United States
The U.S. financial markets are experiencing a calmer phase after a turbulent start to the week. The recently brokered ceasefire between Israel and Iran is holding, and the Trump administration disputes reports suggesting that the U.S. airstrikes only set back Iran’s nuclear endeavors by a few months. Despite the dollar’s downturn to new annual lows against the euro and sterling yesterday, it’s recovering a firmer stance today. Among G10 currencies, the Australian and New Zealand dollars are both slightly stronger, while other currencies are a bit softer, notably the Japanese yen and Swiss franc.
US Treasury yields are mostly declining. However, the 10-year US Treasury yield remains near 4.29%, showing little change. Gold is trying to recover from a 1.3% drop yesterday. US crude oil, specifically WTI, saw a significant drop on Monday and yesterday but is currently ticking back upward slightly, pushing past $65. Meanwhile, Federal Reserve Chair Jerome Powell is presenting his semiannual congressional testimony, echoing his previous statements post-FOMC meeting. The market remains skeptical, with only a 20% chance of a rate cut in the next meeting priced in. Additionally, the US is set to release data on new home sales, which are expected to show a decline for May.
Eurozone
The euro experienced a rally, reaching a fresh three-year high yesterday, peaking near $1.1640, before stabilizing above the $1.1600 mark. This upward momentum is supported by Germany’s plans to increase borrowing by 118.5 billion euros in the third quarter, primarily to enhance public infrastructure and defense. Meanwhile, auto registrations in the eurozone recovered in April and reported a 1.6% increase in May. This contrasts with the United States, where May auto sales experienced a decline on an annual basis, although the year-to-date figures, helped by acceleration in purchases driven by impending tariffs, are still up by 5.6%.
United Kingdom
Sterling hit a five-week low earlier this week but quickly rebounded to a new three-year high near $1.3650 yesterday. This momentum is largely attributed to the general weakness of the US dollar. The strength of the pound is bolstering market confidence that the Bank of England may cut rates during its upcoming Monetary Policy Committee meeting in August, with current odds at about 85%.
China
The US dollar’s broad decline has affected its rate against the Chinese yuan, recording a marginal new low for the year around CNY7.1605. The People’s Bank of China (PBOC) has been setting the dollar’s reference rate lower lately, aiming to stabilize the dollar’s decline. The recent changes in the reference rate mark the largest adjustments since late May.
Japan
In Japan, the US 10-year yield has decreased by 10 basis points over the last three sessions, with half of that reduction occurring yesterday. This drop offset gains from the previous three days. The dollar found support near the 20-day moving average. Japan reported that service producer prices for May eased to a 3.3% year-over-year pace, down from the revised April figure. Despite economic uncertainties, a hawkish voice from the Bank of Japan suggested potential rate hikes, although market sentiment leans against immediate action.
Canada
Yesterday, the Canadian dollar achieved minor gains against the US dollar, with the Norwegian krone performing worse among G10 currencies. The Canadian dollar has some degree of positive correlation with changes in WTI. The market is poised for a potential rate cut in October, with a 95% chance priced in, following a May CPI report that aligned with expectations.
Australia
The Australian dollar has seen a robust recovery after being sold to a six-week low earlier this week. This was followed by a rebound near $0.6520, just shy of the seven-month high achieved earlier this month. Australia’s May CPI shows a moderation, matching last year’s low. The futures market shows confidence in a rate cut at an upcoming central bank meeting.
Mexico
The Mexican peso enjoyed a boost after the dollar recorded a recent low against it. With Mexico providing a significant interest rate differential and its implied volatility being reasonably stable, market sentiment remains upbeat. Upcoming central bank meetings, along with discussions of tariff adjustments related to Mexican steel, have investors watching closely. The consensus is leaning toward another rate change, potentially a half-point cut, addressing ongoing inflationary pressures. Meanwhile, reports suggest forthcoming quota systems to manage tariffs on Mexican steel, aimed at meeting US market needs.
