## United States
Last week, the US dollar hit new lows for the year against several G10 currencies, including the sterling, the Norwegian krone, and the Canadian, Australian, and New Zealand dollars. The pivotal issue here is whether this marks a true breakout, signaling an accelerated decline of the dollar in the near future. However, within the larger downtrend, the evidence suggests that the dollar might consolidate with a firmer bias shortly. Notably, the three-month moving average of nonfarm payrolls rose in April and May, while the unemployment rate remained steady at 4.2% for the past three months. The Federal Reserve’s perspective shows no urgency for new action, allowing it to maintain a restrictive policy to curb price pressures. Upcoming data highlights, including the May Consumer Price Index (CPI), are expected to show small gains year-over-year. Surveys suggest many businesses plan to pass higher tariffs onto consumers. As US-China trade talks resume in London, economic data highlights also include China’s inflation and real sector data for May, as well as the UK’s employment report and April GDP. Meanwhile, with Ukraine’s continued drone strikes on Russia, potential retaliatory actions by Moscow could impact Europe significantly.
Despite discussions of a capital strike against the US over fiscal concerns and the erosion of the US exceptionalism narrative, US 10-year bonds remain the best performers among the G7 this year. While the S&P 500 is underperforming compared to Europe, it still posts a small gain, whereas Japan’s Nikkei and China’s CSI show minor losses. The Trump administration’s tariff strategy has faced judicial resistance, but the issue remains unresolved, adding uncertainty over businesses and investor decisions. Congress does not seem ready to reclaim deferred power from the executive branch.
Data from the Federal Reserve indicates survey data alone won’t prompt action, as the economy continues to be skewed by reactions to tariff announcements. Last week revealed slower auto sales and job growth in May. Attention is shifting to prices, with the May CPI expected to have risen by 0.2%. Given the base effect in May 2024, the year-over-year rate could rise to 2.5%, the first increase since January. The core rate might see a 0.3% rise, potentially pushing the year-over-year rate to 2.9% or 3.0%. The Producer Price Index (PPI) will also attract attention, although unlikely to match the notable month-over-month decline recorded in April.
The US Treasury plans to sell $119 billion in coupons, amid reports of poor reception to recent government bond auctions. Last week ended with a rise in US yields. The Dollar Index reached a near-term low around 98.35, but faces resistance around the 99.65-100.00 range. Russia’s retaliation against Ukraine, following Kyiv’s impactful drone strike, could spark a short-covering rally, with a move above 100.50 potentially targeting 102.00.
## Eurozone
Beginning in June 2024, the European Central Bank (ECB) cut its policy rates by 200 basis points and is now likely to pause to evaluate the cumulative effects of easing measures. While tensions within the Eurozone are low, issues with the US remain unresolved. The new German government’s consideration of a 10% digital tax might complicate efforts to restore relations with the US. Russia’s retaliation against Ukraine also poses a threat to the euro.
Economic reports this week feature the aggregate April trade surplus and industrial production figures. March data might have been influenced by attempts to counter US tariffs, with April potentially reflecting some repercussions. Germany reported a 3.6% increase in March factory orders and a 2.3% jump in industrial output, yet April saw only a 0.6% rise in factory orders and a 1.4% drop in industrial production. Similarly, German exports fell by 1.7% in April after a 1.2% increase in March.
The euro dropped to nearly $1.1370 following US employment data but quickly rebounded to around $1.1415, its pre-report level. Thursday’s high, just under $1.1500, could mark a near-term peak, leaving the euro vulnerable to decline to the $1.1260-$1.1320 range.
## United Kingdom
Sterling has been buoyed by two key factors. Firstly, markets have moderated their expectations regarding the Bank of England’s monetary policy actions. Swaps markets indicate a more than 30 basis point rise in the year-end rate over the past month. Secondly, the broad weakness of the US dollar plays a role, with the inverse correlation between sterling changes and the Dollar Index near -0.90. However, the euro’s weighting in the Dollar Index implies a strong correlation between sterling and the euro.
The UK is set to release its monthly labor market report and April GDP data. Despite the UK economy’s 0.7% growth in Q1, a leading figure among the G7, it appears poised for slower growth in the coming quarters. The data is unlikely to alter market expectations ahead of next week’s Bank of England meeting.
Last week, sterling reached a three-year high around $1.3615, but momentum waned following US job data, bringing it near $1.3500. Before the weekend, sterling slipped below its five-day moving average (~$1.3545) for the first time in the week. Support is expected near $1.3490, with stronger support around $1.3435, aligning with the 20-day moving average – a level sterling has not breached since May 16.
## China
While Beijing may be gaining ground as the US steps back from entities like the World Health Organization, internal policies continue to hinder its leverage over the situation. China’s currency management aims to maintain stability against the US dollar. The year-to-date increase in its 10-year yield is around three basis points, while the US 10-year yield has declined about ten basis points, marking the largest drop among G10 currencies. The CSI 300 index, however, has underperformed with a roughly 1.5% year-to-date decline.
China is set to report its May CPI and PPI as markets open on Monday. Despite a roughly 8% compounded annual consumption growth since the Great Financial Crisis, excess investment framing seems more persuasive. Consumer price deflation partly reflects food’s heavy weighting and competition for market share, as indicated by a recent price cut announcement by BYD. Lending figures are likely to remain robust given new quotas for local governments and banks. The practical embargo ahead of a May 11 agreement with the US might have distorted May trade. Reports suggest US retailers preemptively ordered goods before the cooling-off period, but container shipments slowed by late May.
The dollar approached its annual low against the offshore yuan near CNH7.1615 in late May, recovering to CNH7.1940 after US jobs data. It’s expected to regain more ground, with the CNH7.20 area in focus, though the upper end of the range extends toward CNH7.2240-60. Against the onshore yuan, the greenback could test the CNY7.20 area, correlating with the 20-day moving average – a level it hasn’t surpassed in over a month.
## Japan
The yen’s exchange rate continues to be influenced more by broad dollar movements than interest rates. Over the past 30 sessions, changes in the exchange rate and the 10-year US yield show a correlation of about 0.25, while the correlation with the two-year Treasury note is over double that. The correlation with Dollar Index changes exceeds 0.90. Notably, the correlation between exchange rate changes and US 10-year yields is higher than that with Japanese 10-year yields, exceeding the correlation with changes in the 10-year spread.
The upcoming economic calendar looks crowded, but much of the data is dated, like a revised look at Q1 GDP and April’s industrial output. New data includes the April current account, some survey measures, and the tertiary industry index, typically not market movers. The swaps market anticipates over 16 basis points of tightening by year’s end. An agreement with the US ahead of the G7 summit in mid-June has sparked newfound hope in Tokyo.
After reaching a six-month low near CNH7.1615 in late May, the US dollar has shifted into a consolidation phase. The upper range sits around CNH7.2250, finishing last week near CNH7.1900. Against the onshore yuan, the greenback might test the 20-day moving average (~CNY7.20), which it hasn’t breached in over a month.
## Canada
The Canadian dollar responds more to general US dollar movements (DXY) than interest rates, S&P 500 performance (risk), or oil prices. The correlation with the Dollar Index is nearly 0.75 for the past 30 and 60 sessions, respectively, with gold being a close second.
Following last week’s jobs report and Bank of Canada meeting, the economic calendar quiets down with April building permits, manufacturing sales, and Q1 capacity utilization rate. The swaps market has reduced the likelihood of a July rate cut to about 30% from nearly 65% last week. The year-end rate is projected near 2.50%, rising from less than 2.20% in late April and 2.35% at May’s close.
Recently, the US dollar fell to a new seven-month low against the Canadian dollar around CAD1.3635. Since February’s end, the greenback has recorded weekly advances only four times over 14 weeks, hinting at a near-term low. However, momentum indicators haven’t reversed course, facing initial resistance around the CAD1.3725-50 range, clearing which could target CAD1.3800-30.
## Australia
The 30-day correlation between Australian dollar changes and the Dollar Index is slightly under 0.75, higher than the correlation with Canadian dollar (~0.65) and gold (~0.60). Over 60 sessions, the correlation with the Canadian dollar nears 0.70, with gold at 0.60 and the Dollar Index at 0.55.
The upcoming week is notably quiet, focusing on consumer and business confidence surveys. Futures markets imply an 80% chance of a rate cut at next month’s central bank meeting, up from about two-thirds odds previously. The current overnight cash target rate is 3.85%, with futures markets anticipating it near 3.09% by year-end, increasing a few basis points over the last week.
On June 5, the Australian dollar reached a marginal new high for the year below $0.6540, settling above $0.6500 for the first time since November’s end, though it lacked follow-through before the weekend. It settled just below $0.6500 again, with a $0.6480 break potentially leading to the $0.6445-50 range, as stronger support lies around $0.6400, a level last settled below on May 12.
## Mexico
The Mexican peso’s resilience seems tied to the broad dollar weakness and favorable interest rate differentials. Though Mexico’s central bank is cutting rates aggressively, the carry remains attractive, with a total return near 11.75% for the year’s first five months. Mexico’s 10-year peso bond yield has decreased by 110 basis points this year to 9.30%, while its 10-year dollar bond yield has fallen nearly 30 basis points to just under 6.35%.
Mexico will release CPI for May and April industrial production data. Given early May CPI data, a firm CPI reading exceeding 4%, the top of the target range, is anticipated. The core rate could also surpass 4%, although growth downgrades suggest the central bank is likely to enact a 50-basis point cut later this month.
Recently, the dollar reached a new low against the peso since last September, slightly below MXN19.10, despite broader dollar gains. It settled below the previous session’s low (~MXN19.14), with the lower Bollinger Band near MXN19.08. Momentum indicators are retracting from mid-range, with the greenback holding above MXN19.00 since late last August, with few obstacles to a retest.
