond sell-off. Antipodean 10-year yields climbed by 7-8 basis points, and Japan’s 10-year government bond yield rose nearly four basis points to 1.48%. In Europe, benchmark yields are up by 5-8 basis points, with peripheral yields ascending quicker than the core. Today, gold has positioned itself as a safe haven, climbing slightly more than 1% to near $3240. Meanwhile, July WTI remains within last Thursday’s range of approximately $60 to $62.50.
Last week, before Moody’s downgrade, the Dollar Index settled securely, reaching a three-day high and recording a bullish outside day. Yet, post-downgrade, it has been sold through last week’s lows near 100.25, hovering approximately at 100.15. Risks could extend to 99.50 in the near term. Late yesterday, minor adjustments expedited some Medicaid-related cuts, as a House committee gave the nod to a White House-sponsored budget post last-minute negotiations, amplifying the debt. This week is light on US data, with the Index of Leading Economic Indicators due today. With most components of the index already released, market reactions are unsurprisingly muted. The LEI has dropped for the past three months, only rising twice last year after consistently falling in 2023 and all but one month in 2022. Upcoming is the Philadelphia Fed’s non-manufacturing survey, expected to show improvement from April’s poor -42.7 reading.
## Eurozone
The euro, despite settling at a three-day low, has regained traction, breaking a downtrend line from last month’s high near $1.1575 today, currently around $1.1260. European morning trades saw it surpass this line. With the next targets at $1.1320 and possibly $1.1380, intraday momentum indicators are in overbought territory. Important data points this week include Thursday’s German IFO survey and preliminary May PMI release. The market anticipates an ECB rate cut next month, with another likely in H2, collectively reducing the deposit rate to 2.75%. Some ECB officials have floated this as being around the neutral rate. Concurrently, reports suggest the ECB is urging member banks to minimize their dollar funding needs. This de-risking move follows concerns that the US may not grant access to swap lines in a future crisis, although this hinges on the Fed rather than Treasury, and Chair Powell has affirmed the Fed’s commitment. One de-risking measure is reducing dollar-denominated asset holdings. Reports also indicate the US may retract certain capital rules from the Great Financial Crisis era, particularly easing the Supplementary Leverage Ratio. There’s talk of exempting Treasury bonds, as currently, large US banks are mandated to hold 5% of Tier One capital under the SLR, a higher threshold than in other affluent nations.
## United Kingdom
Sterling, having traded on both sides of Thursday and Friday’s ranges, reached $1.3400 in European morning trades. Important resistance is the three-year high set late last month near $1.3445. Meanwhile, the UK and EU reached a new tentative agreement on defense and security, alongside extending fishing rights to 2038, reciprocated by agreements on energy cooperation and agricultural standards. Key UK high-frequency data will release later in the week, including the CPI, flash PMI, and retail sales. Currently, back-to-back rate cuts by the Bank of England are unlikely, negating any prospect of a cut next month. The Monetary Policy Committee will have more data for its August meeting, with current odds for a cut slightly below 75% from nearly 85% a week ago.
## China
The dollar’s six-month low at CNH7.1790 last week may hold for some time, showing a slightly firm bias against offshore yuan, reaching CNH7.2180. The 200-day moving average rests near CNH7.2235. The PBOC set the dollar’s reference rate at CNY7.1916, the lowest since April 3, down from CNY7.1938 on Friday. Key high-frequency data for the week have been released. Despite various reforms, the property market struggles, with property sales down 1.9% year-to-date year-over-year. Property investment also weakened, declining 10.3% YTD YOY. Additionally, retail sales slowed to 5.1% YOY from 5.9%, and industrial production dropped to 6.1% YOY from 7.7%. Tomorrow, banks are likely to pass a 10 bp cut in the key seven-day repo rate to the loan prime rates. However, the Chinese economy could face challenges without further fiscal support. Growth, after a 1.2% quarter-over-quarter expansion in Q1, may drop below 1% this quarter, marking the weakest since Q4 2023.
## Japan
Before the weekend, the dollar dipped below JPY145 before finding a bid and reaching new session highs in North America at JPY146.00. This morning, it continues last week’s decline, reaching near JPY144.65. Initial support may lie around JPY144.25-45. With Q1 GDP reported before the weekend at -0.2% quarter-over-quarter, the March tertiary index at -0.3% holds less significance. However, Wednesday’s April trade balance may draw more attention, potentially reporting a third consecutive monthly trade surplus, a first since February-April 2021. Meanwhile, the US indicates nearing a trade agreement with Japan, although Tokyo’s confirmation is pending, which may impact the tariff regime President Trump plans to unveil in the coming weeks.
## Canada
The CAD1.4000-20 range continues to challenge US dollar bulls, capping the greenback several times last week. The US dollar is currently softer against the Canadian dollar, holding above last week’s low near CAD1.3935. A breach might target CAD1.3900. Tomorrow showcases April CPI data, anticipated to decline 0.2% month-over-month due to a base effect, lowering the year-over-year rate from 2.3% in March to around 1.6%. Core measures, crucial to the central bank, have inched up but remain under 3% in March. Chances of a Bank of Canada rate cut at the June 19 meeting stand around 67%, largely unchanged week-over-week.
## Australia
The Australian dollar experienced an almost 1.5-cent range last week, slightly settling below its midpoint. Low momentum indicators and last week’s three-day low below $0.6390 project a bearish technical outlook. Today’s gains, driven by a weaker greenback, are limited to $0.6450. A rise above could push to $0.6460. The Reserve Bank of Australia is predicted to deliver a second ease cycle cut tomorrow, lowering the cash target rate by a quarter-point to 3.85%. Earlier market volatility suggested a half-point cut, but calmer conditions have moderated expectations. Two more H2 2025 cuts are anticipated, with a terminal rate forecast at 3.25%.
## Mexico
Mid-last week saw the dollar fall to a seven-month low near MXN19.30 before rebounding to MXN19.5660 by the weekend, stalling near the 20-day moving average around MXN19.57, a level not close since April 11. Profound selling pressure brought the dollar down to almost MXN19.4150 today. The peso’s resilience stands out amidst aggressive rate cuts and multifaceted US challenges; since early this month, the peso has depreciated in only three sessions. This week’s high-frequency data, starting mid-week, aim to shed light on two key questions: Mexico’s Q1 economic momentum and inflation pressures, although the latter hasn’t deterred the central bank’s recent 50 bp rate cut. Banxico’s guidance indicates another likely half-point cut amidst growth concerns. Swaps market implied a 12-month overnight rate of 6.55% last week, down from 7.28% the previous week.
