Marc to Market

Video: Last Week's Echo to Reverberate

noreply@blogger.com (Marc Chandler) — Sat, 20 Jun 2026 14:11:35 -0400

Here is a few minute video where I try to sketch out the significant developments last week, including the Fed's hawkish hold, BOJ rate hike, and the by-election in the UK, whose effects may not have run their course yet.

That said, the Fed's hawkish hold will likely to persist, and the El Nino weather pattern warns of the risk of another food shock in the fall. The BOJ's rate hike did not stop the market from extending the yen's sell-off. Gaming intervention and the possibility of greater US support (than in April and May) is part of trading the yen now. The UK's Brexit referendum was a decade ago, and in that time, the country has had six prime ministers, and seems likely to have a seventh in the second half of the year.

August WTI has come off a little more than 25% since the peak on May 18, a little over $100. At last week's lows, it was back at levels seen in mid-March. Much good news seems to be discounted, and yet the ceasefire remains fragile.

Disclaimer

Week Ahead: Digesting Last Week's Evolving Developments

noreply@blogger.com (Marc Chandler) — Sat, 20 Jun 2026 06:59:54 -0400

Last week was momentous. There was a fragile 60-day de-escalation during negotiations between Washington and Tehran. However, the allies of both (Hezbollah and Israel) continue to clash, stalling talks. Still, oil prices tumbled 7-9%. At the same time, a new era at the Federal Reserve has begun. The new chair eschews forward guidance, and this was reflected in the terse statement and the fact that he did not participate in updated individual projections. Ironically, this led to even more weight being placed on Summary of Economic Projections. Nine of the remaining 18 Fed officials anticipated at least one rate hike would be appropriate this year. This sparked a 13 bp jump in the two-year US Treasury yield, the largest rise since April 2025, and lifted the dollar broadly.

The Bank of Japan raised its overnight target rate to 1% last week. It did not prevent the yen from extending its slide to a new low since July 2024. Given the hike, perhaps Japanese officials can count on US support for intervention in a way if did not get during the April and May intervention. By measures such as size of speculative short yen position in the CME futures, the one-way direction of the market, and volatility, conditions favor intervention more than they did at the end of April, when the market responded to what was perceived as not sufficiently hawkish message by BOJ Governor Ueda. Meanwhile, Andrew Burnham will return to the UK parliament after winning a byelection. The political drama will play out in the coming days/weeks, and many expect Burnham to become the next Prime Minister. The largely as expected results, seemed to have marginal impact at best, and the outsized nearly nine basis point rise in the UK 10-year Gilt yield was more a function of the jump in oil prices, which lifted most European yields by 5-6 bp before the weekend, and the deterioration in the government finances that were reported on Friday.

Drivers: The one variable whose changes remain highly correlated (~0.65) with changes in the Dollar Index is the two-year US yield over the past 30 sessions. While the dollar typically has risen alongside the increase in US rates, the Dollar Index is inversely correlated with changes in the S&P 500. Near -0.45, the inverse correlation is the least extreme since the end of Q1 26.

Data: Most of the high-frequency reports in the coming days consist of surveys, mostly from the regional Federal Reserve Banks but the preliminary June PMI will be reported on Tuesday. Real sector data include May personal income and consumption (along with the deflators, which can be extrapolated from the CPI and PPI), durable goods orders and May's goods trade deficit. The Federal Reserve meets at the end of July (July 28-29) and the bar to a change in policy is high. The Fed funds futures have about 10 basis points of tightening discounted--and if the real choice is between standing pat and hiking 25 bp, the odds of a hike are around 40%. At the end of April, the was still a small chance of a cut priced in and at the end of May, about 1.5 bp of tightening was reflected in the swaps market.

Prices: On the back of the hawkish hold by the Federal Reserve, the Dollar Index broke to the upside. It reached a new high since May 2025, and the high ahead of the weekend, slightly below 101.15, met the (38.2%) retracement objective of DXY's decline since the high in January 2025, a week before President Trump's second inauguration. Overcoming that area, target the 102.85, which corresponds to the 50% retracement and is also where the 200-day moving average is found. A note of caution, in the pre-weekend session, the Dollar Index may have recorded an ostensibly bearish shooting star candlestick. The price action on Monday will be important for the near-term technical outlook.

EMU

Drivers: The euro 's 30-day inverse correlation with the US two-year yield remains robust near -0.85. The correlation between the exchange rate and changes in the German two-year yield is also inverse but a less than against the US two-year yield, around -0.52. The euro also is the most correlated with the S&P 500 in more than a decade, near 0.75 earlier this month but has eased to a little more than 0.60. It fits into the narrative about European investors buying US equities but hedging the currency risk. The euro's correlation with changes in the Stoxx 600 is weaker (~0.27)

Data: The swaps market leans slightly toward another ECB hike next month but has it fully discounted for September and around an 80% chance of another before the end of the year. There are two surveys due this week, but neither will likely be decisive in July rate decision, barring a major surprise. First is the preliminary June PMI. Recall that in the first five months, the composite (output) fell four times and at 48.5 in May was the weakest since January 2024. The other survey is the ECB's on inflation expectations. In May, the one-year stood at 4.0% and the three-year stood at 2.9%. May's inflation was confirmed last week at 3.2% with a 2.5% core. The ECB's updated forecast is for CPI to increase by 3% this year, 2.3% next year, and 2.0% in 2028.

Prices: The euro stalled in the first half of last week near $1.1620. The backing up of US rates saw it drop to a little below $1.1420 ahead of the weekend. The low for the year was recorded in mid-March near $1.1410. The euro bounced back and reached a new session high in light North American dealings slightly above $1.1480. A potential bullish hammer candlestick was left in its wake. However, the euro still settled below the previous week's low. Regaining a foothold above $1.15 is needed to stabilize the technical tone.

PRC

Drivers: The PBOC continues to guide the yuan higher through the daily fix. The yuan is the strongest currency in Asia so far this year. It has risen by 3.20%-3.40% (offshore, onshore, respectively). A distant second is the Singapore dollar, up about 0.20%. The case that a stronger yuan would help lift other currencies in the region seems off-the-mark so far. Only the onshore and offshore yuan have risen against the greenback among Asian currencies so far this year. The dollar's performance against the offshore yuan has about a 0.65 correlation with the Dollar Index over the past 30 sessions and a little more than 0.70 over the past 60 sessions.

Data: Without signals from the central bank, Chinese banks will likely keep the loan prime rates steady at 3.0% and 3.50% for one- and five-year loans, respectively. The five-year government bond yield is little changed over the past month, near 1.45%. China also will likely confirm a 3.7% current account surplus is Q1 26. The IMF projects a slightly smaller surplus this year (3.5% vs. 3.8% in 2025), while OECD estimates steady at 3.8% before increasing to 4.0% next year. Early Saturday in Beijing, May industrial profits will be reported. Although officials have been critical excess investment, the rise in industrial profits has been largely function of two sectors--tech and materials. Industrial profits surged 24.7% year-over-year in April after rising 15.8% in March.

Prices: The dollar recorded a new three-year low against the offshore yuan in the middle of last week, near CNH6.7540 before the FOMC meeting. The broad greenback gains lifted it to about CNH6.7980 ahead of the weekend, its highest level since May 22. Near-term risk may extend to around CNH6.82.

Japan

Drivers: Changes in the dollar against the yen remain more sensitive to changes in US 10-year yields than to the 10-year interest rate differential. The 30-day correlation with changes in US 10 Treasury yields is above 0.56, easing from a new high since last September (~0.65) seen earlier last week. The correlation approached 0.10 earlier this year. The correlation of the changes in the exchange rate and the 10-year interest rate differential is around half as much.

Data: The market favors another hike by the Bank of Japan before the end of the year, though it is not fully discounted. However, given the glacial speed at which the BOJ is moving, it seems unrealistic to expect this week's data to have much impact on expectations. The market typically has muted reaction to the PMI. Still, recall that the May composite stood at 51.1, the low for this year after falling for three consecutive months. The other report, Tokyo's June CPI, is a good indicator of the national reading. In May, the national CPI stood at 1.5% and 1.4% for the core. The target for the latter, which excludes fresh food, is 2%. It has not been above the target this year. Most other countries wish they had Japan's inflation and would most likely not be raising interest rates. Japan has purchased lower inflation, as it were by providing energy subsidies. Tokyo's headline CPI was 1.4% in May, with the core at 1.3%.

Prices: The dollar reached JPY161.80 the day after the FOMC's hawkish hold. This was its best level since it came within spitting distance of JPY162 in July 2024. The greenback rose by about 0.65% against the yen last week. It is the fifth weekly gain in six weeks. It is arguably more of a one-way market now than in late April when the BOJ intervened. At the end of April, one-month implied vol was near 7% before the intervention. It reached 8.1% before the weekend, the highest May 7. As of June 9, the most recent CFTC data, non-commercials (speculators) in the CME futures have amassed the largest net short yen position since July 2024.

Drivers: Of the past 30 and 60 days, changes in sterling are more correlated with the euro than the Dollar Index. However, sterling's correlation with the US two-year yield is less than the euro's over the past 30 and 60 sessions. Sterling remains not only inversely correlated with US two-year rates but is also inversely correlated with changes in the two-year Gilt yield (30-day correlation is around -0.30 and the 60-day correlation is about -0.40).

Data: The only economic report of note in the coming days is the preliminary June PMI. In May, the composite PMI fell to 49.7. The last time it was below the 50 boom/bust level was in October 2023. The BOE stood pat last week (3.75%) with a 7-2 decision, and the market is nearly evenly split about the outcome at next month's meeting. However, a hike is nearly fully discounted for the following meeting in mid-September. The political fallout from last week's byelection may take a bit of time to sort out but a formal challenge to Prime Minister Starmer, the sixth prime minister since the Brexit referendum a decade ago, is a certainty.

Prices: Sterling, which began last week above $1.35 fell slightly below $1.3165 ahead of the weekend to approach the low of the year, recorded at the end of March near $1.3160. It recovered amid the wider pullback in the US dollar and traded back toward the session high near $1.3240 in late European turnover. Near-term potential may extend toward $1.3275, while a push above the $1.3310-15 area improves the technical tone.

Canada

Drivers: Changes in the US dollar against the Canadian dollar show a low correlation over the past 30- and 60 sessions with changes in the US-Canada two-year interest rate differential (0.15-0.18). The exchange rate is more correlated with the Dollar Index (~0.57and 0.66, respectively) and the US two-year yield (~0.53 and 0.42). The exchange rate is also positive correlated with a change in Canada's two-year yield (~0.41 and 0.32). The Canadian dollar tends to weaken as US and/or Canadian yields rise. Yet, the rise of the US two-year premium began widening in in early May and has risen consistently alongside the greenback rising against the Canadian dollar. The US two-year premium rose from about 94 bp on May 1 to slightly more than 140 bp at the end of last week.

Data: The market understands the dilemma of weak growth and firm prices that Bank of Canada Governor Macklem discussed as keeping the central bank on the sidelines in the coming months. The market is pricing in a hike late this year. Still, this week's data highlights are the May CPI and the establishment jobs survey (SEPH). Through April, the headline CPI has risen at an annualized pace of about 5.4%. The core rate was at 1.5% in April, the underlying cores, which the central bank pays attention to, while Macklem has suggested it might overstate, averaging 2.05% in April. The market responds more to Canada's household survey that is often reported alongside the US jobs data on the first Friday of the following month. The US reports the household and establishment surveys, at the same time, while Canada's establishment survey is reported with a lag. In April, the household survey found a loss of almost 18k jobs, while establishment survey had a nearly 32k decline. In May, the household survey saw an 87.8k increase in jobs (154k full-time positions vs. -46.7k in April).

Prices: Since the Canadian dolla5r's slide began at the start of last month, it has fallen by about 4.15% and is the worst performing G10 currency. It remains under pressure. The Canadian dollar fell for the seventh consecutive session ahead of the weekend. The Loonie fell for the third consecutive week, and the sixth week in the past seven. The greenback reached almost CAD1.418 in North America before weekend, its highest level since April 2025. With last week's gains, the US dollar met the (50%) retracement objective of the decline from the multiyear high in February 2025 (~CAD1.48). The next retracement (61.8%) is slightly below CAD1.43. Still, some caution is in order. The US dollar settled above the upper Bollinger Band for the past three sessions, and the momentum indicators are stretched.

Australia

Drivers: The correlation between changes in the Australian dollar's exchange rate and the two-year interest rate differential is more robust than we saw with the Canadian dollar. The Aussie's correlation is about 0.60 and 0.50 over the past 30 and 60 sessions, respectively. Australia's two-year premium over the US has dropped from about 90 bp on April 30 to almost 25 bp in the middle of last week, the lowest since last November. The Aussie may be the closest thing to a proxy for gold among the G10 currencies. The rolling 30-day correlation is almost 0.85, and the 60-day correlation is near 0.73, which is the highest since early 2024.

Data: The Reserve Bank of Australia has raised rates three times this year and recognizes that the impact is being felt. The bar to another hike seems high now, and many suspect the short tightening may be over, after a short easing cycle. Still, in addition to the preliminary PMI, Australia will see three reports that feed into the RBA's reaction function: CPI, employment, and household spending. In the four months through April, Australia's inflation rose at a 5.7% annualized pace. Given the base effect (-0.5% in May 2025), the year-over-year headline rate may lurch higher from April's 4.2% pace. Australia lost jobs in April (18.6k) for the first time this year. The unemployment rate rose from 4.1% in December to 4.5% in April, while the participation rate has been steady at 66.7%. Household spending is expected to have stabilized after falling 1.1% in April, which followed a 1.6% jump in March. The swing appears to have been driven by a 1.3% decline in food (+1.6% in March), transportation dropped 4.7% (+5.4% in March) and a 2.2% contraction in clothing and footwear (+0.9%) in March.

Prices: The Australian dollar recorded last week's low in Friday's turnover, near $0.6990. It recovered to about $0.7025 by late in the European session. It fell in the past four sessions and in nine of the past 11. The technical tone remains fragile, but a move above $0.7050 would help stabilize it. That said, we continue to monitor a possible head and shoulders topping pattern. We estimate the neckline is $0.7080-$0.7100. Last week's high, slightly below $0.7090 on Monday, tested the neckline, which is not unusual in this pattern. It held and the Aussie declined for the rest of the week. Recall, that the $0.7000 also is the (61.8%) retracement of the Aussie's rally from the March low (~$0.6835).

Mexico

Drivers: The correlation between changes in the two-year US yield and the dollar/Mexican peso exchange rate over the past 30 session is near 0.79, the highest in more than 20 years. Also, it is above the 30-day correlation between the exchange rate and the Dollar Index (~0.70). Note that the 30-day correlation between changes in the exchange rate and Mexico's two-year yield is also positive (USD tends to rise alongside Mexican interest rates). It is a little below 0.50.

Data: It is a week full of important economic data and the central bank meeting on Thursday. Yet, the fact of the matter is that the economy contracted in Q1 (-0.6% quarter-over-quarter). Still, after cutting the overnight rate by 425 bp in the past two years, and most recently while the headline and core CPI were above the 2-4% target range, the central bank has signaled an extended pause. Mexico's inflation headline inflation in May slipped slightly below 4% for the first time since January. The core rate remains above 4% and the reading for the first half of June will be published on Wednesday, the day before the central bank meeting. However, before the inflation report, Mexico sees retail sales and that IGAE report, which is like a monthly GDP estimate. The day after the central bank meets, the May trade figures are due. Through April, Mexico had a $3.5 bln trade surplus compared with a $313 mln deficit in the first four months of 2025 and a $9.4 bln deficit in the same 2024 period. To put the trade balance in perspective, note the worker remittances to Mexico were $19.5 bln in the Jan-Apr period this year and almost as much in the same 2024 period.

Prices: The dollar had been in a roughly MXN17.16-MXN17.25 trading range in the few days before the FOMC meeting. The greenback spiked to almost MXN17.4370 in response to the hawkish hold. In the past two sessions, the US dollar has held below that high and consolidated. In the larger picture, the dollar seems well supported MXN17.12-15 and capped around MXN17.50-MXN17.54.

Disclaimer

Dollar Glows After the Fed's Hawkish Hold

noreply@blogger.com (Marc Chandler) — Thu, 18 Jun 2026 07:01:45 -0400

The Federal Reserve delivered a hawkish hold yesterday. The jump in US rates spurred a strong dollar advance that has been extended a little today. The new Fed chair received mostly high marks and dealt a blow to those narratives that saw him as beholden to the president’s wishes. He repeatedly underscored his and the Fed’s commitment to price stability. Warsh appears to harken back to Greenspan’s era before greater transparency replaced ambiguity in the communication. Less is more. On Tuesday, the Fed funds futures were discounting 21 bp of tightening this year, and now it is near 40 bp.

Three other G10 central banks met today, Norway’s Norges Bank, the Swiss National Bank, and the Bank of England. All three kept policy unchanged. Norway signaled another hike is likely this year. The swaps market has it discounted for September. The Swiss National Bank kept its deposit rate at zero. The BOE’s target rate remained at 3.75% and the swaps market anticipates at least one hike by year end. Today’s byelection in Makerfield will shape the near-term course of national politics and set the stage for a formal challenge to Prime Minister Starmer. Lastly, reports indicate ships are beginning to transit the Strait of Hormuz and oil prices are extended their slide.

Prices

G10

• Following the hawkish hold by the Federal Reserve, the euro tumbled to its lowest level since the end of March. It has made a new low near $1.1460 today. The intraday momentum indicators are stretched, and the euro looks poised to stabilize. Initial resistance may be around $1.15, where options for 9.5 bln euros expire today and another 2.9 bln euros on Friday. That said, the next technical target may be the low from late March around $1.1445 and the mid-March low, which is also the low for the year, was about $1.1410.

• Rising US yields pushed the yen to a new low since July 2024. The dollar reached JPY160.80. It backed off to about JPY160.50 but returned to JPY160.90 in Europe. Options for $1.5 bln at JPY161 expire today. The BOJ tried to overwhelm the market in late April/early May following the BOJ meeting that was judged as not sufficiently hawkish. With the US on holiday tomorrow, is this an opportunity for Japanese officials to try to overwhelm the market again. Separately, we will likely learn tomorrow that Japan’s core inflation was below its 2% target for the fourth consecutive month in May.

• Sterling tumbled to $1.3285 yesterday, its lowest level in a little more than two months. The firm labor market report was insufficient to prevent sterling from extending yesterday’s losses to slightly below $1.3225 today. The early April low was around $1.3180 and the late March low, and low for the year, was closer to $1.3160. The intraday momentum indicators are overextended. The $1.3265-85 area may offer the first hurdle.

• The Canadian dollar was sold to new lows for the year yesterday amid the jump in US rates and the risk-off reflected in the sharp equity market losses. The greenback reached almost CAD1.4125 yesterday and nearly CAD1.4135 today. It found support a little below CAD1.41 today. Previously, the year’s US dollar higher, which was recorded last week, was near CAD1.4025. Last November’s high was around CAD1.4140.

• While the Australian dollar was sold yesterday and traded slightly below $0.7000, it held above last week’s low (~$0.6980). It is consolidating so far today between about $0.7005 and $0.7040. In the bigger picture, we have been monitoring a possible head and shoulders top pattern. The neckline is around $0.7080-$0.7100 and projects toward $0.6880.

• The dollar made a one-month low against the Mexican peso on Monday near MXN17.1575. It reached almost MXN17.4370 on the back of the jump in rates and the equity drop. The greenback’s gains were halved in late dealings, and it settled near MXN17.3055. It is trading in about a MXN17.24-MXN17.3550 range today. The intraday momentum indicators are overextended and a pullback in North America toward the session low seems reasonable. Separately, Brazil’s central bank delivered its third consecutive quarter-point rate cut and brought the Selic to 14.25%. It was largely anticipated though inflation at 4.72% in May is above target and unemployment is near a record low. The dollar settled at BRL5.1115 yesterday, a six-day high close. Near-term risk extends back to last week’s high around BRL5.20.

• The dollar reached a five-day high against the offshore yuan yesterday, near CNH6.7815. Initial resistance may be around last week’s high (~CNH6.7925). It is consolidating inside yesterday’s range today. The dollar’s jump gave the PBOC little choice, it would seem, but to fix the dollar higher today and it did (CNY6.8130 vs. CNY6.8096 yesterday).

• The prospect of a trade deal with the US and the further drop in oil prices helped the Indian rupee extend its recovery into the fifth session today. In fact, initially the dollar gapped higher today and reached INMR94.7225 before reversing lower and fell to INR94.17, its lowest level since early May. It settled at INR94.33 for a nearly 0.85% loss this week, the largest in a little more than two months.

Other Markets

• The sharp decline in US equities did not carry over much to the Asia Pacific session today. Most large bourses advance but Hong Kong and mainland companies that trade there. Australia and New Zealand indices also retreated. Europe’s Stoxx 600 is threatening to end a five-day advance. US index futures are bouncing back, with the Nasdaq futures up about 1.6% and the S&P 500 up around 0.9%.

• The jump in US rates yesterday (13 bp in the two-year note and nearly five bp in the 10-year note) appeared to drag global rates higher today. European 10-year benchmark yields are mostly 1-2 bp higher. The 10-year US Treasury yield is about three basis points softer, near 4.45%, while the two-year yield is firm near 4.19%. European two-year rates are mostly 4-6 bp higher.

• Gold was not a match for the jump in US rates and dollar. It posted an ostensibly bearish outside down day. It closed the gap created by Monday’s higher opening and settled inside it. The yellow metal is firmer today but within yesterday’s range. It has traded between about $4254 and $4330 today. Silver’s price action was similar—an outside down day and filled the gap from Monday. However, unlike gold, silver settled below now filled gap, adding to the bearish action. Yet, it too has not seen follow-through selling today and is slightly firmer, above $68.

• July WTI fell to $74.60 yesterday before stabilizing. Losses were extended about $74.15 today. Reports indicate that the first ships, including a Saudi supertanker has made its way through the Strait of Hormuz today. July WTI is off a little more than $20 since the start of last week. The momentum indicators are stretched, and much good news seemingly has been discounted. The memorandum of understanding, or as one US Senator called it “a framework on how to get a deal”, has been signed and apparently is being implemented, and therein lies the immediate risk.

Data

• Following yesterday’s FOMC’s hawkish hold, today’s US data seems like small beer. The June Philadelphia Fed business outlook is one of the first June surveys that are reported. The Empire manufacturing and services were weaker than expected. Weekly initial jobs claims draw some attention after last week’s report saw a third consecutive weekly increase to 229k, the most since January. Continuing claims rose to a two-month high. Late today, the Treasury’s April international capital report (TIC) will be released. In Q1 26, there was a monthly average net foreign purchase of US stocks and bonds of about $101.55 bln, which is down from an average of about $128.55 in Q1 25. Chair Warsh may eschew forward guidance, yet for the time being at least, the market uses the Summary of Economic Projections as its forward guidance.

• Canada reports May industrial product and raw material prices. These are not the stuff that moves markets. Tomorrow, Canada is expected to report a 0.6% rise in April retail sales (0.9% in March). Next week’s highlight is the May CPI. The swaps market expects the Bank of Canada to remain sidelined until at least the fourth quarter.

• The eurozone reported a 15.7 bln euro current account surplus in April. In April 2025, it stood at 22.1 bln euros. In the first four months of the year, it averaged 24.09 bln euros compared with an average of 24.25 bln euros in January-April 2025 and 38.83 bln euros in the same period in 2024. Separately, construction spending rose by 0.6% after rising by a revised 1.7% (0.8% initially) in March.

• Ahead of the expected standpat decision by the Bank of England (7-2 vote), the UK released labor market report. Average weekly earnings growth with and without bonuses was steady at 4.4% and 3.4%, respectively. The number of payrolled employees rose by 2k in May. It was the first increase in four months. Through May, the UK payrolls fell by about 85k compared a loss of 43.2k in the first five months of 2025. The claimant count rose by 31.2k for an average monthly increase of about 12k this year compared with an average decline of almost 5k a month in the year ago period. The ILO measure of unemployment slipped to 4.9% from 5.0%. The swaps market has the BOE on the sideline until late this year when a 25 bp hike is discounted in Q4. Makerfield holds its much anticipated byelection today, and a victory by Andrew Burnham sets the stage for a formal challenge of Prime Minister Starmer, who the Labour Mayor of London declined back earlier this week. Still, there are hopes that there can be an orderly transition.

Disclaimer

New Era at the Federal Reserve

noreply@blogger.com (Marc Chandler) — Wed, 17 Jun 2026 06:43:50 -0400

Subdued activity mostly characterizes the capital markets today, ahead of the sessions highlight, the outcome of the FOMC meeting that Kevin Warsh will chair for the first time. Given his criticisms of the central bank and his past comments, it is possible he does not participate in the Summary of Economic Projections. At the press conference, he may share initiatives that are under consideration. There is a strong belief that after an extended period of continuity (Bernanke, Yellen, Powell), a new chapter in the Federal Reserve’s history is beginning.

The dollar is mostly firmer today, but the Swiss franc and Japanese yen are bucking the trend. Sweden’s Riksbank delivered a hawkish hold implying a rate hike by early 2027, but the krona is off about 0.20%, and among the G10 currencies, only the New Zealand dollar is heavier. The UK’s April CPI was softer than expected but there was little doubt before it that the Bank of England will hold policy steady tomorrow. The same is true for Norway’s Norges Bank. Late today, Brazil’s central bank meets and the swaps market leans toward a 25 bp rate cut that would bring the Selic to 14.25%. Oil prices initially extended their sharp decline but stabilized and both Brent and WTI futures are slightly higher.

Prices

G10

• Even though the euro was confined to Monday’s range yesterday, it posted its highest settlement since June 4, a little above $1.1605. The $1.1615 level, which has been frayed on an intraday basis for the last two sessions, corresponds to the (61.8%) retracement of the euro’s decline since the May 29 high (~$1.1685). The euro is trading quietly with a softer bias today. It has slipped below $1.16 in Europe. Initial support is seen $1.1590 but yesterday’s low was closer to $1.1575. We continue to note resistance in the $1.1640-50 area.

• Given that the BOJ’s rate hike was well discounted, we did not expect it to have much of an impact on the yen. In subdued trading today, it is within yesterday’s range. The greenback held above JPY160 yesterday and settled near its highs, slightly below JPY160.50. Last week’s high was slightly shy of JPY160.60. The April 30 high before the BOJ intervention was a smidgeon above JPY160.70.

• Sterling held above $1.3390 in the Asia Pacific session yesterday, a little below Monday’s low (~$1.3405) and set the session high near midday in NY near $1.3445. It must overcome resistance around $1.3485 to be meaningful, but for the first time in three weeks, it settled above the 20-day moving average. There has been no follow-through today, and sterling is trading in a narrow range (~$1.3410-$1.3435). Softer than expected CPI (0.2% vs. 0.4%) has spurred a Gilts rally that has not impressed sterling traders.

• The US dollar made another run at last week’s high for the year against the Canadian dollar (~CAD1.4025) but held slightly below. Still, the greenback posted its highest settlement since early last December and remains within striking distance. It is in less than a 10-tick range around CAD1.40. Yesterday’s session high was set in Asia-Pacific hours, and the session low was near midday in NY (~CAD1.3980). The US dollar’s 3.5% advance since the May 1 low (~CAD1.3550) is getting stretched. We are looking for some signal in the price action that a top is in place.

• The Australian dollar traded quietly yesterday, inside Monday’s range. It is within yesterday’s range today. We have been monitoring a head and shoulder topping pattern. Although the downside momentum stalled last week, the Aussie has not risen back above the neckline, which is $0.7080-$0.7100. Yesterday’s high was $0.7080.

• The Mexican peso advanced for the seventh consecutive session against the US dollar yesterday. It is the longest rally since last September’s eight-day run. The peso has appreciated by about 1.5% over the run. However, the downside momentum looks to have stalled in the MXN17.15-16 area. The low since May 2024 was recorded around the middle of February near MXN17.0865. The greenback is a little firmer today, but within yesterday’s range. A move above MXN17.2750 could signal a near-term low is in place.

• The offshore yuan rose it a new three-year high today. The greenback was sold to CNH6.7540. Through yesterday, the offshore yuan has risen by about 3.25% this year while the onshore yuan has risen by slightly more than 3.4%. This is the best in the region and accept to the Singaporean dollar, the other Asian currencies have declined against the dollar. The PBOC set the dollar’s reference rate at CNY6.8096 (CNY6.8108 yesterday).

• The US dollar gapped lower against the Indian rupee on Monday and consolidated inside that range yesterday. The near-term price action is important for the technical outlook. The top of the gap is around INR94.9475. If the dollar settles above it, it would be seen as a bullish development. On the other hand, follow-through dollar selling could signal a test on last month’s low near INR94.07. Today, the dollar was sold to a six-week low near INR94.29 but gains were trimming in late dealings, and it settled near INR94.5325.

Other Markets

• Profit-taking in the US tech stocks saw the Nasdaq tumble a little more than 1.1% yesterday, snapping a three-nearly 6% rally. The S&P fell almost by 0.60%. However, most bourses in the Asia Pacific region shrugged it off, but Hong Kong and the index of mainland shares that trade there, though China’s CSI 300 rose nearly 1%. Europe’s Stoxx 600 is extending its advance for the fifth consecutive session. In futures trading, the Nasdaq is up about 0.5% while the S&P 500 and Dow are narrowly mixed.

• Falling oil prices appeared to lend support to European and North American bonds yesterday. Benchmark 10-year yields fell 2-4 bp. The 10-year US Treasury yield fell in back-to-back sessions for the first time this month and near 4.44%, the yield has been practically flat since the end of April. Falling yields helped ensure a solid reception to Treasury’s $13 bln sale of 20-year bonds. Asia Pacific bond markets played catch-up and fell 4-7 bp today. European yields are narrowly mixed but for the 10-year Gilt, which is off 4-5 bp. The 10-year US Treasury yield is slightly softer but above 4.43%.

• Gold recovered from the test on $4000 last Thursday and approached $4370 on Monday before consolidating yesterday. It continues to consolidate and remains within Monday’s range. Nearby resistance is seen in the $4375-$4405 band. For its part, silver bottomed last week near $61.60 and reached about $71.30 on Monday before consolidating yesterday and today.

• July WTI took a leg down in North America yesterday amid reports that the MOU between the US and Iran will lift the sanctions on Iranian oil. The July WTI contract was sold to a new three-month low near $75.50. It fell another $1 today before recovering and is now slightly firmer on the day. The $74.35 area corresponds to a (61.8%) retracement of this year’s rally and the 200-day moving average is near $71.20.

Data

• Despite elevated household debt stress levels and the decline in savings, Americans continue to shop. The median forecast in Bloomberg’s survey is for retail sales to have risen by 0.5% in May, the same as in April. In the first four months of the year, US retail sales grew by an average of 0.8% a month compared with 0.2% a month in Jan-Apr 2025 period. Of course, the retail sales figure has been inflated by rising prices, but still we know that through April, real personal consumption rose by an average of 0.2% a month compared with a flat average in the first four months of last year. Still, it is outcome of the FOMC meeting—Warsh’s first as chair—and the Summary of Economic Projections (of which he is critical and has suggested before that he might not participate in the exercise. There is little doubt but that the FOMC will standpat and the statement may be crafted to avoid the three dissents over the bias at the April meeting. The post-FOMC press conference will draw much attention as the markets take the measure of the new chair.

• Ahead of tomorrow’s Bank of England meeting, at which it will most likely stand pat, the UK reported an acceleration in May’s CPI. The 0.2% increase was half of the median forecast in Bloomberg’s survey and kept the year-over-year rate steady at 2.8%. At an annualized pace, UK CPI has risen by 3.6% this year. Core prices are 2.6% higher year-over-year after a 2.5% increase in April. Service prices accelerated to 3.7% from 3.2%. Input producer prices rose 0.2% after a 2.6% surge in April (revised from 2.4%) for a year-over-year increase of 8.7% (vs.7.9%). Output producer prices were eased to 4.0% from 4.1%. The divergence warns of margin risk.

• True to form, Japan’s trade balance deteriorated in May (as it has done in 18 of the past 20 years). It nearly always has improved in June. Japan reported a trade deficit of about JPY379 bln, its first deficit since January. Through May, its trade deficit is around JPY577 bln vs. almost a JPY2 trillion shortfall in the first five months of last year. Separately, Japan reported core machine orders surged 8.7% in April after they plunged 9.4% in March.

Disclaimer

The Dollar Holds above JPY160 after BOJ Hikes, Aussie is Firmer after RBA Stands Pat

noreply@blogger.com (Marc Chandler) — Tue, 16 Jun 2026 06:42:29 -0400

Investors are still in the dark over the precise details of the memorandum of understanding between the US and Iran, but they apparently are sufficiently comfortable to take July WTI to a new two-month low, with August Brent at three-month lows. Softer oil prices are helping ease interest rates, and peripheral European benchmark 10-year yields are at three-month lows. The 10-year US Treasury yield has fallen a dozen basis points since Monday, June 8. Most G10 and emerging market currencies are firmer today.

As widely expected, the Bank of Japan hiked its overnight rate to 1% and would stop tapering its bond purchase next April, stabilizing them around JPY2 trillion (~$12.5 bln) month. The market leans toward another hike late this year. The dollar has held above JPY160 so far today. The Reserve Bank of Australia kept its policy rate steady at 4.35%. The market has around a 50% chance of another hike discounted in the fourth quarter. Chile’s central bank meets late today and is expected maintain its 4.5% overnight target rate.

Prices

G10

• After the euro was marked up to around $1.1620 yesterday, the upside momentum yielded to consolidation. The market appears to wait for more details of the US-Iran agreement and may have turned cautious ahead of tomorrow’s outcome of the FOMC meeting. The euro was sold to $1.1575 in the Asia Pacific session but recovered to almost $1.1615 in the European morning. The intraday momentum indicators are stretched and there are 1.25 bln euros of options at $1.16 that expire today.

• The Bank of Japan’s widely anticipated 25 bp rate hike left the dollar unimpressed. The dollar has held above JPY160 today and remains within last Thursday’s range (~JPY159.60-JPY160.60). Last Thursday, and again yesterday, the dollar approached and held above the 20-day moving average (~JPY159.75 today). It has not settled below it since May 14.

• Sterling recorded yesterday’s high near $1.3460 in Asia Pacific turnover. It was sold to a low near $1.3415 in the North American morning but mostly consolidated below $1.3445. After spending most of the session above the 20-day moving average (~$1.3420), it failed to settle above it. It has not closed above it in three weeks. Sterling was sold to $1.3390 before the European session today snapped back to around $1.3425 in the European morning. The intraday momentum indicators are stretched ahead of the North American opening. Almost GBP470 mln options at $1.34 expire today.

• The Canadian dollar rose a little through the pre-weekend high but remained on the defensive in North America. The US dollar fell to nearly CAD1.3950 in late Asia-Pacific trading yesterday and recovered to reach almost CAD1.3995 in North America. It reached nearly CAD1.4020 earlier today. Recall that last week, the greenback set a new high for the year near CAD1.4025. It is finding support in Europe near CAD1.40.

• The Australian dollar rose through last week’s high yesterday to reach almost $0.7090. After first approaching $0.7090 in early Asia Pacific turnover yesterday, it retested it in North America. The session low near $0.7040 was recorded after the RBA’s widely anticipated decision to hold policy steady. It recovered to around $0.7070 in Europe, which stretched the intraday momentum indicators.

Emerging Markets

• The risk-on mood helped the Mexican peso extend last week’s 1.4% rally. The greenback reached a one-month low before the weekend (~MXN17.1770) and recorded a marginal new low near MXN17.1575 yesterday, which was slightly below last month’s low. It is holding above MXN17.19 so far today. The US dollar ‘s decline is stretching into the seventh consecutive session today. fallen for the past six sessions. The April low was closer to MXN17.1275.

• The offshore yuan reached a new three-year high yesterday but is consolidating today. The US dollar was sold to nearly CNH6.7555. It is trading between CNH7.7565 and CNH6.7635 today. The PBOC set the dollar’s reference rate at CNY6.8108 (CNY6.8088 yesterday, a three-year low).

• The Indian rupee rose by a little more than 1% over the past two sessions, seemingly boosted more by the drop in oil prices than the official measures taken to encourage foreign investment and limit speculation of further rupee decline. The rupee is firm today but inside yesterday’s range. The dollar is trading between~ INR94.49 and INR94.7160, the lower end of where it has been over the past month.

Other Markets

• Falling oil and interest rates helped lift equities yesterday but consolidation is the flavor today. The MSC Asia Pacific Index rose 3% yesterday after a 2.75% gain before the weekend. It rose by about 0.5%, with the Nikkei 225 reaching a new record high. Australia stocks recovered from earlier losses after the RBA stood pat. Europe’s Stoxx 600 surged almost 1.9% before the weekend and edged up another 0.20% yesterday. It is up another 0.5% today. US S&P 500 and Nasdaq gapped sharply higher yesterday and settled firmly. The Dow Industrials did not gap higher but rose to a new record high. US index futures are narrowly mixed.

• Benchmark 10-year yields fell mostly 2-6 bp yesterday among the G10 yesterday. Australia and Canada were the exceptions, as their yields fell around half of a basis point. The US 10-year yield briefly slipped to a new low for the month, slightly below 4.42% but recovered to new session highs near 4.47% in the NY afternoon. While the 10-year JGB yield jumped nearly six basis points earlier today, Europe yields and the 10-year US Treasury yields are off mostly 2-4 bp. Peripheral European benchmark yields are at three-month lows, including Greece, Italy, Spain, and Portugal

• Gold rallied strongly yesterday and reached nearly $4370 after testing $4000 last week. The three-day rally of about 6.5% was the biggest three-day advance since early February. It gapped higher yesterday and the gap was unfilled. In the cash market it is found between the pre-weekend high (~$4246.50) and yesterday’s low (~$4265.35). It is consolidating today between about $4306 and $4348.50. Silver also gapped higher yesterday. The gap is between about $68.35 and $68.75. The 20-day moving average near $72.25 may offer initial resistance. Silver is trading between about $69 and $70.65 today. The consolidation in gold and silver looks constructive.

• July WTI gapped lower yesterday, but given the uncertainty, the market seemed reluctant to push it much below $80 yesterday. Today, the market seems more confident and pushed the July contract to almost $78.40, a new two-month low. Previous support (~$80) may not offer resistance.

Data

• The US reports May import/export prices (export prices rising faster than import prices) and housing starts and permits (which are expected to have slipped). The NY Fed’s service business survey is due on the heals of the softer manufacturing survey (13.5 vs. 19.6) reported yesterday. Still, tomorrow’s FOMC outcome is center stage as the Warsh era begins.

• Canada reports May existing home sales today. They rose (0.7%) in April, the first increase since last October. Canada also reports April portfolio capital flows. There has been a positive turnaround this year. In the first three months of the 2026, Canada reported net inflows of C$57.75 bln. In Q1 25, Canada experienced nearly C$6 bln net outflows.

• Germany’s June ZEW survey was mixed. The assessment of the current situation deteriorated (-81.0 vs. -77.8), while the current assessment improved (10.5 vs. -10.2). It is the third consecutive deterioration which now has returned to the level since at the end of last year. The expectations component, which had been improving, was dealt setback apparently by the Middle East war but recovered in May and June. The 10.5 reading in June is the best since February.

• As widely anticipated, the Bank of Japan hiked its target rate to 1.0% from 0.75% earlier today. It was a 7-1 vote with Asada, a Takaichi appointment, dissented. The swaps market has another 21 bp increase by the end of the year. The BOJ indicated that the normalization of monetary policy is not complete and indicated that from April 2027 it would stabilize its bond buying at around JPY2 trillion (~$12.5 bln) a month.

• There was not surprise from the Reserve Bank of Australia. After delivering three hikes already this year, it stood pat today. The futures market suspects the RBA is on the sidelines until at least last Q4, where around a 50% chance of another hike is discounted. The RBA seemed non-committal and kept the door open to further tightening if necessary.

• The weakness in China’s retail sales (-0.6% year-over-year) is grabbing attention today along side the continued contraction in property and fixed asset investment. Industrial output accelerated (4.5% year-over-year vs. 4.1% in April). House prices continue to decline. The yuan is unlikely to feature prominently in G7 discussions because 1) the currency is appreciating, even if the pace could be faster, and 2) there are other, arguably more important issues (e.g., AI, rare earths, Middle East War).

Disclaimer

Investors Don't Wait for Details to Celebrate US-Iran Agreement

noreply@blogger.com (Marc Chandler) — Mon, 15 Jun 2026 06:39:51 -0400

The prospect of a deal between the US and Iran has bolstered risk-taking appetites today, even though the details are the agreement are not clear and Washington and Tehran seem to have different interpretations of what has been agreed. Brent and WTI are near two-month lows. Stocks and bonds have rallied. The dollar has been sold and the PBOC set the dollar’s fix at a new three-year low.

At the end of last week, the US government ordered Anthropic to remove complete access to its new Fable 5 and Mythos new AI. The implications continue to be discussed. The US also added several large Chinese companies, including Alibaba, Baidu, and BYD to list of companies with alleged military ties. The most immediate implications are to restrict Pentagon procurement, but Beijing argues it is in violation of the recent agreement between Trump and Xi. Lastly, we note that Swiss voters rejected the referendum to cap the country’s population at 10 mln 55% to 45%. Still, the referendum does not appear to resolve the immigration issue.

Prices

G10

• The euro consolidated ahead of the weekend between about $1.1555 and $1.1590. It recorded an ostensibly bullish outside up day on June 11 on hopes of a Middle East settlement. Support near $1.15 held on two tests last week and boosted its significance. It opened near $1.1570 today and reached a little above $1.1620. Since the high was recorded, the euro has consolidated and found support a little below $1.16, where options for 1.43 bln euro expire today. Nearby resistance is seen in the $1.1640-50 area.

• The dollar consolidated against the yen ahead of the weekend. It was capped near JPY160.60 in the middle of last week and fell to about JPY159.60 on the optimism on June 11 and held above the 20-day moving average (~JPY159.70 today) and has not settled below it in a month. Yet, it still recovered ahead of the weekend and settled above JPY160 for the seventh time in the past two weeks. It is in about a quarter of a yen range around JPY160 today, where options for about $960 mln expire today.

• News before the weekend that the UK economy contracted by 0.1% in April took sterling to the session low near $1.3385. It recovered quickly to the session high near $1.3425 before consolidating. It approached that area again near midday in NY and it held again. It has been lifted to $1.3460 today, a six-day high. The next technical target may be the $1.3480-$1.3500 area.

• The Canadian dollar spent Friday’s session consolidating the loss from the previous session that saw it trade at levels not seen snice the end of last November. The greenback reached nearly CAD1.4025. It spent session ahead of the weekend below CAD1.40 and was sold to almost CAD1.3950 today. Last Thursday’s range is key (~CAD1.3930-CAD1.4025).

• The Australian dollar posted an ostensibly bullish key upside reversal on the June 11 risk-on fueled advance. Follow-through ahead of the weekend was limited to about 5/100 of a cent. Still, the consolidation looks favorable. Buying today lifted the Aussie to the lower end of a band of resistance that extends from $0.7090-$0.7120. A convincing move above there would negate the bearish head and shoulders pattern we have been tracking. There are about A$1 bln options at $0.7075 and another A$485 mln at $0.7085 that expires today.

• The risk-on mood helped lift the Mexican peso to its best level in nearly a month at the end of last week. The greenback was sold to MXN17.1770 and about MXN17.1575 today. In the previous week, the dollar traded above MXN17.50 for the first time in a month. It has a five-day slide in tow, matching the longest losing streak since January. Five of the eight top performing emerging market currencies were from LATAM last week. The Mexican peso was in eighth place, while the Colombian peso’s 3.3% (continued favorable response to recent first round of the presidential election) was the strongest. The Colombian peso is at level not seen since early 2021. Colombia’s central bank meets at the end of the month, and the swaps market is pricing in a 50 bp hike.

• The offshore yuan consolidated in the first part of last week and strengthened in the last couple of sessions. The dollar was sold to a marginally new the three-year low today near CNH6.7555. The PBOC set the dollar’s fixing ahead of the weekend at a new three-year low (CNY6.8109) and a little lower today (CNY6.8088).

• The Indian rupee traded firmly ahead of the weekend, helped by the lower oil prices and a smaller than expected rise in the May CPI. Indian inflation rose to 3.93% in May up from 3.48% in April. Inflation rose for the seventh consecutive month and was already at 3.21% before the Middle East war began. Helped by the tentative agreement between the US and Iran and the drop in oil prices, the rupee rose to its best level in over a month today. The dollar gapped lower and was sold to INR94.4525 before recovering and reached the session high in late turnover, near INR94.7740 and settled around INR94.7160. The pre-weekend low was INR94.9475.

Other Markets

• Equities finished last week on firm tone. Still, Japan, China, Hong Kong, South Korea and Taiwan and Singapore among the largest bourse posted weekly declines. Regional markets were firmer today. Several large bourses in the Asia Pacific regions rallied more than 2%. Europe’s Stoxx 600 rose nearly 1.7% last week and is up 0.60today. The S&P 500 bottomed last Tuesday at its lowest level in a little more than a month and recovered to trade at three-day highs ahead of the weekend. US indices are poised to gap higher at the open.

• Benchmark 10-year yields fell last week, arguably dragged lower by the drop in oil prices. The 10-year JGB fell 10 bp last week, and in Europe, only UK, Italy, and Greek yields were down slightly more. The 10-year Treasury yield fell a little more than eight basis points. Yields have fallen further today. The 10-year JGB yield was off almost 4.5 bp, while European yields mostly 4-5 bp lower. The 10-year US Treasury is down 3-4 bp to almost 4.44%.

• Gold fell to almost $4000 last week, completely unwinding the rally since late last November that had carried the now-tarnished yellow metal to nearly $5600 at the end of January. While it traded firmer ahead of the weekend and reached slightly above $4245, it still fell by 2.5% last week but gapped higher today to reach $4345. Silver also gapped higher today and it is pushing above $70. Initial resistance is around $72.50.

• July WTI fell by almost 3.5% ahead of the weekend to bring the weekly loss to about 6.5%. It traded as low as $83.20 at the end of last week, a level not seen since April 21. It gapped lower today and traded below $80 for the first time since April 17.

Data

• The US reports May industrial output and manufacturing production, and the NY Fed’s June manufacturing survey is due. The manufacturing ISM and PMI rose to four-year highs in May. After rising 0.7% in April, industrial output is expected to have risen by about 0.2% in May. Manufacturing production also is anticipated to have slowed after rising 0.6% in April. Manufacturing jobs increased by 25k in the first five months of the year. The sector lost nearly 160k last year. Recall that there are around four times more service sector jobs than manufacturing.

• Canada reports May housing starts and April manufacturing and wholesale sale. The reports tend not to move the exchange rate, and the implications for monetary policy are marginal at best.

• The eurozone reported a 0.1% increase in April industrial production after a 0.2% rise in March was revised to 0.4%. Over the first four months of the year, eurozone industrial output is flat compared with a 1.2% increase in the Jan-Apr 2025 period. The aggregate trade April trade surplus (seasonally adjusted) was 1.3 bln euros, down from 13 bln euros in April 2025. Through April, the eurozone trade surplus stood at 19.7 bln vs. 70.4 bln euros in the first four months of last year.

• The Reserve Bank of Australia meets the first thing tomorrow. After three rates hikes so far this year, and Governor Bullock acknowledging that they have begun having the desired impact, there is little doubt but that the RBA will leave policy unchanged.

• At the end of last week, Japan confirmed industrial output rose in April for the first time in three months. Earlier today, we learned that tertiary industry activity (services) rose by 1.3%, which was also the first increase since January and was twice as strong as the median forecast in Bloomberg’s survey projected. The Bank of Japan’s two-day meeting also concludes tomorrow. The market has high confidence of a 25 bp hike, even though Governor Ueda is sick and in a hospital. We suspect that a rate hike may make material intervention more rather than less likely.

• Tomorrow is the one day a month that China releases bevy of data, including retail sales, industrial production, fixed asset investment, unemployment, and house prices. Beijing reported that the economy grew by 1.3% quarter-over-quarter in Q1 26, the fastest since Q4.24. However, the economy appears to have slowed and growth this quarter may be near 1.0% (due mid-July).

Disclaimer

Week Ahead: 7 G10 Central Banks Meet, Only BOJ to Hike, Warsh Chairs First FOMC meeting, G7 Summit, and Possible US-Iran Agreement

noreply@blogger.com (Marc Chandler) — Sat, 13 Jun 2026 06:55:55 -0400

The week ahead is important. Seven G10 central banks meet. Even though Bank of Japan Governor Ueda has been hospitalized and will not attend the central bank meeting, it is only central bank expected to hike. Still, the FOMC meeting is historic, even though there is practically no chance of a change in policy. Kevin Warsh chairs his first FOMC meeting and a new Summary of Economic Projections will be published. A new era is at hand, and the full implications are not fully clear yet. In the UK, while the Bank of England still seems to be several months away from a change in monetary policy, the byelection in Makerfield may set the stage for a proper challenge to Prime Minister Starmer.

Risk appetites continue to appear sensitive to developments in the Middle East. After threatening a new round of intense bombing of Iran, the US relented and suggested an agreement was near. Risk was bought, lifting stocks and bonds and foreign currencies against the dollar in the North American afternoon on June 11. However, the lack of further progress and unnamed officials were quoted on the newswires suggesting an agreement may be struck on the outskirts of the G7 heads of state summit in France on June 15-17. Polymarket participants seem less sanguine and have a 17% chance that the Strait of Hormuz is re-opened by the end of June and 40% by the end of July.

Drivers: The single most important driver of the dollar is US interest rates. The correlation is a little stronger at the short-end of the curve (December Fed funds and the two-year yield) than changes in the 10-year note yield. The 30-day correlation of changes in the Dollar Index and two-year note yield is near the highest in about ten years (~0.77) while the correlation with the December Fed funds futures is near a two-year high (~0.76).

Data: With the May employment and CPI in hand, attention would turn to the real sector this week with industrial output, retail sales, and housing starts on tap. However, the most important event is the FOMC meeting, which Warsh will chair for the first time and hold a press conference. There will be a new Summary of Economic Projections. The Bernanke, Yellen, Powell era at the Fed is over. Warsh is from a different school of thought, and his appoint of a couple of advisers, including the author of the Agenda 2025 chapter on the Fed, underscores that observation. In addition to changes at the Federal Reserve itself, which may include communication and inflation targets, we suspect there is a reasonably good case for a new Treasury-Fed accord and the revaluation of gold, which is carried on the US books at $42.22 an ounce.

Prices: The Dollar Index has been trending higher since early May. The trendline connecting May's lows begins the new week near 99.50 and near 99.75 at the end of the week. The momentum indicators look poised to turn lower. The 20-day moving average, which DXY has not closed below since May 13 is near 99.45.

EMU

Drivers: It seems intuitive that the euro would be sensitive to changes in US rates. The rolling 30-day correlation between changes in the two-year US yield and the euro is near -0.84, the most since 2003. What is less intuitive is that changes in the euro are also inversely correlated with changes in the Germany's two-year yield. It reached -0.65, in early June, the most extreme since Q1 2020. Theory suggests the rate differential should be more important, and while we find that exchange rate often broadly tracks the two-year US German interest rate differential, the 30- and 60-day correlations are statistically insignificant.

Data: The ECB's rate hike last week, and given the other central bank meetings this week, the eurozone data may pose little more than headline rise. The eurozone data includes industrial production, external balances, and construction output. Germany's June ZEW investor survey is due on June 16. Expectations in May improved (for the first time since January), while the assessment of the current situation deteriorated for the second consecutive month to stand at a new low for the year. Note that Sweden's Riksbank meets on June 17 and the Swiss National Bank and Norway's Norges Bank meet the following day. All three will most likely stand pat.

Prices: Follow-through selling after the June 5 slide, spurred by the US jobs report, was limited to $1.15, which was tested last Monday and Thursday. The euro peaked last Thursday and Friday near $1.1590, encouraged by hopes of a lasting ceasefire in the Middle East, which corresponds to about the halfway mark of the sell-off since the May 29 high near $1.1685. The 20-day moving average also is near $1.1600. The momentum indicators look set to turn higher. The $1.1640-55 area may offer resistance ahead of the end of May high.

PRC

Drivers: Beijing’s encouragement of gradual yuan appreciation through the setting of the dollar's daily reference rate is like oxygen. At the same time, the dollar's broad movement also has been conducive. Changes in the Dollar Index and the greenback against the offshore yuan rolling 60-day correlation rose above 0.80 for the first time in a decade in late May and is now around 0.76.

Data: China reports real sector data and house prices on June 16. The Chinese economy has lost some momentum. Retail sales in May are projected to have declined on a year-over-year basis for the first since the end of 2022. Industrial output may have increased by around 4.3% year-over-year. In May 2025, it rose 5.8% year-over-year. Meanwhile, house prices still do not appear to have reached a floor, and fixed asset investment contraction is deepening.

Prices: Ahead of the weekend, the PBOC set the dollar's reference rate at a new three-year low (CNY6.8109). Since the end of last September, when the PBOC campaign began the dollar's fix has risen on a weekly basis only three times (in 35 weeks). The cumulative move has been modest (~4.2%). Still, only a handful of emerging market currencies, (mostly Latam, Hungarian forint, Russian ruble, and South African rand) have outperformed it. It means that yuan is rising on a trade weighted basis alongside the rising trade surplus. The dollar made a new low for the week ahead of the weekend near CNH6.7590, just above the three-year low set earlier this month (~CNH6.7580). The next important technical target may be around CNH6.70.

Japan

Drivers: The broad direction of the dollar appears to be the one of the most important influences on the dollar-yen exchange rate, despite the weakening correlation. The rolling 30-day correlation of changes is nearly 0.60 correlated, down from about 0.85 in late May, and now is near the lowest in three months. The correlation of changes in the exchange rate and US rates is around 0.62 (two-year yield) and 0.60 (10-year yield). The dollar tends to rise when Japanese yields increase too, but the correlations over the past 30- and 60-days are below 0.1 (for the 10-year JGB yield for both tenors) and 0.15-0.20 (for two-year JGB yield). We are not convinced that a 25 bp hike will change the exchange rate dynamics. However, it might make the US more supportive, like it was in January, of Japanese official efforts to support the currency, rather than the silence that greeted the recent material intervention.

Data: The highlight of the week is the Bank of Japan meeting that concludes on June 16. The swaps market has 25 bp nearly fully discounted. The market also is discounting about an 80% chance of another hike before year end. Japan's May CPI is due a couple of days later, but the Tokyo CPI gives good insight. Recall that Tokyo's May CPI eased to 1.4% from 1.5%, and the core measure, which excludes fresh food slipped to 1.3% from 1.5%. The measure that excludes fresh food and energy moderated to 1.6% from 1.9%. The core rate, which the BOJ targets, has been below 2% for three months through April. Ironically, with US CPI running more than twice as high as Japan's, and growth considerably stronger (2.6% year-over-year in Q1 vs. 0.4% year-over-year in Japan), the US administration wants Japan's central bank to raise rate and for the Federal Reserve to cut them. Japan also reports May trade figures. By most reckoning, the yen is terribly undervalued, yet it continues to record trade deficits. It is swinging toward a surplus. In the first four months of the year, the trade deficit was about JPY200 bln. The deficit was about JPY1.91 trillion in the same period in 2025. Japan has reported a small surplus in five of the past six months.

Prices: The dollar settled above the JPY160 threshold for the second consecutive week. The greenback appreciated in the previous four weeks. In the three weeks before the late April intervention, the dollar had fallen. It reached almost JPY160.60 last week, its best level since poking above JPY160.70 briefly at the end of April. The momentum indicators are turning lower. A break of last Thursday's low (~JPY159.60), which also is around where the 20-day moving average is found, may be the first indication a top may be forming.

Drivers: The 100-day correlation of changes in sterling and the euro (~0.88) is slightly higher than the correlation between the Swiss franc and euro (0.86). Changes in sterling are inversely correlated (30 sessions) with changes in the US two-year yield by the most in more than a decade (~-0.75). Sterling also is inversely correlated with changes in the UK two-year yield (-0.52, the lower end of a four-year range.

Data: Ahead of the conclusion of the Bank of England meeting on June 18, the UK reports May CPI and April/May labor market update. In the first four months of the year, UK's CPI has risen at an annualized rate of almost 4%. The UK's 10-year breakeven (the difference between the inflation protected security yield and the conventional yield) has risen from a little below 2.95% at the end of last year to nearly 3.65% in mid-May and now is near 3.28%. The UK's unemployment rate has risen from 4.4% at the beginning of last year to 5.2% in December 2025 and January 2026 before pulling back to 4.9% in February and was 5% in March. Private sector earnings growth (three-month average, year-over-year) has slowed to 3% in March 2026 from around 6% at the start of 2025. The swaps market recognizes there is little chance of a change in policy from the BOE now. The swaps market has about 9 bp of tightening discounted for next month's meeting or about 36% of a 25 bp hike. A hike is fully discounted at the November BOE meeting and about 12.5 bp of another hike in December is priced in before the end of the year. Meanwhile, all eyes will be on the Makerfield byelection on June 18, where a victory for Manchester Mayor Burnham will give him standing to challenge Prime Minister Starmer. Defense Secretary Healey resigned last week in a dispute over military spending. An ally of Starmer's, Healey's resignation is another blow to the prime minister.

Prices: After posting an ostensibly bearish outside down day after the US employment report on June 5, follow-through sterling selling was limited to about a quarter-of-a-cent at the start of last week. Sterling found support ahead of last month's low (~$1.3300). It recovered to almost $1.3435 on June 11 amid optimism about the Middle East. The momentum indicators have stabilized but have not turned higher. Sterling appears to be near the middle of a one-month two-cent trading range, $1.33-$1.35.

Canada

Drivers: Among various financial variable, the changes in the US dollar against the Canadian dollar had been the most correlated with the changes in the Dollar Index. The rolling 30-day correlation is around 0.70. The high for the year was in early March, near 0.85. It has now fallen to a new low since early January, around 0.47. The exchange rate is correlated with the changes in the US two-year yield. It peaked near 0.55 in mid-May, the highest since last October, and now it is near 0.37. The correlation was mostly inverse last November-December and again from early February 2026 to early March. Since mid-March, higher Canadian two-year rates have coincided with a stronger US dollar against the Canadian dollar. The 30-day correlation is a little above 0.35, the highest this year. It was mostly inversely correlated from last November through mid-March.

Data: As widely anticipated, the Bank of Canada left policy steady last week, with its overnight target rate at 2.25%. The policy dilemma that officials noted of the supply shock emanating from the Middle East war amidst economic sluggishness is understood to keep the central bank on the sidelines in the coming month. A quarter-point hike at the end of year is largely priced into the swaps curve. This week's high-frequency data, which includes May housing starts, existing home sales, and April portfolio flows and retails sales do not have the heft to move the needle.

Prices: Want to see a one-way market? Look at the Canadian dollar. Since the start of May, there have been 31 sessions through the end of last week. The Canadian dollar has weakened in 24 of the sessions, and five of the past six weeks. The greenback reached nearly CAD1.4025 last week, its best level since last November. The momentum indicators are stretched but do not stand in the way of a new high, but last November highs (~CAD1.4130-40) seem a bridge too far. Initial support maybe in the CAD1.3900-30 area.

Australia

Drivers: Over the past 30 sessions, changes in the Australian dollar's exchange rate are slightly more inversely correlated with changes in the US two-year yield (~-0.85), than the Dollar Index (~-0.77). Changes in the two-year US yield is more than twice the correlation with Australia's two-year yield (~0.12). The Aussie's rolling 30-day correlation with gold prices edged a bit higher to almost 0.87 in recent days, the highest in more than a decade. The 60-day correlation peaked in February, a little above 0.70, a two-year high, and is near there now.

Data: In an otherwise quiet week for high-frequency Australia data, the central bank meeting on June 16 is the highlight. The RBA has hiked its cash rate target by 75 bp this year in three steps to 4.35%. Governor Bullock has recognized that the tightening of policy is already having the desired impact. The Reserve Bank of Australia's mini-tightening cycle may be over. It followed a three-step easing cycle in 2025. The swap and futures market do not have another hike fully discounted.

Prices: The Australian dollar's losses after the June 5 US jobs data were extended from a little below $0.7040 to about $0.6980 last week. However, the risk-on, drop in oil prices and lower US rates helped the Aussie post a potential key upside reversal on June 11. The Aussie made a new two-month low and then recovered to settle above the previous day's high. It consolidated between about $0.7020 and $0.7055 ahead of the weekend. The neckline of the potential head and shoulders pattern is ~$0.7080-$0.7100 and it is not unusual to retest the neckline after a break of it. Momentum indicators are extended but have not turned higher. A break of the $0.6980 area could target $0.6940 next.

Mexico

Drivers: Two factors seem to have the most influence on the Mexican peso's exchange rate against the dollar now. The first is changes in the US two-year yield. The 30-day correlation is near 0.80, the highest in more than a decade. The 60-day correlation is around 0.55, the highest since late 2022. The other factor is the risk environment, for which we use the S&P 500 as a proxy. Over the past 30 sessions, the inverse correlation of change in the US dollar-peso exchange rate and the S&P 500 is near -0.76. It has rarely been more extreme than -0.80 in the past 10 years. The 60-day correlation is nearly identical with the 30-day, but it is the most extreme since 2012.

Data: There are no market-moving economic reports from Mexico in the coming days. Brazil's central bank meet on June 17, and economists polled by Bloomberg are more confident of a rate cut, which would be the second in the cycle than is the swaps market, which has about eight basis points of easing discounted.

Prices: Optimism about the war in the Middle East and the risk on spurred a 1% gain for the peso on June 11, the largest single day advance since early April. The peso has a five-day rally coming into the new week. The dollar pushed briefly above MXN17.50 on June 5 after the US jobs report and reached MXN17.1770 before the weekend, its lowest level in about a month. Last month's low was closer to MXN17.16 and the April low was about MXN17.1275. A two-year low was recorded in February near MXN17.0865.

Disclaimer

Week Ahead: Surging Greenback on Robust Jobs Data, while ECB Hike Seen as a Done Deal

noreply@blogger.com (Marc Chandler) — Sat, 6 Jun 2026 07:15:00 -0400

(No commentary this week. Analysis returns on June 13 with the next weekly. Good luck, and thank you for your patience.)

The war in the Middle East continues to disrupt flows from the region and helps shape risk appetites. After falling by almost 14% in the last two weeks of May, July WTI rose about 4.5% last week as there seemed to be little progress toward a resolution. The odds that Strait of Hormuz on Polymarket seem more cautionary and stable than the vagaries of the capital markets and oil futures. On that event site, there is about 18% chance that the Strait is opened by the end of June and about 36% it is opened by the end of next month.

Meanwhile, monetary policy is also in play. The Bank of Canada and the European Central Bank meet on Wednesday and Thursday, respectively. Even though revisions at the end of last week showed the regional economy contracted in Q1, the market is highly confident that the ECB will hike rates and signal that it will remain vigilant, i.e., that it is prepared to raise rates again. The deposit rate will stand at 2.25% at the end of next week. On the other hand, there is practically no chance that the Bank of Canada changes its 2.25% policy rate. The Canadian economy unexpectedly contracted in Q1 26, the second consecutive quarterly contraction. Still, ahead of the weekend, Canada reported an increase of 154k full-time positions in May and a drop in the unemployment rate to 6.6% from 6.9%. Canada and the EU-harmonized CPI baskets are quite different, yet Canada's April headline CPI was 2.8% and its core rate was at 1.5%, and its underlying core measure average about 2.05%. The eurozone's May CPI was 3.2% and the core 2.5%.

Drivers: The greenback remains sensitive to geopolitical developments, and when news gives reason to be hopeful of an extended ceasefire, the dollar is typically sold. In terms of financial variables, the 30-day correlation of changes in the Dollar Index and the two-year US yield is around 0.75, near the highest since late 2016. The correlation of changes in the Dollar Index and the US 10-year is also near 075, the highest since the end of 2024. Last month, the rolling 30-day correlation of changes in the Dollar Index and S&P 500 reached almost -0.75, its most extreme since Q4 22. It is now closer to -0.65, which is more extreme than seen in 2025.

Data: The most important high-frequency US data point is the mid-week release of May CPI. The median forecast in Bloomberg's survey is for a 0.5% rise in the headline rate and 0.4% in the core. Given the base effect, the year-over-year rates will likely rise to about 4.2% (from 3.8%) and to 3.1% (from 2.8%), respectively. This may understate the price pressures. Assuming the median projections are accurate, it would translate into a 6% annualized pace of headline inflation in the first five months and 3.6% annualized pace in the core. That is a week before the conclusion of the first FOMC meeting that Warsh chairs, at which a new Summary of Economic Projections will be presumably released. The day after the CPI report, the May PPI is due. For understandable reasons, the market reacts less to PPI than CPI. After surging 1.4% in April, a more modest but still strong rise of 0.5% is expected. That would lift the year-over-year rate to 6.2% from 6.0%. The April trade balance is also due. We already know that the goods surplus narrowed a little. While the US runs a chronic goods deficit, its service surplus is just as persistent. While China, with about 17% of the world's population accounts for about 14.5% of the world's exports, the US accounts for a little more than 4% of the world's population and 13% of global service exports. Throughout the industrialized and many emerging markets, the service sector provides for more jobs than the manufacturing sector. The May federal budget deficit will be reported, too. Through April, the cumulative deficit is about 9% smaller than the year ago period, through the shortfall in the first four months of the calendar year is about 4% larger.

Prices: The strong May jobs growth and the backing up of market rates lifted the Dollar Index to two-month highs ahead of the weekend, about 100.10. It posted an ostensibly bullish outside up day by trading on both sides of the previous session's range and closing above it high. The next technical target may be the year's high was recorded at the end of March, near 100.65.

EMU

Drivers: With a few exceptions, the euro has been mostly in a $1.16-$1.18 trading range since around April 20. It broke decisively lower ahead of the weekend and after the US employment data. The euro's inverse 30-day correlation with changes in the two-year US yield is near -0.82, the most extreme in more than 20 years. Ironically, the correlation of changes in the euro and Germany's two-year yield is also inverse and around -0.65, it is near the most extreme in six years. The correlation between changes in the euro and the two-year interest rate differential is about 0.10 over the past 30 sessions.

Data: Germany reports April factory orders, industrial output, and trade figures ahead of the ECB meeting on Thursday, June 11. German factory orders jumped 5% in March after a 1.4% increase in February. Yet, industrial output has disappointed. It fell by 0.7% in March after a decline of 0.5% in February. On the other hand, Germany's trade surplus is holding up better than one might expect given the China shock memes. German recorded an average monthly trade surplus in Q1 26 of 18 bln euros, the same as in Q1 25. Meanwhile, the market is confident that the ECB will hike rates. The swaps market has another hike fully discounted in the fourth quarter.

Prices: The euro was turned back from the 20-day moving average (~$1.1645) even before the stronger-than-expected US jobs data sent the single currency below last month's low near $1.1575. It slumped a little through $1.1520. Initially, the $1.1500 area may offer support , but a move back to the year's low set in mid-March a little above $1.1400 cannot be ruled out. Reestablishing a foothold above $1.1600 is needed to begin repairing the technical damage.

Japan

Drivers: Near 0.85, the 30-day rolling correlation of changes in the dollar-yen exchange rate and the Dollar Index, it is near the best level since early Q4 25. The correlation between the exchange rate and the changes in the US 10-year yield has drifted lower from the year's high in late April near 0.65 to a little above 0.50. The correlation between the exchange rate and Japan's 10-year yield is less than 0.05 and has not been above 0.40 since mid-2024. The correlation of the exchange rate and the 10-year interest rate differential is a little below 0.50. It was briefly inversely correlated in December last year. The threat of intervention after a record operation in late April through early May has also injected a new element into the mix.

Data: Ahead of the BOJ meeting conclusion on June 16, Japan offers up a revision of Q1 GDP, April's current account, and May producer prices. The data is unlikely to impact expectations that the central bank will hike rates. The initial estimate of Q1 GDP (2.1% annualized vs. 0.8% in Q4 25) was stronger than expected. While Japan runs a current account surplus and has a currency that is undervalued, it has been running a trade deficit. That is changing. The swaps market has almost an 80% chance of a hike later this month, and around a 70% chance of another before the end of the year. Paradoxically, the US Treasury Secretary has encouraged a BOJ hike, yet its core inflation has been below target for the three months through April, and its headline rate is less than half of the US, but the administration has argued for lower US policy rates.

Prices: The dollar reached a new high since the late April BOJ intervention after the US employment data near JPY160.35. The high set April 30 was JPY160.70. The dollar reached a high in March around JPY160.45. The momentum indicators are higher now than when the BOJ intervened at the end of April. The US two- and 10-year yields are around 25 bp higher than at the end of April. The chances of a BOJ rate hike this month was seen as a 65% chance in the swaps market at the end of April and is now about 95% discounted.

PRC

Drivers: Assuming rational actor, one must conclude the Beijing is allowing the yuan to appreciate against the dollar and its trade-weighted basket because it is understood to be in its interest. One can speculate about what interests are being served. There are a few candidates: Deflect some animosity of its historically large trade surplus, make the acquisition of foreign financial and real assets cheaper, and encourage domestic capital to stay at home, as Beijing checks outbound capital flows. At the same time, the rolling 30-day correlation of changes in the Dollar Index and the dollar against the offshore yuan reached at least a 10-year peak in late April near 0.85 and has eased to about 0.68 now. This is still the upper end of its long-term range. Recall that in late January it fell to below 0.05 and last year, it was even inversely correlated briefly.

Data: China reports two time series for which the markets and the media are particularly sensitive. The first is trade. The May trade figures are due. Through April, the China's trade surplus is about 4% smaller than in the first four months of 2025. While we recognize the yuan is undervalued, the 20% magnitude that some economists and banks suggest, does not appear extreme given the greenback's over-valuation against serval major currencies. The OECD's measure of purchasing power parity estimates the yen is more than 60% undervalued, the euro 30% and the Canadian dollar 20%. And the claim that a rising yuan will allow other Asian currencies to appreciate is not borne out in the price action in recent months. Moreover, some economists claimed that China was exporting deflation. Yet, what has happened is opposite. China's inflation gap with other countries has narrowed, not because others converged with China, but China's consumer and producer prices have risen.

Prices: The yuan is entering a consolidative/corrective phase after trending higher since the end of March. It had spent most of March consolidating. The greenback posted an outside up day against the offshore yuan and settled above the 20-day moving average (~CNH6.7875) for the first time since the end of April. The dollar's high from the second half of May was around CNH6.82 and this may be a reasonable initial target.

Drivers: Sterling's correlation with the euro over the past 30 sessions is near 0.87. It has rarely been higher in the past decade. The 60-session rolling correlation is 0.90, which matches the late 2023 correlation, and the highest in at least two decades. Changes in sterling are inversely correlated with changes in US two-year yields, as one would intuitively expect, and around -0.75, it is the most extreme since nearly 20 years. Less intuitively clear, the correlation of changes in sterling and UK two-year yields is also inverse, at near -0.55, it rarely is more extreme.

Data: The UK's April GDP will be released at the end of the week. Growth in the first quarter was a firm 0.6%, matching the best quarterly performance since Q1 24. Still, the economy seems to be on the verge of slowing, and the median forecast in Bloomberg's survey is for near stagnation in Q2 and Q3. The swaps market has tempered its previous hawkish outlook for the central bank. The first hike is not fully discounted until the middle of Q4 and about a 20% chance of a second hike. Recall that as recently as late April, three hikes were fully discounted.

Prices: Sterling posted a big outside down day ahead of the weekend. It settled below $1.3400 for the first time in two and a half weeks. It was sold to $1.3330. The next target is around $1.3300, which held last month. The year low was recorded at the end of March near $1.3160.

Canada

Drivers: The Canadian dollar is sensitive to the greenback’s overall direction. The rolling 30-day correlation of changes in the USD-CAD exchange rate and the Dollar Index is around 0.67. It peaked shortly after the war began near 0.85, which was the highest since mid-2024. The Canadian dollar is also sensitive to the general risk environment, using the S&P 500 as the proxy. The rolling 30-day correlation of changes in the USD-CAD exchange rate and S&P 500 is near -0.45. The exchange rate is more sensitive to changes in the US two-year yield (~0.45, 30-day rolling correlation) than changes in Canada’s two-year yield (~0.35) or changes in the two-year interest rate differential (~-0.04).

Data: As we noted above, the OECD's model of purchasing power parity has the Canadian dollar trading about 20% below fair value. Yet, Canada's trade balance has deteriorated. In Q1 25, the goods balance was in surplus by an average of about C$337 mln a month. In Q1 26, the average shortfall was nearly C$2.2 bln. The Bank of Canada meets on June 10. Before the Middle East war began, the swaps market was discounting about a 40% chance of another cut. This swung around dramatically, and by March 20, the market had a little more than three rate hikes this year fully discounted. The pendulum has swung sharply again, and even before the recent data that showed back-to-back quarterly contractions, the swaps market had less than two hikes priced into the swaps curve. Now, there is a hike fully discounted late in the year and about a 37% chance of a second.

Prices: The Canadian dollar initially reacted positively to news that a whopping 154k full-time jobs were created in May, the most since February 2022. The unemployment rate fell back to 6.6% from 6.9%, while the participation rate was steady (at 65%) and wage growth slowed markedly (to 3.2% from 4.8%). The US dollar initially fell to almost CAD1.3865 before it rebounded to a new session high near CAD1.3950. The year's high was recorded at the end of March slightly above CAD1.3965. A move above CAD1.40 would signal potential toward CAD1.4100-40.

Australia

Drivers: Judging from the 30-day rolling correlation of changes, the Australian dollar is most sensitive to changes the US two-year yield (-0.85), the most in more than two decades. The Aussie is also sensitive to the greenback's broad direction, using DXY as the proxy (~-0.82), the most extreme in two years. The Aussie is less sensitive to changes in the domestic two-year yield (<0.35). The correlation with the two-year interest rate differential and the exchange rate is lower than with the US rate alone (~0.71). The exchange rate’s correlation with gold has recovered from around 0.35 in late March to around 0.84, the highest since late 2022.

Data: Australia's economic calendar is light, consisting of private sector consumer and business surveys. Melbourne Institute's consumer inflation expectation survey may be the most important. It reached 5.9% in April, its highest level since November 2022 before pulling back in May to 5.6%, which was also last year's high print. The central bank meets on June 16. With three hikes this year already delivered and the recent data, including employment, the preliminary May PMI, and April household spending, weaker than expected, there is little doubt, but the RBA is on hold. The futures market has downgraded the probability of another hike this year to about 70%. It had been fully discounted as recently as May 26.

Prices: The Australian dollar broke down after the US jobs data and fell a little below below $0.7040, its lowest level since April 13. It settled below the lower Bollinger Band (~$0.7065) The Aussie could be at the edge of a precipice. Since around mid-April, a head and shoulders topping pattern has been etched out and it appears to have settled below the neckline with the losses suffered at the end of last week. The measuring objective of the pattern is around $0.6900. From another perspective, the $0.7055 area is the halfway mark of the Aussie's rally off the year's low from March 331 (~$0.6835) and the next retracement objective is near $0.7000.

Mexico

Drivers: Four recent peso drivers stand out. First, the 30-day correlation between changes in the exchange rate and changes in the US two-year yield is above 0.80 and the highest in 20 years. They were inversely correlated until about mid-March. Second, there is still a substantial sensitivity to risk. Using the S&P 500 as the proxy, the inverse correlation of the dollar-peso exchange rate is almost -0.79. In April, it approached -0.85, which has not been seen in a decade. Third, the exchange rate is inversely correlated with gold (~-.079), the most extreme since mid-2022. This is to say, the peso tends to strengthen alongside gold. Fourth is the dollar's overall direction. The correlation of the exchange rate and DXY changes is about 0.63. It is off this year's peak near 0.80, but it is still in the upper end of this year's range.

Data: Mexico reports May vehicle production and exports to start the new week. In April, Mexico exported almost 87% of the vehicles it produced. By contrast, estimates suggest China exports 15-20% of the vehicles it produces and about of a fifth of those exports are foreign brands. The highlight of the week is Tuesday's May CPI and Thursday's April industrial output. Both the headline and core CPI measures likely remained about the upper end of the 2%-4% target range, while the economy struggles to find traction. Industrial output contracted by 1.2% year-over-year in Q1 and the monthly series fell by a cumulative 1.36% in Q1. After delivering the second cut of the year last month, Banxico has signaled it is moving to the sidelines, and the swaps market favors a rate hike (80%) by the end of the year.

Prices: The Mexican peso fell by around 1.10% ahead of the weekend, matching it biggest decline in nearly three months. It turned what was a small gain for the week into modest loss (~0.70%). The dollar recorded an ostensibly bullish outside up day against the peso, having traded on both sides of Thursday’s range and settled above its high. In fact, the greenback settled at its best level in a month. The dollar had forged a base in recent sessions in the MXN17.26-MXN17.27 area. It was lifted to about MXN17.5360 before the weekend, its best level since May 5 before closing near MXN17.48. The next technical target is the cap from the second half in April in the MXN17.58-MXN17.59 area.

Disclaimer

New Fed may Sap Market's Reaction Function to US Jobs Report

noreply@blogger.com (Marc Chandler) — Fri, 5 Jun 2026 06:43:14 -0400

The low-intensity war in the Middle East continues. Crude oil looks set to close the week higher for the first time in three weeks. Meanwhile, some poor earnings have hit the tech sector this week and it is evident in both Asia and the US. A dramatic revision to Ireland’s Q1 growth spurred a downward revision in Q1 eurozone growth to show a 0.2% contraction rather than a 0.1% expansion. Nevertheless, the market remains confident that the ECB will hike rates next week.

The immediate attention turns to the US May employment report. It often elicits a dramatic reaction in the foreign exchange market. The median forecast in Bloomberg’s survey is for an 88k increase. The 150k average in March and April are subject to revisions. Still, given the new Fed chair, the impact on expectations for the June 16-17 FOMC will likely be minimal and this may dampen the reaction today’s report. That said, the intraday momentum indicators appear to favor a dollar recovery ahead of the weekend.

Prices

G10

• The euro held the lower end of its recent range below $1.1600 and recovered to $1.1645 in early North American activity. After the high was recorded, the euro trended back to hover around $1.1610 in late turnover. It transversed the range today. The intraday momentum indicators are stretched, suggesting limited upside and risk of a retreat after the US jobs data. There are options for 1.84 bln euros at $1.1650 that expire later today. Last Friday, the euro reached about $1.1685, its best level since May 14. This week’s high was set Monday slightly above $1.1670.

• The dollar traded sideways yesterday in about a half of a yen range above JPY159.60. It rose steadily from around JPY159.75 to a little above JPY160 in the North American morning yesterday and straddled that are in late dealings. It is stuck in a tighter range so far today, not quite 15 ticks above JPY159.90. Although few appear to have commented on it, we are still struck by the silence from the US Treasury. When the dollar was slightly lower and the US 10-year premium over JGBs was about 30 bp wider, it sent a clear signal to the market. The market is nearly fully pricing in a BOJ hike the day after the FOMC meeting concludes later this month. It seems that the US Treasury’s silence is like “damning by faint praise” and arguably has encouraged the market to shrug-off record BOJ intervention and continue to challenge JPY160.

• Sterling has spent this week, with 1/100 of a cent exception at the start of the week, inside last Friday’s trading range (~$1.3410-$1.3485). Yesterday afternoon, it approached the lower end of that range and the higher end today. The 20-day moving average comes in slightly near $1.3450 today. Sterling has not settled above it in almost two weeks. Intraday momentum indicators are stretched, suggesting risk to the downside in the North American session. Sterling settled near $1.3455 last week. It was the seventh weekly gain in the past eight weeks.

• The Canadian dollar bottomed in early Europe yesterday and recovered through early North American trading. The US dollar reached CAD1.3925, its best level since April 7. It pulled back to almost CAD1.3880 before buyers reemerged. The greenback is trading lower and is near session lows (~CAD1.3875) ahead of the North American open and the intraday momentum indicators are oversold from the drop in late-Asia/early European activity. Initial support is seen near CAD1.3860.

• For three weeks, and a couple of minor intraday violations, the Australian dollar has traded $0.7100-$0.7200. It spent yesterday in the lower half of the range. It approached $0.7100 today but has recovered to $0.7140 in Europe. Respect the price action. Assume the range holds until it does not. Three-month implied vol is straddling 8%, the lower end of this year’s range.

• The Mexican peso traded firmly yesterday but remains within Tuesday’s range (~MXN17.2640-MXN17.3665). Three-month implied volatility is slipping through 9.0% to four-month lows. Given the ~300 bp premium Mexico offers on overnight deposits, one is still paid to be long pesos during the sideways movement of the exchange rate. There are, of course, higher carries, but the peso also has relatively low vol and better liquidity.

• The dollar traded quietly yesterday against the offshore yuan. For the most part, this was CNH6.7580, a multiyear low and CNH6.78. It was turned back the upper end of the range and eased to CNH6.7665. The greenback settled at CNH6.7635 at the end of last week, and a higher close now would be the first in three weeks. The PBOC set the dollar’s fix at CNY6.8157 today. It was set at CNY6.8203 yesterday andCNY6.8176 last Friday.

• Although the Reserve Bank of India kept policy steady, it delivered a hawkish hold and announced new measures to attract foreign capital. This triggered a short squeeze that lifted the rupee by nearly 1%. The dollar fell to around INR94.8885, a four-day low. The central bank announced steps to make it easier for foreign investors to buy Indian stocks and bonds, while the government indicated that taxes for capital gains on bonds investments by foreign investors would be reduced.

Other Markets

• The recovery of US equities yesterday did not help Asia Pacific equities recover today from Thursday’s steep losses. All the large bourses fell today, led by the 5.5% drop in the high-flying South Korean Kospi and the 1.8% drop in China’s CSI 300. Europe’s Stoxx 600 saw follow-through buying today, extending the recovery that began yesterday. The Nasdaq futures are off almost 1% and the S&P 500 futures are down nearly half as much.

• Benchmark 10-year yields in Europe and Americas softened yesterday alongside oil prices and Asia Pacific played a little catch-up today. The 10-year JGB yield slipped fractionally to ~2.64%, leaving it down almost two basis points on the week. Australia’s 10-year yield was off one bp to 4.90% and up 2.5 bp on the week. European yields mostly around one basis point higher lower leaving them up 2-4 bp on the week. Ahead of the jobs report, the 10-year Treasury yield is near 4.47%, about two basis points higher this week.

• The 200-day moving average, near $4428.50 today, is giving bottom pickers in gold something to hold on to, as it were. Still, it is difficult to be too enthusiastic until it re-establishes a foothold above around $4550-60. After recording a marginal new five-session low yesterday, slightly below $72.50, silver recovered but failed to reestablish a foothold above $75. It was sold to a marginal new low since the end of May today, near $71.25 and is near $72.75 late in the European morning.

• July WTI snapped a three-day and nearly10% advance yesterday. It fell around 3.1% to slightly above $93.00. It slipped to a three-day low today near $91.50. Still, it will likely close higher on the week, for the first time in three weeks. Recall that in the previous two weeks, it fell from about $101 to a little below $87.50.

Data

• The US May employment report is front and center today. After averaging 150k new jobs in March and April, a softer report is expected today. The median forecast in Bloomberg’s survey is for an 88k increase in nonfarm payrolls, softer year-over-year growth in average hourly earnings (and falling in real terms), but a steady unemployment rate (4.3%). That said, barring a horrific report, expectations for this month’s FOMC meeting, Warsh’s first, seem practically unmovable with virtually no chance of a change in policy. Meanwhile, in the 12-months since Liberation Day in April 2025, the US has lost about 72k manufacturing jobs. There is nothing intrinsic about the repetitive and often dangerous tasks of manufacturing that make those jobs valuable, but rather it was, arguably, the unionization of that sector that ensured income and benefits. Yet, the service sector employs more than four times as many people in the US.

• Canada also reports May jobs data on today. The median forecast is for 10k increase in jobs, which would be only the second month this year when jobs increased. In the first four months of the year, Canada loss about 112k jobs. In the first four months last year, Canada gained 32k jobs. Nearly all the jobs lost this year are accounted for by full-time positions. Nevertheless, it is widely understood that the Bank of Canada, which meets next week, is on hold with its overnight target rate at 2.25%.

• Much has been written about the eurozone’s under-performance compared with the US. Today, it cut Q1 growth to -0.2% from 0.1% initially will underscore the point. The revision is due primarily to the adjustment from Ireland, where the economy reportedly contracted by 12.1% rather than 2% as previously estimated. The multinational sector in Ireland collapsed by 27%, which overstates the impact on the local economy. A different measure, focused more on domestic demand, grew by 0.6%. Separately, France had previously revised its figures to show a small contraction in Q1. Still look at last year. The US grew by 2.1% and reported a budget deficit of 5.4% of GDP. The eurozone grew by 1.4% and recorded a budget deficit of 2.9% of GDP. Did the US willingness to run such a large deficit, while the economy was growing above what the Federal Reserve says is the long-term growth potential, account for the growth differential?

• Contrary to conventional wisdom, rising real labor income in Japan has not translated to increased consumption. Cash earnings rose 3.5% year-over-year in April, up from 3.1% in March. When adjusted for inflation, real earnings growth accelerated to 1.9% from 1.4%. Yet, household spending fell 0.5% year-over-year in April after the 2.9% decline in March. Household spending has contracted in five of the past six months. Consumption, we have suggested, is more complicated than simply income, and ultimately from an economic point of view it is consumption that is more important than income for driving growth.

• The Reserve Bank of India stood pat today but seemed to signal its intention to lift rates later after it raised its inflation forecast to 5.1% this fiscal year from 4.6% and shaved its growth projections to 6.6% from 6.9%. The key repo rate was kept at 5.25%. Q1 GDP also was reported. It slowed from a revised 8.0% year-over-year to 7.8%, somewhat better than expected. The May CPI will be released next week. It is expected to rise for the seventh consecutive month. It was at 3.48% in April, the highest since March 2025. It ended last year at 1.17%.

Disclaimer

Softer Oil, Softer Greenback

noreply@blogger.com (Marc Chandler) — Thu, 4 Jun 2026 06:50:14 -0400

A new ceasefire between Israel and Lebanon raises hopes of a breakthrough in US-Iran talks where a low intensity conflict has been waged under the flag of a ceasefire. The Israel-Lebanon deal reportedly does not include Hezbollah, underscoring the fragility and limits of the ceasefire claims. July WTI is near the middle of the $94-$96 range. The market seems cautious.

The US dollar is mostly softer, with the Canadian dollar the weakest among the G10 currencies. The swaps market has a BOJ hike nearly fully discounted for later this month and the greenback continues to hover near but below JPY160. Japan’s finance minister continued to press with recent rhetoric that it stands ready to act. Poor earnings from Broadcom late yesterday weighed on the chip sector in Asia and has dragged the Nasdaq futures down over 1%. The market-sensitive US May jobs data are due tomorrow but the bar to a change in Fed policy this month, as Warsh chairs his first meeting is very high.

Prices

G10

• The euro reached a two-week high on at the end of May near $1.1685 and eased below $1.1600 yesterday in North American session. In the last two weeks of May, it traded below $1.16 on an intraday basis several times but did not close below it once, but it did yesterday. Still, there was no follow-through selling and the euro recovered to almost $1.1635 in European turnover. A close above yesterday’s high, a little below $1.1635, would help lift the tone, ahead of tomorrow’s US jobs data.

• The dollar trended cautiously but higher against the yen in North America yesterday. After European markets closed, the greenback was pushed to JPY160.10, as if the impish market were daring verbal intervention by the US Treasury like earlier this year, or in Tokyo today. The market is nervous and the dollar spiked down to almost JPY159.60 in the local session but quickly recovered but has not been above JPY160, where options for $2.7 bln expire today. Finance Minister Katayama reiterated that officials are in contact with Washington and are prepared to take action. The US has remained quiet unlike in late January.

• Sterling continues chopping in last Friday’s trading range (~$1.3410-$1.3485). The lower end of the range held yesterday and today, setting the stage to test the upper end of the range. Yesterday’s high was slightly above $1.3470 and the 20-day moving average is near $1.3460, which sterling has settled above once (and that was barely) since May 11.

• Risk-off and a poor macro backdrop saw the Canadian dollar fall to its lowest level since early April. The greenback approached CAD1.39 yesterday and reached CAD1.3925 today. The high for the year was recorded at the end of March slightly above CAD1.3965. It settled slightly above the upper Bollinger Band (~CAD1.3910 today).

• The Australian dollar slipped through yesterday’s low near $0.7130 to almost $0.7120 today, a five-day low. It recovered, perhaps with the help of the swing back into a trade surplus in April but stalled near $0.7140. Options for A$625 mln at $0.7155 expire today.

• The dollar traded within Tuesday’s range yesterday (~MXN17.2640-MXN17.3665) against the Mexican peso. With a few exceptions, the dollar continues to be confined to the range set May 15 (~MXN17.21-MXN17.40). So far today, it is inside yesterday’s range, which was inside Tuesday’s range (~MXN17.3640-MXN17.3665). The Colombian peso, still in the afterglow of the last weekend’s presidential election, was the strongest of emerging market currency yesterday, with a minor 0.30% gain.

• The offshore yuan’s nearly 0.30% decline yesterday was the largest in two-and-a-half weeks. The dollar’s broad gains played a role. It follows the threat of new US tariffs, the first since President Trump was in Beijing. Also, yesterday, for the first time since August 2024, the PBOC skipped its open-market operation. The dollar is trading with a heavier bias today and has drifted toward CNH6.7730. The PBOC set the dollar’s reference rate at CNY6.8203 (CNY6.8184 yesterday).

• The Indian rupee remains under pressure even as reports suggest the government is considering new measures to support the currency. The dollar settled at session highs near INR95.7925. Recall on Monday, the dollar reached a low near INR94.73. The central bank meets tomorrow. A Bloomberg survey found 29 of 25 economists expect the RBI to stand pat, though speculation of a hawkish hold has not helped the currency, which settled near two-week lows.

Other Markets

• US equities fell yesterday and the S&P 500 snapped a nine-session advance, its longest in 1995. Asia Pacific equities were unable to get much traction today and snapped a four-day advance. Europe’s Stoxx 600 is slightly firmer after losing 0.65% yesterday. It has not posted back-to-back declines since May 7-8. Poor Broadcom earnings are taking a toll on the NASDAQ futures, which are off about 1%, while S&P 500 futures are off about 0.35%.

• Benchmark 10-year yields are mostly narrowly mixed today after yesterday’s lurch higher that saw a six basis point increase in Tokyo and 6-9 bp increase in Europe and an almost five basis increase in the US 10-year Treasury to 4.49%. The 10-year JGB yield rose 2.5 bp today, while European yields are little changed. The 10-year Gilt yield is the big mover in Europe, and the yield is off about 1.5 bp. The US 10-year Treasury yield is down a couple of basis points to 4.47%.

• Gold was sold to a four-day low slightly below $4427. It is firmer today near $4470 in late European morning turnover. Yesterday’s high was near $4496. The 200-day moving average appears to be offering support. It is found near $4423 today. The yellow metal traded below the moving average last month but settled above it. Silver settled softly and posted its lowest close in a month, near $72.70. It has not traded below $71 in two months. It also has come back better bid today and is near $73.50. Yesterday’s high was slightly below $76.

• July WTI rose for the third consecutive session yesterday and settled above the 20-day moving average for the first in almost two weeks. It has retraced half of what it lost since the contract high was recorded on May 18 ($105.20). It is consolidating in about a dollar range on both sides of $95.

Data

• US weekly jobless claims today are overshadowed by tomorrow’s non-farm payrolls. Still, it is notable that a year ago, the four-week moving average of initial jobless claims was around 230k-235k and in the middle of last month was at 202k, the lowest since January 2024. Continuing claims were around 1.935-1.950 mln a year ago and as of May 16, were about 1.786 mln. In late April, continuing claims fell to 1.758 mln, the lowest since January 2024. Given that Q1 GDP was revised lower, then nonfarm productivity will likely be lowered from the 0.8% earlier estimate by as much as half, while unit labor costs will probably edge higher.

• Mexico reports March gross fixed investment and private consumption today. Capex fell in January and February, and the median forecast in Bloomberg’s survey is for a 0.1% rise in March. Moreover, capex fell in 2024 and 2025. This is a challenge for Mexico, and it cannot all be attributed to the disruption caused or threatened by the US. Private consumption is faring better but the year-over-year in real terms is off to a weak start after a strong finish to 2025.

• Retail sales in the eurozone fell by 0.4% in April. It would have been the fourth consecutive month in volume terms, but the March series was unexpectedly revised to 0.8% from -0.1% initially reported.

• The UK’s May construction PMI continued to deteriorate. While most economists Bloomberg surveyed expected a small increase, it fell to38.2 from 39.7. It has not been above the 50 boom/bust level since the end of 2024. It was at 47.9 last May.

• Australia’s April trade balance swung back into surplus, A$1.79 bln from its first monthly deficit (-A$1.02 bln) in March since 2017. Imports surged 12.2% in March and edged up 0.8% in April. Exports fell 2.5% in March and rose 7.2% in April.

Disclaimer

War and New Tariff Threat Strengthen the Dollar

noreply@blogger.com (Marc Chandler) — Wed, 3 Jun 2026 06:46:32 -0400

While what has been dubbed China Shock 2.0 as the Chinese model moves into higher value-added goods is important, the most immediate challenge facing investors is the double shock from the US in the form or tariffs and war. And both are impacting the capital markets today. More clashes between the US and Iran have been reported, which are underpinning oil prices and lifting bond yields. At the same time, the US is threatening new tariffs of at least 10% on imports from 60 trading partners over how goods allegedly from forced labor are handled. This levy would ostensibly apply to Canada, Mexico, the EU, Taiwan, and UK, while China, Japan, India, South Korea, Brazil, and Switzerland would face a 12.5% tariff. A public comment and review period is planned to run into early July before implementation.

The US dollar is firmer against most of the G10 currencies. The two exceptions are notable. The Norwegian krone is the strongest and may be helped by the gains in oil prices. The yen is the other exception. While comments by BOJ Governor Ueda saw the swap market lift the chances of a rate hike later this month, officials said little new about the weakness of the yen. The greenback tested JPY160 without moving above it, which is its best level since the late April intervention. It is hovering a little below it ahead of the North American session.

Prices

G10

• Unable to make much headway above $1.1650 yesterday, the euro succumbed to selling pressure and fell to slightly through $1.1615 in the North American afternoon yesterday. Monday’s low was a little above $1.1605, and it has been retested today. Coming into the North American session it does not look like a low is in place. Last week’s low was near $1.1585, and May’s low was closer to $1.1575, which met the (61.8%) retracement objective of the euro’s rally from the mid-March low (~$1.1410), which is also the low for the year. Options for 1.3 bln euros at $1.1625 expire today.

• The dollar rose against the yen and got nearly as close to JPY160 as it could without trading it. It is the highest since the April 30 intervention. Recall that last March, the greenback breeched JPY160 but there was no material intervention. The dollar continues to hover near JPY160 even after BOJ Governor Ueda comments seemed to suggest a hike this month. The swaps market is pricing in nearly 22 bp of a hike compared with 19.5 bp in the past three sessions. The market remains wary of intervention and there are options for $660 mln at JPY160 that expire today.

• Sterling fared better than the euro over the past couple of sessions. It approached the upper end of its recent range against the dollar as it pushed briefly above $1.3480 yesterday to approach the pre-weekend high. Sterling frayed the 20-day moving average (~$1.3470 today) but failed to settle above it. It has come back softer today and recorded the session low a little before the European markets opened today, slightly above $1.3435. Options for almost GBP415 mln at $1.3440 expire today.

• The Canadian dollar recovered from three-day lows but continues to look vulnerable. The US dollar reached nearly CAD1.3855 in the European morning and was sold to about CAD1.3815 in early North American turnover yesterday and recovered toward CAD1.3845. Last week’s high was near CAD1.3870 but the greenback posted a key downside reversal afterwards and it looked like the kind of price action one would associate with a top after a month-long rally. Still, it has edged to almost CAD1.3860 today and a push above CAD1.3870 could signal CADF1.3900 next, while the April high was closer to CAD1.3950.

• The Australian dollar traded firmly but within Monday’s ~$0.7135-$0.7190 trading range yesterday. It tested and held support near $0.7170 in North America. The Aussie is trading within yesterday’s range today.

• The Mexican peso rose to a six-session high yesterday but remains within the consolidative range than it has been forged in recent weeks. The US dollar trended lower since peaking Monday near MXBN17.40. It was sold a little below MXN17.2650 yesterday before recovering back toward almost MXN17.31. It is trading quietly between above MXN17.28 and MXN17.3150. The dollar held above BRL5.00 and reached the session high (~BRL5.0225) in the afternoon. The market largely shrugged off the US threat to impose a 25% tariff on Brazilian goods in 30 days after an investigation found unfair trade practices. There are two mitigating factors. First, exports to the US account for around 2% of overall Brazilian exports. Second, the US is excluding among the most important imports from Brazil, including coffee, beef, some fruits, and aircraft parts. The post-election surge of the Colombian peso continued yesterday, and the dollar set a marginal new low for the year (~COP3530.65) but recovered and settled at COP3579.

• The dollar made a marginal new three-year low against the offshore yuan yesterday near CNH6.7580. The five-day moving average of the close is near CNH6.7670 today and the greenback has not settled above it in two weeks, though it is poised to do so today. The dollar reached a four-session high today near CNH6.7760. The yuan is near three-year highs against the trade-weighted basket the PBOC says it monitors. The PBOC set the dollar’s fix at CNY6.8184 today (CNY6.8187 yesterday).

• The dollar gapped higher against the Indian rupee today and reached INR95.80, an eight-session high. Reports suggest that the government will soon announce steps, like tax changes, to encourage foreign investment in the sovereign bond market.

Other Markets

• The S&P 500 and Dow Industrials made marginal new highs yesterday, but the NASDAQ did not. Equities are mixed today. The MSCI Asia Pacific Index reached set a fresh record high as it rose for eighth session of the past nine today. Most of the large bourses rallied today, with Hong Kong and India notable exceptions. Also, we note that pressure on Indonesia continues and the equity market tumbled a little more than 4% today to five-year lows. The poor macro backdrop and fear of a downgrade weighs on sentiment. Europe’s Stoxx 600 set its record high on the eve of the US and Israel attack on Iran at the end of February. It is off about 0.4% through the European morning today. Nasdaq futures are slightly firmer, while S&P and Dow futures are softer.

• The recovery in oil prices yesterday saw European bonds trim their earlier gains and the 10-year US Treasury yield was flat near 4.45%. It is near 4.48% now. Benchmark 10-year yields are up 3-4 bp today in Europe. The 10-year JGB yield, which tumbled nearly 11 bp yesterday and rose 6.5 bp today (to 2.62%).

• Gold was confined to Monday’s range yesterday and hovered mostly above $4480 in the North American afternoon. It was sold to a four-session low today near $4439 but is above $4455 as the North American session is about to begin. Silver reached a four-session high near $77 yesterday but settled around $75.25. It has a softer profile today, trading between about $74 and $76.

• July WTI held support near $90 yesterday and reached $94, the session high in late turnover. News that Hezbollah was rejecting a partial ceasefire and reports of continued Israeli strikes in southern Lebanon may have helped put a floor under the crude. The continued strikes during the ceasefire and the apparent lack of progress in the negotiations lifted the contract to $97 today, a seven-session high. It is pressing against the high in late European morning turnover.

Data

• In a packed US economic calendar today, the highlight is the ADP private sector jobs estimate, which the median forecast in Bloomberg’s survey is for 120k after 109k in April. The final services and composite PMI will be overshadowed by the ISM services index. Similarly, the preliminary durable goods orders steal most of the thunder from today’s factory orders report. We know that without Boeing and defense orders, durable goods orders contracted. Lastly, late in the session the Fed’s Beige Book, prepared for the June 16-17 FOMC meeting, will be released.

• Canada is expected to report a small quarter-over-quarter gain in productivity (0.3% after a 0.1% decline in Q4 25). Canada unexpectedly reported a contraction in Q1 26 GDP, the second consecutive quarterly decline in output. The May services and composite PMI are due and were both a little below the 50 boom/bust level in April.

• The eurozone reported that April PPI rose 0.6% on the month and 4.9% year-over-year, surging from 2.0% in March. Separately, the May final services and composite PMI were somewhat with the preliminary estimates but still below the 50 boom/bust levels. The services PMI stands at 47.7 rather than 46.4, confirming the second reading below 50 (47.6 in April). The composite PMI stands at 48.5, better than the flash reading of 47.5, but still the third consecutive decline (48.8 in April).

• The UK’s final May services PMI stands at 49.3, confirming the first sub-50 reading since April 2025, though better than the initial estimate of 47.9. The composite is at 49.7, up from the flash reading of 48.5, but down sharply from 52.6 in April. It is also the first reading below 50 since last April.

• Australia’s economy grew by 0.3% in Q1 26 after it expanded by 0.9% in Q4 25. The year-over-year pace was steady at 2.5%. The final May PMI warns that activity may be slowing in Q2. The services PMI is at 48.7 compared with the initial estimate of 47.7. It averaged 51.8 in Q1 26 and 52.1 in Q4 25. The composite PMI stands at 48.7 (47.8 initially) after averaging 51.6 in Q1 26 and 51.9 in Q4 25. Private credit expansion continues apace, rising 0.7% in April the same as in March.

• Japan’s final May services PMI was confirmed at 50.0 (51.0 in April). It was the third consecutive monthly decline. It was at 51.0 in May 2025. At 51.1, the final May composite also fell for the third month after peaking at 53.9 in February before the Middle East war began. The composite PMI averaged 53.3 in Q1 25, its best quarterly performance in several years.

• China’s RatingDog services and composite PMI unexpectedly ticked higher. The services PMI is at 54.4 from 52.6 in April. It was at 50.7 in April 2025 and finished last year at 52.0. The composite eased to 54.0 from 53.1. It was at 51.1 in April 2025 and 51.3 at the end of 2025. Recall that the “official” composite rose to 50.5 in May from 50.1 in April. The manufacturing PMI had slipped (50.0 vs. 50.3), and the non-manufacturing PMI edged up to 50.1 from 49.4. The composite improved to 50.5 from 50.1.

• India’s services PMI rose to 59.8 from 58.9 and the composite rose to 59.3 from 58.1. This is the highest composite reading since last November. The RBI meets at the end of the week. The consensus is that it stands pat, but some speculation of a hike has been creeping into the market.

Disclaimer

Market Continues to Tempt Japanese Intervention, while PBOC Signals Gradual Yuan Appreciation

noreply@blogger.com (Marc Chandler) — Tue, 2 Jun 2026 06:44:28 -0400

The capital markets remain hopefully that the US and Iran will reach an agreement. Oil is a little softer and bond yields are lower. However, in Polymarket, the odds that the Strait of Hormuz is open by the end of the month is at around 22%, down from around 35% last week. The odds it is open by the end of next month is 41%. It briefly was below 40% yesterday for the first time in around three weeks.

The dollar is mostly a little softer but within well-worn ranges. The dollar continues to ease slowly against the Chinese yuan. Against the offshore yuan, a new three-year low was recorded today even as the PBOC set the dollar’s fix slightly higher. Meanwhile, the greenback is trading in a narrow range near yesterday’s high against the Japanese yen (~JPY159.75), which is the highest the it has been since the April 30 intervention.

Prices

G10

• The euro recorded the session low yesterday in early North American trading, slightly above $1.1605 apparently in response to news reports that due to Israel’s campaign in Lebanon that Tehran was going to stop exchanging messages with the US. After the low was made, the euro recovered to almost $1.1640. It continues to trade quietly today and so far, is in a roughly $1.1630-$1.1655 range. The intraday momentum indicators favor an upside range extension in North America.

• The dollar reached JPY159.75 in North America yesterday, its best level against the yen since the April 30 intervention and is knocking against it in the European morning. It has not been below JPY159.60 today. The dollar settled above JPY159 for the fifth consecutive session. In the 22 sessions since April 30 (intervention), the dollar has risen in all but four. Finance Minister Katayama warned at the end of last week that intervention to counter volatility or speculative move remains an option. One-month implied volatility fell to four-year lows before the weekend, near 6.1%. It was about 7.5% before the intervention on April 30. Similarly, three-month implied vol fell to nearly 7% before the weekend, which it also has not seen in four years. In terms of speculative positioning, the Commitment of Traders report shows that non-commercials have amassed the largest short yen position since 2007 (227.6k contracts, JPY12.5 mln per contract or cumulative ~$17.83 bln) as of May 26. Options for $1.6 bln at JPY160 expire today.

• According to Bloomberg, sterling traded 1/100 of a cent below last Friday’s low. It held above $1.3405 and recovered to approach the session high near $1.3475 by early in the NY afternoon. It briefly poked above $1.3480 today and held above $1.3450. Our reading of the technicals still favor the upside. Initial resistance is in the $1.3480-$1.3500.

• The dollar-bloc currencies were weaker yesterday and the Canadian dollar lost about 0.25%. The greenback rose to almost CAD1.3850 yesterday as it extended the recovery seen before the weekend. It has reached almost CAD1.3855 today. Last week’s high, which was also the high for May, was near CAD1.3870.

• With a few exceptions on an intraday basis, the Australian dollar has traded between $0.7100 and $0.7200 since mid-May. Only a break of this range is meaningful. Here, too, our assessment of the technical condition favors an upside break. It has reached nearly $0.7190 today, where options for A$370 mln expire today.

• The dollar traced a MXN17.21-MXN17.40 range against the Mexican peso on May 15 and with a few exceptions on the upside, has mostly remained in it. Interim support may be around MXN17.28-MXN17.30, which is being tested in Europe today. The Colombian peso soared nearly 3.6% yesterday in response to the first round of the president election. The MSCI Colombian stock index jumped about 4.7% and 10-year local currency bond yield fell 65 bp (to ~12.53%). The price of insuring Colombia’s debt from default (credit default swap) for five years fell to the lowest since last September. The dollar settled near COP3800 on May 15 and trended lower in the run-up to the election. It fell a little through COP3615 in the middle of last week before recovering ahead of the weekend to a slightly more than COP3710. Yesterday, the greenback was sold to almost COP3550. The five-year low was recorded in late April near COP3530.

• The dollar consolidated between CNH6.7620 and CNH6.7710 yesterday against the offshore yuan. It has slipped to a new three-year low near CNH6.7580 today. The greenback has not settled above its five-day moving average in nearly two weeks. It comes in near CNH6.7685 today. The PBOC set the dollar’s fix a little higher today (CNY6.8187 vs. CNY6.8167 yesterday, a new multiyear low)

• The dollar rose against the Indian rupee today, the first gain in three sessions. It was sold to INR94.73 yesterday, its lowest level since May 8 but settled near session highs. Foreign equity sales of Indian stocks and bonds yesterday took a toll on the rupee today. The dollar rose a little more than 0.25% to settle near INR95.27 today.

Other Markets

• US equities continued to push ahead. The S&P and Nasdaq set new records. Through May, the Russell 2000 was up a little more than the Nasdaq. The Russell 2000 record high was last week. Most of the large bourses, but Japan and Australia rose today. Hong Kong and the index of mainland stocks led the regional advance with gains of 2.5% and 3.0%, respectively. Europe’s Stoxx 60 is up about 0.65% in late morning turnover, recouping most of yesterday’s loss. US index futures are trading with a heavier bias.

• The US 10-year yield rose yesterday for the first time in eight sessions. At highest, it was approaching 4.52% but finished the session near 4.47%. European benchmark 10-year yields are unwinding most of yesterday’s 6-8 bp jump. Yields are off mostly 5-6 bp today. The 10-year JGB yield peaked on May 20, near 2.81% and is now close to 2.55%, with today’s nearly 11 bp decline today, following a robust auction. The 40-year JGB yield peaked near 4.22% on May 18 and is now at 3.77%.

• Gold is trapped between the 200-day moving average near $4406 and the 20-day moving average around $4585. It is showing a firmer profile today and is near $4530 late in the European morning. Silver continues to trade quietly in last week’s range (~$71.80-$78.80). It is also firmed today and is near $76.30 in Europe.

• July WTI reached almost $95.80 on yesterday’s geopolitical news. This closed the gap left on the charts from the lower opening on May 26. It pulled back with the help of President Trump’s assurances that negotiations were still taking place. It saw a low near $90.80 in the NY afternoon and settled a little above $92. The 5.5% rise was the largest since the end of April. It has come back softer today. It is in a range a little above $90 to $92.65 and is near $91 late in the European morning.

Data

• US jobs are the economic focus this week. April jobs opening (JOLTS) is expected to be little changed when it is reported today, near March 6.866 mln. Tomorrow, the ADP private sector jobs estimate is due and the median forecast in Bloomberg’s survey is for 120k, which would be the most since January 2025. May auto sales will trickle in and small increase from 15.92 mln (seasonally adjusted annual rate) in April. US sales have averaged 15.72 mln pace in the first four months of the year, down from 16.66 mln the Jan-Apr period last year, which may have been flattered by trying to front run tariffs and secure tax breaks for EVs.

• After the large members reported their CPI figures last week, the eurozone aggregate reading was not a surprise. The headline May CPI rose to 3.2% from 3.0%, reflecting a 0.1% month-over-month rise. The core rate rose to 2.5% from 2.2%. The swaps market has a rate hike next week nearly fully discounted.

• The UK reported a GBP1.9 bln rise in April consumer credit. It rose almost GBP2 bln in April 2025 and is the first slowing in the year-over-year pace since May 2025. UK figures, unlike US consumer credit, exclude student loans. Separately, mortgage lending slowed in April even as approvals rose.

• Ahead of tomorrow’s Q1 26 GDP, Australia reported today that net exports were a 0.8% drag on growth in the first three months of year after revision showed a flat contribution in Q1 (initially it was estimated to have shaved growth by 0.1%).The current account deficit widened to A$27.1 bln from a revised A$23 bln (A$21.1 bln initially) in Q4 25. Meanwhile, April building approvals continue to slow after surging by 31% in February (month-over-month). They fell 10.5% in March and 3.4% in April. The median forecast in Bloomberg’s survey is for 0.5% quarter-over-quarter GDP in Q1 26 after posting 0.8% growth in Q4 25.

Disclaimer

Oil Gains on Apparent Lack of Middle East Progress

noreply@blogger.com (Marc Chandler) — Mon, 1 Jun 2026 06:49:56 -0400

The war in the Middle East continues to hang over risk-taking appetites the sword of Damocles. There appears to have been little progress over the weekend, even though a US decision was expected after the meeting in the White House Situation Room at the end of last week. Reports suggest there have been a series of skirmishes over the weekend, and Israel intensified its assault on Lebanon. The US and Iran reportedly are proposing amendments to a draft deal. Both the Washington and Tehran apparently think they have the superior hand. Oil prices are 3-4% higher today.

The dollar is consolidating mostly within the ranges seen at the end of last week. The market continues to test the resolve of Japanese officials. The greenback is holding above JPY159 and has not settled below there since last Monday. Most emerging market currencies are beginning the week softer, but the Mexican peso is a notable exception and the PBOC set the dollar’s fix at a new multiyear low though the offshore yuan consolidated its recent gains. The first round of the Colombian presidential election saw the outsider De La Espriella finish ahead. Although a run-off will be held later this month, the results will likely be seen as market friendly.

Prices

G10

• The euro rose to about $1.1685 ahead of the weekend, its best level in a little more than two weeks amid hopes of an extended ceasefire in the Middle East. That is roughly the halfway mark of May’s range. It is trading inside last Friday’s range and has been confined to about $1.1640 to $1.1670 today.

• Confirmation that the BOJ bought JPY11.7 trillion between late April and late May had little impact on the market ahead of the weekend. The dollar settled above JPY159 for the fourth consecutive session and looks poised to do so again today. It has been pinned in a quarter-of-a-yen range above JPY159.25. There are about $1.3 bln in options struck between JPY159.25 and JPY159.27 that expire today. The yen was the weakest of the G10 currencies in May. It lost almost 1.7% after it appreciated around 1.35% in April.

• For the third time in about two-and-a-half weeks, sterling stalled near the 20-day moving average at the end of last week. It is found slightly below $1.3480 today. At last week’s high, near $1.3510, sterling approached the (61.8%) retracement of May’s decline. Overcoming it would lift the technical tone. So far today, it is in about a quarter-of-a-cent range below $1.3475. Options for about GBP650 mln at $1.3420 and almost GBP620 mln at $1.3450 expire today.

• Ahead of the weekend, geopolitical hopes offset the disappointing Canada’s Q1 26 GDP, which saw the second consecutive quarterly contraction and lifted the Canadian dollar to a six-session high. The greenback fell to CAD1.3770 after posting bearish key reversal in the previous session. It has mostly held above CAD1.3790 today and recorded session highs in European turnover near CAD1.3825. Options for about $785 mln at CAD!.3790 expire today. Last Friday’s high was about CAD1.3830 and last week’s high, the month’s high, was near CAD1.3870.

• Ahead of the weekend, the Australian dollar extended its recovery off the $0.7100 area to briefly trade above $0.7200 for the first time since mid-May. It settled at the 20-day moving average, found near $0.7185 today. It is trading between about $0.7170 and $0.7190 so far today. Options for A$725 mln at $0.7200 expire today.

• With a couple of minor exceptions, the Mexican peso has been largely confined to the range set on May 20. Then, the dollar traded between about MXN17.26 and MXN17.43. Now it remains within last Friday’s range, which itself was in last Thursday’s range (~MXN17.3040-MXN17.4400). Colombia went to the polls over the weekend to elect a new president. The pendulum of political sentiment swung to the right. Still, ahead of the results, the dollar set a new high for the week against the Colombian peso near COP3710. The central bank meets at the end of June, and the swaps market is discounting 25 bp hike. It delivered two 100 bp hikes this year (January and March). May inflation is due at the end of the week and is expected to edge a bit closer to 6%. We look for the Colombian peso to outperform the Mexican peso in the coming weeks.

• The yuan’s march higher continues. It reached a new three-year high ahead of the weekend. The greenback fell to nearly CNH6.76 and CNY6.7660. The yuan has risen 3.15%-3.30% this year through May. It is the strongest currency in the region. Claims that the yuan’s strength would allow the other regional currencies to appreciate seem wide of the market. The only other Asian currencies to appreciate this year has been the Malaysian ringgit (~2.4%), the Singapore dollar (~0,75%) and the Taiwanese dollar (~0.20). Even the Hong Kong dollar has fallen (~0.70%). Yet, China’s price competitiveness is much larger than the modest yuan appreciation. The dollar is consolidating today between CNH6.7620 and CNH7.7685, while the PBOC set the dollar’s reference rate a marginal new low: CNY6.8167 (vs. CNY6.8176 before the weekend).

• The combination of apparently aggressive central bank intervention, the pullback in oil prices, and softer US dollar has spurred a short squeeze of the Indian rupee. The rupee posted its third weekly rise in the past four weeks for the first time in three months. A roughly two-month uptrend has been violated and the momentum indicators have are falling. The dollar initially was sold to INR94.73 today, a three-week low, before recovering to settle a little above INR95.01. The RBI meets at the end of the week, and officials do not seem prepared to hike rates to defend the currency. A surprise hike would likely extend the rupee’s recovery.

Other Markets

• Asia Pacific equities were mixed today after the regional MSCI index rose 8.3% last month. Chinese equities were lower, except an index of shares that trade in Hong Kong. South Korea and Taiwan extended their surge. Europe’s Stoxx 600 rose 2.4% last month but is slipping a little today. US index futures are firm. The S&P 500 rose 5.1% in May and the Nasdaq gained nearly 8.4%.

• Benchmark 10-year yields softened last week, encouraged by the decline in oil prices, which not only eased inflation expectations but an end to the Middle East war will take some pressure off central banks, even if the return to normalcy takes some time. The streak of declining US 10-year yields extended for the seventh consecutive session ahead of the weekend. It matches the longest decline since July-August 2024. Yields are firmer today. European rates are mostly 3-5 bp higher and the 10-year Treasury yield is up three basis points to almost 4.47%.

• The prospect for an extended ceasefire is good for gold insofar as it reduces the pressure on some oil importers and exporters to sell the yellow metal and softens interest rates. Gold reached a two-week high ahead of the weekend a little below $4600, though it settled closer to $4555 in the spot market. There has been no follow-through buying. Instead, gold is fraying $4500 in European turnover. Silver was less impressive. It traded quietly between ~$74.60 and $76.65, well-within the recent range. It is trading firmer today but has held below $76.30.

• July WTI fell by about 10.4% last week, easily the most since the war began. It settled below $87 for first time since April 21. The $84.70 area is the (38.2%) retracement of the war-inspired rally. However, the continued military strikes and the lack of resolution have lifted oil prices today (~3-4%). July WTI reached about $91.25 today and August WTI recovered to $94.65.

Data

• The final US manufacturing PMI is overshadowed today by the ISM manufacturing report. The ISM has lagged the PMI, but after stalling at 52.7 in April and another rise is expected to lift it to its best level in nearly four years. The US has gained about 16k manufacturing jobs this year after losing 108k in 2025 and 180k in 2024.

• Canada sees the May manufacturing PMI for the first time today. It bottomed last April at 45.3 amid the trade shock from the US. However, it recovered and reached a multiyear high in April of 53.3.

• Mexico’s manufacturing PMI and IMEF indices are expected to show an economy that continues to struggle to sustain forward momentum. Separately, Mexico reports April worker remittances, which remain an important source of capital inflows. Remittances averaged $4.82 bln in Q1 26, slightly better than the $4.75 bln average in Q1 25. There is a strong seasonal pattern for remittances to rise in March and May but are typically fall in April and June.

• The first pullback in the eurozone’s final manufacturing PMI in May was confirmed earlier today. It stands at 51.6 from the initial estimate of 51.4 after 52.2 in April. Separately, the unemployment rate remained at 6.3%, after the March series was revised from the EMU-era low of 6.2% to 6.3%. Money supply does not capture the market’s imagination the way it previously may have but the lending figures reported at the same time showed loans to households rose by 3.0% year-over-year, the same as in February, while lending to non-financial firms accelerated to 3.2% from 3.0%. Lastly, the ECB’s survey of one-year expectations was at 4.0% (unchanged from March) and three-year inflation expectation slipped to 2.9% from 3.0%.

• The UK’s final May manufacturing PMI stands at 53.9, up from the preliminary estimate of 53.7, which is where it was in April. It was 46.4 last May and 50.6 at the end of 2025.

• Australia’s final May manufacturing PMI is 50.7, up from the 50.2 initial estimate and down from 51.3 in April. It peaked at 53.0 last August and was at 51.6 at the end of 2025. The Melbourne Institute’s inflation gauge rose to 4.4% from 4.3% in April. It was at 3.5% at the end of last year, before the central bank’s three rate hikes. It is the highest since the end of 2023. Still the softer April CPI figures last week softened expectations for another rate hike this year. The futures market is discounting around an 80% chance of another hike this year. It reached about 71% before the weekend, the least since early December.

• Japan’s final May manufacturing PMI confirmed the preliminary reading of 54.5, which was a small pullback from April’s 55.1. It was at 49.4 last May and 50.0 at the end of last year. Japan’s Q1 GDP rose by 0.6% quarter-over-quarter, which was stronger than expected. It assumed capex slowed but today’s figures suggest it may have slowed more than anticipated. In any event, the forward-looking market anticipates weaker growth here in Q2 (~0.3%).

• China reported its May PMI over the weekend. There was little change since April. The manufacturing PMI is at 50.0 from 50.3 in April. The non-manufacturing PMI rose higher to 50.1 from 49.4. The composite stands at 50.5, up from 50.1, matching the highest of the year. The Rating Dog iteration of the manufacturing PMI, which runs hotter than the “official” one fell to 51.8 from 52.2. Separately, Beijing published new rules today that require closer scrutiny of overseas real investment, effective July 1.

Disclaimer

June 2026 Monthly

noreply@blogger.com (Marc Chandler) — Sat, 30 May 2026 07:10:00 -0400

The world enters June optimistic that an extended ceasefire in the Middle East is possible. The front month Brent oil futures contract finished May at its lowest level in a little more than five weeks. Major US and Japanese equity indices are at record highs. After a dramatic jump, European benchmark 10-year yields pulled back mostly 15-25 bp in May, although the 10-year US Treasury yield was flat. Geopolitics remain unsettled. Four developments in particular deserve careful attention, not because they are new, but because of their ability to impact the investment climate.

Leaving aside the Reserve Bank of New Zealand, which announced a hawkish hold in late May, the other central banks meet in June. The Bank of Japan and the European Central Bank are the most likely to hike rates. Beijing continues to facilitate a modest appreciation of the yuan, which is now at three-year highs against the dollar and also is appreciating against the other G10 currencies and most of the currencies in Asia. The yuan’s advance does not appear complete.

The Strait of Hormuz: Adaptation Is Not Resolution

The Strait of Hormuz remains closed, and the ceasefire surrounding the conflict that produced that closure is better described as a pause than a settlement. Polymarket currently puts the probability of the Strait reopening by the end of June at roughly 38%, which means the base case, as the crowd sees it, is that the world's most critical energy chokepoint remains shut as we move into the summer. That is not a tail risk. That is the central scenario.

What has prevented this from becoming a full-blown energy crisis is a combination of American commercial opportunism and Chinese demand restraint. The United States, now a top-tier exporter of crude and refined products, shipped record volumes as the price signal made doing so irresistible. China, wrestling with slower domestic growth and large inventories, dialed back imports with a discipline that took some of the heat off global prices. Neither acted out of multilateral generosity; both responded to their own incentives. But there seems to be limits to these efforts as US inventories dwindle and Beijing may want to preserve a large buffer.

The net effect was a market that bent without breaking. But tanker insurance remains punitive, supply chains remain permanently rerouted, and the cost structure of global energy supply has shifted to a new and more expensive equilibrium. Planning assumptions built on a swift normalization of Gulf energy flows and other commodities are not supported by the evidence.

UK Politics: The Risks of What Comes After Starmer

The challenge to Keir Starmer has moved well past the rumor stage. The local election results were seen as a genuine repudiation and calls from within the Labour Party for his resignation are now open and organized. A leadership change in the coming months is more likely than not.

The problem is that the internal Labour critics who are most eager to push Starmer out appear to have thought carefully about the removal but not about the consequences. The political terrain they would inherit is punishing. Reform UK has demonstrated real organizational capacity on the populist right. The Greens are not a protest movement. They represent a durable and growing coalition of younger, urban voters who will not automatically return to Labour because the leadership tilts leftward. And the Liberal Democrats are still pushing hard.

A successor more ideologically comfortable with the parliamentary party's instincts might consolidate internal support while simultaneously widening vulnerability to the other parties. exposure. The June 18 byelection in Makerfield will determine whether the current mayor of Manchester will spearhead a leadership challenge. For sterling and UK assets more broadly, the question is not who wins the internal contest but whether any plausible iteration of this government can credibly address a stalling economy and a public whose patience has been exhausted. The honest answer is that it is not obvious, and the market is only beginning to price in that ambiguity.

The Bank of Japan: Intervention Without an Anchor

The Bank of Japan intervened twice in recent weeks to arrest yen weakness, and on both occasions it did so without any accompanying signal of a policy shift. The most authoritative data from the BOJ points to purchases of JPY11.7 trillion (about $73.5 bln) The operations were tactical — designed to slow a disorderly market move rather than announce a new regime. Markets understood this perfectly well, which is precisely why speculative short-yen positioning rebuilt itself with remarkable speed after each operation.

The BOJ's difficulty is structural. The gap between Japanese rates and global rates continues to provide a powerful and persistent incentive to sell yen, and intervention without a credible policy anchor is, at best, a holding action. Sophisticated participants know this, and the positioning data suggests they are already preparing to test the BOJ again.

The central bank may find itself defending a line it never explicitly drew, against a market that has both the conviction and the capital to push hard on it. At the same time, despite price pressures, which appear to be moderating, the economy appears to have begun Q2 on solid footing after stronger than expected growth in the first quarter (0.6%). A BOJ rate hike in June is likely.

June's Central Bank Calendar: Divergence Without Clarity

Every G10 central bank meets in June except the Reserve Bank of New Zealand, and the policy landscape they collectively present is anything but synchronized. Swaps markets assign around 80%-90% probability of rate hikes from both the ECB and the Bank of Japan, while the market is pricing in practically no chance that the Federal Reserve, the Bank of Canada, the Reserve Bank of Australia, or the Swiss National Bank change rates. The swaps market discounts less than a 10% chance of a BOE move, the market is pricing in a little better than a 1-in-4 chance that Norway's Norges Bank hikes, and less than a 5% chance Sweden's Riksbank does.

The divergence is real, but it does not resolve into a clean narrative. The ECB confronts persistent services inflation that has proven more stubborn than its models anticipated. The BOJ faces a currency dynamic that threatens to import inflation faster than domestic policy can contain it. The Fed and the SNB, by contrast, are watching domestic conditions soften and are in no hurry. What links all four is that their forward guidance is losing traction precisely because they are all, to varying degrees, data-dependent, which is the institutional equivalent of admitting that no one is quite sure what comes next. June will produce decisions. It is less likely to produce clarity.

The through-line connecting these four fault lines is straightforward: the surface has stabilized without the underlying tension dissipating. That distinction matters more than it might appear, and investors and business leaders who mistake the current relative calm for resolution may find June considerably more consequential than they anticipated.

Bannockburn World Currency Index

Bannockburn's World Currency Index is composed of the currencies of the dozen largest economies--half of which are from high-income countries and half from emerging markets. It eked out a negligible gain in May, the sixth monthly advance in the past seven months. Yet, all of the currencies from high income countries fell against the dollar and half of the emerging market components fell. By GDP weighting, the three currencies that rose (the Chinese yuan, the Russian ruble, and the Mexican peso) account for about 25% of the index. The US dollar itself is around a third of the index, and that contributes to the low vol nature of the BWCI.

Three of G10 components of the BWCI fell by more than 1% (Japanese yen, Canadian dollar, and British pound). The euro lost a more modest 0.55% and the Australian dollar was off about 0.20%. Among the emerging market components, the South Korean won fell by around 1.80% and the Brazilian real tumbled a little less.

In early May, BWCI took out the 2025 high but stalled near the late 2024 high. Yet, price action looks constructive and that is consistent with our bearish outlook for the greenback. BWCI rose a little more than 1% in the year through May. We envisage this year's gains to be in line with last year, when it appreciated by 3.7%, which would bring the BWCI to the high from early 2024.

U.S. Dollar: The greenback rallied in the first month of the Middle East war, came off in April and mostly remained in the March-April range in May. The prospect for an extended ceasefire and the re-opening of the Strait of Hormuz can weigh on the dollar in the coming weeks. This aligns with our reading of the technical condition of the market. The resilience of the US economy has been impressive, and the Atlanta Fed's model sees the economy tracking a little faster than 4% this quarter. While pending revisions, March and April jobs growth of a combined 300k increase was the best two months since the end of 2024. However, developments, like the falling order book in the manufacturing sector (PMI), the squeeze on households forcing a decline in savings, and the record-low consumer sentiment (University of Michigan) are worrisome in the coming quarters. The Federal Reserve will stand pat at the conclusion of the FOMC meeting on June 17. The meeting will draw much attention. It is the first meeting of a new era. Chair Warsh not only will hold a must-see press conference, but he will also be asked questions about the updated Summary of Economic Projections, for which he is a critic. Meanwhile, a Supreme Court decision about the president's attempt to fire Governor Cook may be handed down by month's end.

Euro: The euro appears to have forged a base by $1.1575, near a technical retracement target of the recovery off the low of the year recorded in mid-April slightly above $1.14. Yet, it must overcome the May high, near $1.1700, to be significant. Expectations for an ECB rate hike at the June 11 meeting have been trimmed since being fully discounted at the end of April, but nearly 90%, it remains elevated. A move now would have the cover of the updated staff forecasts, which will likely include a bump in the March projection of 2.6% CPI this year and 2.0% next year. Another headwind for the euro is that sharp widening of the US two-year premium over Germany. It rose by almost 40 basis points to 160 bp, the most since last November. It pulled back to around 145 bp in the end of May. On the one hand, the euro's resilience is notable, but on the other hand, it could point to its vulnerability. Respect the price action. Lastly, the US has given the EU until July 4 to ratify and implement the trade agreement, threatening a dramatic increase in tariffs, including on autos).

(As of May 29, indicative closing prices, previous in parentheses)

Spot: $1.1661 ($1.1722) Median Bloomberg One-month forecast: $1.1694 ($1.1712) One-month forward: $1.1674 ($1.1738) One-month implied vol: 5.0% (5.8%)

Japanese Yen: Official data confirms market suspicions that the Bank of Japan intervened in the foreign exchange market between late April and late May to sell JPY11.7 trillion o roughly $73.5 bln. The dollar was threatening the 2024 highs that were also met with material intervention. For nearly three years the dollar has been in a roughly JPY140-JPY160 trading range. Japanese officials are defending a floor for the yen, but they ultimately may have bought time. Time for the Bank of Japan to raise rates. The swaps market has almost an 80% chance of a BOJ hike at the June 16 meeting. There is around a 60% chance of another hike before the end of the year. Time for the US yields to peak. The US 10-year yield, which the exchange rate is often highly correlated with, rose by about 80 bp since the Middle East War began. The US 10-year premium over Japan narrowed to around 180 bp in late May, the smallest in four years. Time for the improving external imbalance to have positive impact. Japan's rolling 12-month trade balance is likely to swing back into surplus for the first time since late 2021 in the coming months. The rolling 12-month current account surplus is at record levels. Yet the dollar finished May near its best level of the month and further intervention cannot be ruled out.

Spot: JPY159.27 (JPY159.38) Median Bloomberg One-month forecast: JPY158.00 (JPY158.24) One-month forward: JPY158.88 (JPY158.98). One-month implied vol: 6.1% (7.3%)

British Pound: After appreciating by 2.85% in April, sterling gave back nearly half in May. The Gilt sell-off, the poor showing of Labour in the local elections, and the political pressure on Prime Minister Starmer took a toll in the first half of the month. Sterling was turned back from the two-and-a-half-month high set on May 1 near $1.3660 and it was sold to almost $1.3300. Hopes of an extended ceasefire in the Middle East and the related recovery in the Gilt market helped sterling rebound a little above $1.3500. Expectations of the trajectory of BOE policy peaked on March 20 with almost 85 bp of hikes discounted for this year. Disappointing labor market data, including the reduction of payrolls for three consecutive months, and a low CPI reading (after last year's administered price increases dropped out of the 12-month comparison) encouraged a re-think by investors. At the end of May, the swaps market was pricing in slightly more than 40 bp of tightening this year. The next step in the British political drama is the June 18 byelection in Makerfield, where the mayor of Great Manchester Andrew Burnham will run for an open seat in parliament, from which is expected to challenge Starmer, the fifth UK prime minister in seven years. When Burnham thought his MP opportunity was in the Gorton and Denton district, he tacked left, but now he is tacking right for the Makerfield constituency.

Spot: $1.3456 ($1.3532) Median Bloomberg One-month forecast: $1.3400 ($1.3469) One-month forward: $1.3455 ($1.3535) One-month implied vol: 6.1% (6.7%)

Canadian Dollar: The Canadian dollar trended lower throughout May. It reached a two-and-a-half month high on May 1 and tumbled a little more than 2%. The greenback bottomed at CAD1.3550 and by late May reached the CAD1.3820, its best level since mid-April and stalled near the 200-day moving average and the key retracement objective both round a little above CAD1.38. The Bank of Canada meets on June 10, but there is little chance of a rate move. The swaps market is discounting almost one hike in H2 26. Canada lost full-time positions for three months through April and five of the past seven months. The economy unexpectedly contracted in Q1 26 for the second consecutive quarter. The Bank of Canada suggests monetary policy might not be able to do much for the structural shift taking place. In early May, the federal government launched a C$1.5 bln initiative to help sectors hit by the US tariffs. Canada risks incurring the wrath of the United States, just as the USMCA review negotiations get underway. Canada hiked to 15% from 5% the amount streaming services (e.g., Netflix and Disney) revenue that must go to local programming. Meanwhile, Alberta will hold a referendum in October to remain in Canada or start a legal process that will lead to a binding referendum on separation, which some in the Trump administration have reportedly encouraged.

Spot: CAD1.3793 (CAD 1.3668) Median Bloomberg One-month forecast: CAD1.3700 (CAD1.3683) One-month forward: CAD1.3775 (CAD1.3651) One-month implied vol: 4.0% (4.2%)

Australian Dollar: A few days after the Reserve Bank of Australia delivered its third hike of the year on May 5, the Australian dollar recorded its highest level in nearly four years, slightly shy of $0.7280. It subsequently pulled back to around $0.7080 and spent the second half of the month consolidating below $0.7200. Weaker economic data and the softer than expected April CPI underscored that the central bank is moving to the sidelines. The futures market sees little chance of a hike at the June 16 central bank meeting. However, the market is pricing in almost an 85% chance of another hike before year-end. Australia reports Q1 GDP on June 3. Weaker consumption and slower government spending warn that the economy may downshift from 0.8% quarter-over-quarter in Q4 25 to around 0.5% in Q1 26. The central bank expects the economy to slow from 2% in 2025 to 1.9% this year and 1.3% in 2027. Australia's CPI rose 2.8% last year and the central bank has projected 4% this year before easing to 2.4% in 2027. With New Zealand set to tighten more than the Australia during the remainder of the year, one source of Aussie demand is set to weaken.

Spot: $0.7185 ($0.7152) Median Bloomberg One-month forecast: $0.7150 ($0.7126) One-month forward: $0.7181 ($0.7149) One-month implied vol: 7.6% (9.0%).

Mexican Peso: The dollar recorded the low for the year so far against the Mexican peso a couple of weeks before the Middle East War began, near MXN17.0865. It recovered to almost MXN18.1650 in late March and returned toward the lows (~MXN17.1275) around the middle of April. After peaking near MXN17.55 in early May, the dollar spent most of last month consolidating between MXN17.16 and MXN17.43. The corrective/consolidative phase does not appear over. The economic momentum is weak, and the central bank cut this year's growth forecast to 1.1% from 1.6%. Banxico also tweaked its inflation forecast for Q2 (4.1% vs. 3.8%) and Q3 (3.8% vs. 3.5%) but kept the CPI forecast for Q4 26 onwards unchanged with the middle of the 2%-4% inflation target being reached in Q2 27. The central bank has signaled it is done easing and the swaps market appears to be pricing in a hike before the end of the year. The combination of domestic policies, which are not particularly investor friendly and the disruption from the US threats, is spurring a change back to assembling inputs from Asia instead of higher value-added production like autos. The review and renegotiation of the USMCA treaty have begun, and this also poses a risk for the peso (and Mexican economy). Our bullishness toward the peso has been tempered and we suspect there may be scope for the dollar to recover toward MXN17.58-MXN17.65 range.

Spot: MXN17.3552 (MXN17.3787) Median Bloomberg One-month forecast: MXN17.4000 (MXN17.5322) One-month forward: MXN17.3986 (MXN17.4237) One-month implied vol: 8.4 (8.9%)

Chinese Yuan: The Chinese yuan trended higher in May, and its roughly 0.80% gain against the dollar outperformed all G10 currencies and most emerging market currencies in the region but the Taiwanese dollar. The yuan reached three-year highs against the dollar, guided by the PBOC, which steadily if slowly, lowered the dollar's reference rate. The dollar's reference rate has fallen in all but three weeks since the end last September. While we continue to closely monitor developments, and it is next to impossible to know the intent of Chinese officials, the campaign accepts the gradual appreciation of the yuan does not appear over. The median forecast in Bloomberg's survey is for the US dollar to finish the year at CNH6.7250, which we think is too conservative, and are more inclined to see something in the CNH6.60-CNH6.65 area. The Chinese economy appears to be struggling, but we do not expect bold new initiatives. China's dominance of high-end manufacturing (dubbed China Shock 2.0 after it dominated labor-intensive manufacturing previously (China Shock 1.0) is continuing apace. High-tech exports have risen by nearly 40% year-over-year in April. China's large current account surplus means that it (the government or the quasi-private sector) will continue to acquire foreign assets. The issue is which foreign assets and at what prices. The significance "constructive strategic stability" that President Xi framed the meeting with President Trump may rest on two things: the potential $14 bln US arms package for Taiwan and the threat of new US tariffs on China.

Spot: CNY6.7662 (CNY6.8321) Median Bloomberg One-month forecast: CNY6.8000 (CNY6.8407) One-month forward: CNY6.7808 (CNY6.8440.) One-month implied vol: 2.3% (2.8%)

Disclaimer

Hope Springs Eternal

noreply@blogger.com (Marc Chandler) — Fri, 29 May 2026 06:51:59 -0400

There does not appear to be materially new developments from the Middle East today. While some US officials seem optimistic that progress has been made, it is not clear that an agreement is at hand. Still, oil prices are more than a dollar lower and equities are mostly firmer. The dollar is mixed against the G10 currencies and mostly in narrow ranges. The New Zealand dollar, which jumped yesterday on the back of a hawkish hold by the central bank, is the strongest of the G10 currencies. It is up nearly 2% this week. Sterling and the Japanese yen are the only two G10 currencies that have fallen against the dollar this week.

Japanese real sector data, including retail sales and industrial output were stronger than expected, while the Tokyo CPI fell and the core rate is at a four-year low. Official Japanese data showed JPY11.7 trillion (~$73.5 bln) in intervention since late April, which is a little more than expected. Still, the dollar remains within striking distance of the JPY160 threshold. The BOJ is seen as most likely (~80%) to raise rates next month. Mostly firmer eurozone member May CPI favors an ECB hike next month (~90% chance discounted in the swaps market).

Prices

G10

• The euro’s recovery in North America from a marginal new five-session low yesterday was aided by reports that suggested a 60-day ceasefire extension had been agreed upon but for President Trump’s approval. Although oil recouped its initial losses, perhaps as many realized that the US president’s approval is the only thing missing for weeks, the euro held on to the lion’s share of its gains, which carried it briefly slightly above $1.1660. With the apparent lack of further progress, and the US approval still awaited, the euro is consolidating in about a third of a cent range above $1.1625. Recall that the euro settled near $1.1730 at the end of April. We think it looks constructive next month and expect the ECB to deliver a quarter-point hike.

• The dollar posted an ostensibly bearish outside down day against the yen yesterday. It traded on both sides of Wednesday’s range and settled below its low. Yet, it has gone practically nowhere today. It is in almost a 20-tick range above JPY159.20. Stronger than expected April industrial production and retail sales offset the softer Tokyo May CPI to underpin expectations of a BOJ rate hike next month. The dollar finished April near JPY156.60.

• Sterling recovered from an eight-session low (slightly below $1.3370) yesterday to reach $1.3450 in the risk-on, weaker dollar environment after new hopes were fanned about a Middle East ceasefire. A close above $1.3455 would have made for a stronger technical case. It has pulled back slightly below $1.3410 today but looks to be finding support in late European morning turnover.

• The Canadian dollar posted its most impressive session of the month yesterday. It reversed higher after setting a new low since April 10 and posted the highest close in a week. The greenback reached CAD1.3870 and was making new lows in late North American dealings to CAD1.3775. The month-long US dollar rally looks over with the key downside reversal yesterday. However, there was no follow-through today and the greenback is consolidating in a narrow range (~CAD1.3780-CAD1.3810).

• The Australian dollar staged a strong recovery yesterday, too. It had briefly slipped below $0.7100 for the first time in almost a week-and-a-half in response to the softer than expected April CPI. It recovered on the back of the broader retreat of the US dollar and reached $0.7170 and stopped slightly short of this week’s high. It is trading quietly between about $0.7150 and $0.7165.

• The dollar looked to be headed for a stronger advance against the Mexican peso. It reached its best level since May 5, near MXN17.44 before it was sold amid the risk-on mood and optimism about a possible extended ceasefire in the Middle East. The greenback fell to almost MXN17.30 before stabilizing. Wednesday’s low was closer to MXN17.2850. It is consolidating in the lower end of yesterday’s range, and so far, has held below MXN17.35.

• The greenback posted an outside down day against the offshore yuan yesterday. It traded on both sides of Wednesday’s range and settled below its low. Moreover, the dollar fell to a new three-year low near CNH6.77. It has extended its losses today to about CNH6.7660. The dollar settled last month near CNH6.8320. Against the onshore yuan, the dollar also recorded a new three-year low (~CNY6.7755) and has been sold to about CNY6.7670 today. Given the US dollar’s weakness, the PBOC seemed to have little choice but to set the dollar’s reference rate at a new low, as well. Today’s fix was at CNY6.8176 (CNY6.8240 yesterday and CNY6.8373 a week ago.

• As Indian markets re-opened after yesterday’s holiday, the Reserve Bank of India reportedly intervened in the offshore and onshore markets to push the rupee higher. The dollar closed Wednesday near INR95.6960 and fell to INR94.9625 with the help of intervention and the pullback in oil prices, though despite a 1.5%-1.7% drop in Indian equities. The dollar settled slightly above INR95.00 today, after finishing April at INR94.92.

Other Markets

• New record highs for the S&P 500 and Nasdaq yesterday appeared to help equities stabilize in the Asia Pacific and Europe today after yesterday’s pullback. Most large bourses in the Asia Pacific region rallied today but China and India. The Nikkei advanced 2.5%, as did Taiwan’s Taiex, with South Korea’s Kospi leading the way with a nearly 3.6% advance. Europe’s Stoxx 600 was nearly flat for the week coming into today and is up about 0.6% through midday. US index futures are trading with a slightly firmer bias.

• Benchmark 10-year yields in Europe eased yesterday and unwound initial gains. Rates were mostly off 2-3 bp though Gilts outperformed with the 10-year yield off nearly 4.5 bp. Today, they are mostly a little softer today. The 10-year US Treasury yield fell almost three basis points to approach 4.45%. It was the sixth consecutive decline, the longest pullback since April 2025. During this run, the yield has fallen by a little more than 20 bp. In the same six sessions, the implied year-end Fed funds rate has fallen by about six basis points. The 10-year Treasury yield is flat near 4.45% now.

• Gold recovered alongside risk assets amid the hopes of an extended ceasefire in the Middle East. The yellow metal had been sold through the 200-day moving average yesterday (~$4399 today) for the first time in two years. Yet, it recovered to almost Wednesday’s high (~$4528). It is trading higher today and reached almost $4540. Regaining a foothold above $4580-90 would lift the technical tone. Silver recovered from its dip below $72 yesterday and reached $76 before stalling. Resistance is seen in the $78-$79 area. It is trading a little softer today after reaching almost $76.50.

• Hopes of the Middle East settlement helped push July WTI to almost a three-week low yesterday, a little above $87. It snapped back within around two hours after setting the low to poke above $90. It spent the NY afternoon consolidating between roughly $88 and $90. Despite the lack of new Middle East developments, July WTI is weaker near $87.50 before the North American open. Last week it settled at $96.60 and almost $99.15 at the end of April.

Data

• The US reports April’s goods trade and inventories. MNI publishes the May Chicago PMI. The US recorded almost a $252 bln goods deficit in Q1 26. Comparisons are difficult because the nearly $464 bln shortfall in Q1 25 was distorted by efforts to beat the US tariff increases. In Q1 26, nominal exports rose about 17% while imports rose by 7.5%. Separately, US inventories contributed about 0.4 percentage points to Q1 26 2.0% annualized growth. Restocking of wholesale and retail inventories appear to have spilled over into Q2. Looking ahead, the early projections for next Friday’s May jobs report is for a little less than 100k increase in nonfarm payrolls (average of 150k increase in March and April, the best two months since the end of 2024.

• Canada reports March and Q1 26 GDP. The economy looks to have recovered from the 0.6% annualized contraction in Q4 25. The median forecast in Bloomberg’s survey is for a 1.5% expansion.

• The Big Four eurozone members have reported the preliminary May CPI before the aggregate figure is released next week. All six German states that reported showed a decline month-over-month. The harmonized national estimate is due shortly and the year-over-year rate may have ticked lower to 2.8% from 2.9%. France’s CPI rose to 2.8% from 2.5%. Spain’s CPI edged up to 3.6% from 3.5% and Italy’s CPI stands at 3.3%, up from 2.8%. In other data, Germany’s May unemployment softened to 6.3% from 6.4%. French consumer spending fell by 0.5% (after rising 0.9% in March). However, Q1 GDP was revised to -0.1% from flat. On the other hand, Italy’s Q1 GDP was revised to 0.3% from 0.2% and the April unemployment rate slipped to 5.1% from 5.2%.

• Tokyo reported a softer than expected May CPI and the Japan reported stronger than expected April jobs, industrial output and retail sales. Headline Tokyo CPI ticked down to 1.4% from1.5%, The core rate was fell to 1.3% at 1.5%, the sixth consecutive monthly decline and a four-year low. It is the fourth consecutive month below 2%. Also released earlier today was the April jobs report (unemployment fell to 2.5% from 2.7%), retail sales jumped 1.3% compared with expectations for a 0.4% increase (though March’s gain was previously trimmed to 1.0% from 1.3% initially. The median forecast in Bloomberg’s survey anticipated the third consecutive decline in industrial output (-0.6%) but instead rose by 0.8%.

Disclaimer

Restrained Market Reaction to Fraying Middle East Ceasefire

noreply@blogger.com (Marc Chandler) — Thu, 28 May 2026 06:44:07 -0400

The market has taken the increase in Middle East hostilities in stride. The response in the capital markets has been fairly restrained, though risk appetites have been pulled back, reflected in the losses in equities. The dollar is also firmer against most currencies, though the yen has recovered from the lowest level of the month. Crude oil is firmer, but the front month contracts for both WTI and Brent are within yesterday’s ranges.

It appears that many investors can recognize the fragility of the ceasefire while at the same time being hopeful that an end to the conflict may still be near. The latest reports suggest control of the Strait of Hormuz remains a key issue. Although neither Iran nor the United States have ratified the UN Law of the Seas, both seem to be claiming its authority. The strait is a natural waterway but at the same time, at the narrowest part (21 miles wide), it is within what the UN law regards as territories waters.

Prices

G10

• The euro’s narrow range of about a quarter-of-a cent that prevailed before the North American session yesterday was extended marginally in both directions. The euro initially rose to a six-session high, slightly above $1.1660 before it reversed lower and slipped below $1.1625. New hostilities in the Middle East saw the euro drop to a new low for the week, near $1.1585. It recovered but stalled near $1.1620 in the European morning. It still looks vulnerable.

• The dollar edged above JPY159.50 in North American turnover yesterday. This represents a new high for the month against the yen, and it came despite the fifth consecutive session that the US 10-year yield eased. It reached JPY159.65 today in the local session before being sold to almost JPY159.35 in Europe. It did not trade below JPY159.20 yesterday. Japanese officials have been notably quiet as the yen returns to within striking distance of the JPY160 level. The Ministry of Finance will release the official figures tomorrow on the intervention over the past month.

• Sterling reached a seven-session high on Monday (~$1.3510), which was a little shy of the retracement objective around $1.3520. It retreated to $1.3435 on Tuesday and nearly $1.3415 yesterday. It was sold today and briefly traded below $1.3380 support in Asia. It recovered to around $1.3410 before stalling. It looks vulnerable unless it can re-establish a foothold above $1.3420-35.

• The Canadian dollar continues to trade heavily. It reached a new low since April 13 today. The greenback rose a little above CAD1.3870 today. While CAD1.3900 offers nearby resistance, a move above it could spur a move toward CAD1.3950. Of the 20 sessions this month, the Canadian dollar has fallen in all but three. The Canadian dollar’s roughly 2.1% loss this month edges out the Japanese yen to be the weakest in the G10.

• The Australian dollar was unable to recover from the selling that took place in response to yesterday’s softer than expected April CPI, especially in the context of the hawkish hold by the Reserve Bank of New Zealand. The Aussie’s 0.5% loss put it at the bottom of the G10 yesterday, while the Kiwi rose almost 1%, the most in the pack. The Australian dollar is trading heavily today and briefly traded slightly below $0.7100. Initial risk extends to last week’s low near $0.7080. Options for about A$545 mln at $0.7115 expire today.

• The Mexican peso eased to a five-day low yesterday but remained mired in a two-week consolidation. It is fraying the upper end of its recent range today as it pushed to nearly MXN17.44. Today’s peso weakness appears to reflect the risk-off mood. Nearly all the emerging market currencies are weaker today. The market showed little reaction to the central bank’s inflation report in which it cut this year’s growth forecast to 1.1% from 1.6% and raised next year’s projection to 2.1% from 2.0%. The central bank tweaked its inflation forecast for Q2 (4.1% vs. 3.8%) and Q3 (3.8% vs. 3.5%) but kept the CPI forecast for Q4 26 onwards unchanged, with the middle of the 2%-4% inflation target being reached in Q2 27.

• The offshore yuan reached a new three-year high yesterday. The dollar traded to almost CNH6.7755. It is the second strongest Asian currency this month, slightly behind the Taiwanese dollar, which has gained about 0.89%. Through yesterday, the onshore yuan is up almost 3.1% this year, which is more than most emerging market and G10 currencies. Of course, it is not fast enough for Chinese critics or significant enough to reduce make Chinese exports less attractive. The price gap between Chinese products and others seems much wider, especially for some key goods, like auto, electronics, and batteries than a 20% revaluation of the yuan, which some have argued is necessary. The PBOC set the dollar’s reference rate at CNY6.8240, a new three-year low.

• Indian markets are closed today for the Bakri Id holiday.

Other Markets

• US equities did not generate a clear signal for today. The S&P 500 and NASDAQ continued to hover near the record-highs reached on Tuesday. Dow Industrials set a record yesterday by a few cents. However, the combination of the hawkish hold by South Korea and the Middle East hostilities weighed on sentiment today. Nearly all the Asia Pacific bourses but China fell, and Europe’s Stoxx 600 is off by nearly 0.50%. US index futures have a heavier bias.

• The US 10-year yield fell for the fifth consecutive session yesterday. It is the longest decline since last November. The yield has fallen almost 20 bp in the run. That streak is at risk today. The yield is slightly firmer as it approaches 4.50%. Benchmark 10-year yields are up mostly 1-2 bp firmer in the Europe, though the UK Gilt continues to trade well and the yield is off a basis point.

• Gold was turned back from around $4580 on Monday and Tuesday and was sold to almost $4400 yesterday, its lowest level since March 27. The 200-day moving average is a little below $4395 which was penetrated today. Gold was sold little below $4367 today. The yellow metal has not settled below the 200-day moving average since February 2022. For its part, silver set a five-session low near $73.45 yesterday and today’s low (~$71.80) is a new low for the month. April’s low was a little below $70.

• Despite comments from President Trump that he is still not content with Iran’s offers, July WTI extended its losses yesterday to almost $87.75. It recovered to around $92.50 today but is now back below $90.50. It settled last week at $96.60. This month’s low was near $86.15. August Brent approached $91.75 yesterday, its lowest level since April 23. It is trading within yesterday’s range and held below $96.

Data

• The US economic diary is busy today. April personal income, consumptions deflators, and durable goods orders will draw the attention while initial jobless claims, another look at Q1 GDP and new home sales may be of secondary interest. For the third consecutive month, consumption is likely to have risen faster than income. The CPI and PPI remove much of the element of surprise for today’s deflators. The headline is seen rising to 3.8% from 3.5% and the core rate may edge up to 3.3% from 3.2%. April durable goods orders will be flattered by the surge in Boeing orders (135 planes, the most in 12 years). Without the commercial plane orders and defense orders, the median forecast in Bloomberg’s survey is for a minor 0.4% increase, which would be the weakest since January’s 0.3% decline.

• Canada runs a small current account deficit. It has been below 1% of GDP for the last four years. Canada reports the Q1 balance today, ahead of tomorrow’s Q1 GDP. The deficit is seen widening slightly from the C$3.4 bln shortfall in Q1 25. Canada publishes its March establishment survey for payrolls. It tends not to draw much attention and does not line up well with the monthly labor report. In the first two months of the year, the establishment survey saw a loss of about 16k jobs, while the monthly change in the labor force employment fell by 108k jobs. In March, the monthly change in the labor force employment rose by 14k. The swaps market reflects expectations that the Bank of Canada is on hold until at least the end of Q3, where nearly a 50% chance of a hike is discounted.

• After easing in February and March, Mexico’s unemployment rate is expected to bounce back to 2.70 in April, the January level and the highest since last September, when the 2.98% rate was the recorded. It was the highest since August 2024.

• EMU May confidence readings showed a little improvement sequentially. They tend not to be market movers. Economic confidence peaked in January at 98.9, the highest since April 2023. It fell for three months to 93.0 in April and edged up to 93.5 in May.

• Australia reported an unexpected surge of 6.5% in private capital expenditure in Q1 (0.7% in Q4 25). The median forecast in Bloomberg’s survey was for a 1% rise. Household spending, which the central bank identified a threat to price stability, fell for the first time this year. The 1.1% pullback in April, twice what was expected, followed a dramatic 1.6% rise in March, which matched the strongest monthly rise since July 2022.

• Japan reports Tokyo’s May CPI tomorrow. It offers insight into the national figures that will not be released for a few weeks. The core rate is expected to be steady at 1.5% after five months of easing. It will be the fourth consecutive month below 2%. Also on tap for tomorrow are April jobs report (unemployment seen steady at 2.7%), retail sales (0.4% after a revised 1.0% rise in March, from 1.3% initially), and industrial output, which is expected to have fallen for the third consecutive month.

Disclaimer

Geopolitical Hopes Underpin Risk Appetites

noreply@blogger.com (Marc Chandler) — Wed, 27 May 2026 06:49:19 -0400

Many remain hopeful of a resolution in the Middle East even though the hostilities are still flaring up and Israel appears to have launched a new offensive in Lebanon. Oil prices are around $3 lower and equity markets mostly higher outside of Japan, China, and Hong Kong.

The dollar is mixed. Lifted by a hawkish hold by the Reserve Bank of New Zealand, the New Zealand dollar leads the G10 currencies with a nearly 0.75% gain. On the other hand, the soft Australian CPI has elicited a dovish response in the interest rate market and dragged the Australian dollar down around 0.40%, the heaviest of the G10 currencies. The market took the yen slightly lower, but the market to may hesitate ahead of JPY159.50, on guard of intervention.

Prices

G10

• The euro traded a little heavier yesterday and traded down to almost $1.1615 after being turned back from nearly $1.1655 on Monday. It is trading quietly in the quarter-cent range below $1.1650 today. A move above $1.1660 signals a test a formidable resistance in the $1.1680-85 area.

• Despite the softer US yields, the yen reached its lowest level since reported intervention on April 30. The dollar approached JPY159.40 in the North American session yesterday and settled firmly. It made a marginal new high today near JPY159.45. In the first 18 sessions this month through yesterday, the yen has weakened in all but four, and that includes May 6 when the BOJ may have intervened again. Yet, one-month implied volatility slumped to a four-year low today, slightly below 6.30%. Still, the market is tempting official intervention.

• Sterling gave back Monday’s gains in full yesterday and traded slightly below Monday’s low to reach $1.3435 in North America. It remains pinned near yesterday’s trough today. It has been unable to push above $1.3460. Nearby support is in the $1.3400-20 area. A break may spur a move to $1.3380 initially and possibly last week’s low (~$1.3300).

• The Canadian dollar continued to be trapped near one-month lows in consolidative trading on Monday and Tuesday and made a marginal new low today. The US dollar reached CAD1.3825 before last weekend and CAD1.3835 today, a new high since April 13. The next technical target is the CAD1.3870-80.Meanwhile, the greenback has not traded below CAD1.3795 so far this week.

• After reaching a five-session high on Monday, slightly above $0.7180, the Aussie consolidated yesterday in quiet turnover. Light buying materialized near $0.7155. Without being above to push above the 20-day moving average (~$0.7185 today), it appears vulnerable. And today’s softer than expected CPI provided the catalyst. It was sold to nearly $0.7135 to approach support may be around $0.7130. A break could spur a retest on last week’s low near $0.7080. Over in New Zealand, the hawkish hold by the RBNZ sent the New Zealand dollar from yesterday’s $0.5830 area nearly $0.5890. Near-term potential extends to $0.5900-25.

• The dollar consolidated within its well-worn ranges against the Mexican peso yesterday. Most of the price action over the past seven sessions has taken place in the range set on May 15 (~MXN17.21-MXN17.40). It is in a roughly MXN17.2855-MXN17.3225 range today. The greenback is also moving broadly sideways against the Brazilian real (~BRL4.99-BRL5.06). Colombia holds its presidential election on May 31. The polls warn that the pendulum of political sentiment has swung hard from the current left governor to the National Salvation Party on the far right. The dollar recovered from a five-year low in late April near COP3530 to two-and-half month high in the middle of May (~COP3821). It was sold a little below COP3614 yesterday, a new low for the month, before it rebounded to COP3685.50. It posted a potential key reversal, suggesting potential for more dollar gains against ahead of the weekend vote.

• The dollar was confined to Monday’s range against the offshore yuan yesterday. It slipped to a marginal new three-year low today, slightly below CNH6.7785. The CNH6.80 offers initial resistance. The PBOC, which set the dollar’s reference rate a three-year low yesterday (CNY6.8288) fixed it slightly higher today (CNY6.8291).

• The dollar settled on session highs yesterday against the Indian rupee (INR95.6850), which also closed the gap created by Monday’s lower dollar opening. Follow-through dollar buying lifted it to INR95.7960 today before stalling. It settled near INR95.6960.

Other Markets

• The S&P 500 and Nasdaq set record highs yesterday, but drifted back toward opening levels, perhaps encouraged by the trend higher in oil prices yesterday as the fragility of the ceasefire was underscored. Chips helped South Korea’s Kospi and Taiwan’s Taiex led the regional equities today with around 2.25% and 1.7% gains, respectively. Japan, China, Hong Kong indices traded with a heavier bias, while Australia and New Zealand advanced. After snapping a six-day advancing streak yesterday, Europe’s Stoxx 600 is rising again today. US index futures are trading ~0.30-0.50% better.

• Benchmark 10-year yields are lower. The 10-year JGB eased about 2.5 bp to slightly below 2.68%. European yields are off 2-4 bp, though the 10-year Gilt yield is down slightly more than five basis points. The 10-year US Treasury yield is near 4.46%, off about 2.5 bp.

• Gold managed to take out Monday’s highs by a less than a dime yesterday and reached a little above $4580 before reversing lower and sliding back below $4485 for the first time in four sessions. It was pushed to almost $4476 today and is near $4486 ahead of the North American session. Last week’s low was slightly below $4454, a level not seen since late March. Silver reached a six-session high on Monday (~$78.80) and was sold to about $75.50 yesterday. It has stabilized after it fell to about $74.65 today. Last week’s low was near $73.00.

• July WTI dipped below $90 during Monday’s US holiday and recovered. Yesterday’s session high was recorded near midday in NY at $94.70. Recall that last Friday’s low was slightly below $94.75, leaving a small gap open. It is hovering around $90 now after slipping briefly to $89.65. The contract has not settled below $90 since April 24.

Data

• With the focus on the Middle East war, today’s US data, Richmond and Dallas Fed May surveys are unlikely to have much impact. There are four Fed speakers today, but all take place late in the session. The drop in oil prices saw the implied yield of the December Fed funds futures fall seven basis points yesterday to 3.78%. It slipped another 2.5 bp today. Tomorrow, the US reports April personal income and consumption data. The resilience of the US consumer is likely to be reflected in yet another month of consumption growth outstripping income growth. After the CPI and PPI readings, we can be confident of another rise in the headline PCE deflator (~3.8% from 3.5%), while the core edges up (~3.3% vs. 3.2%).

• Mexico’s central bank issues the inflation report today. The minutes from the recent central bank meeting show concern about lack of economic momentum. The somber tone will most likely persist but given the elevated price pressures, the bar to another cut is high.

• Australia reported a less than expected 0.4% rise in April CPI, which given the base effect, allowed the year-over-year rate to slip to 4.2% from 4.6%. The trimmed mean edged up to 3.4% from 3.3%. After three hikes already delivered this year, the futures market anticipates the next in Q4 (~83%), though it has more than a 50% chance of a move in Q3.

• In a 3-3 board vote, the Governor of the RBNZ Breman cast the deciding vote to maintain the current target rates of 2.25%. The swaps market is discounting almost three hikes this year. The central bank’s forward guidance implies at least two hikes this year and three by the middle of next year.

• Japan confirmed machine tool orders are surging. The preliminary estimate showed a 45.1% rise year-over-year. Separately, PPI service inflation eased to 3.0% in April from a revised 3.3% in March, which was initially reported at 3.1%. It peaked at 3.4% last year and 3.7% in 2024.

• China reported industrial profits rose 18.2% year-over-year during the first four months of the year, after 15.5% in Q1. April’s year-over-year rise of 24.7% is the highest since November 2023.

Disclaimer

Ceasefire Frays, Tempers Enthusiasm, but Hope Lingers

noreply@blogger.com (Marc Chandler) — Tue, 26 May 2026 06:50:03 -0400

The US dollar is trading with a slightly firmer bias against most currencies today. New hostilities in the Middle East war have blunted the hopes of an extended ceasefire, but such skirmishes are not uncommon in such situations. On Polymarket, the odds that the Strait of Hormuz opens by the end of June was cut to about 45% from a peak of almost 60% at the end of last week. August Brent crude oil is paring yesterday’s nearly 6.8% drop but is still holding mostly below $97 a barrel. July WTI is a little below $92 after settling last week near $96.60.

Outside of the Middle East, the news stream is light and the North American response to the geopolitical developments will set the for the remainder of the session. Although the offshore yuan is nearly flat, the PBOC set the dollar’s reference rate at a new three-year low. The Reserve Bank of New Zealand meets first thing tomorrow and is expected to keep its target rate at 2.25%.

Prices

G10

• The euro was marked higher yesterday in early Asia Pacific trading amid optimism over a potential US-Iran deal. It finished last week slightly above $1.1600 and did not trade below $1.1620 yesterday. Despite reports of US-Iranian clashes, the euro is trading quietly today, holding above yesterday’s low. Last week’s high was a little north of $1.1660 and yesterday’s gains stalled in front of $1.1655. It returned to session highs near $1.1645 in subdued European turnover today. Options for 2.2 bln euros at $1.1650 expire today. A move above last week’s high runs into the next hurdle in the $1.1680-90 area.

• The dollar peaked last week near JPY159.35. It ended the week slightly below JPY159.20 and barely traded above JPY159 yesterday. It is trading firm today against the yen today and reached almost JPY159.25. It has held above yesterday’s low (~JPY158.75). Initial support is seen around JPY158.50-60, and a break could target the JPY158 area.

• Sterling poked above $1.3500 yesterday and reached a seven-session high (~$1.3510). It frayed the 20-day moving average but settled below it (~$1.3500 today). The (61.8%) retracement of this month’s losses is a little above $1.3520. A move above there could spur another half-cent gain near-term. Sterling is consolidating within yesterday’s range today and found initial support around $1.3465.

• In the soft US dollar environment, the Canadian dollar, as is often the case, the laggard. It rose less than 0.1% against the greenback, the least among the G10 currencies. The Norwegian krone, which is more sensitive to oil prices rose more than twice as much. The US dollar stalled before the weekend near CAD1.3825, and it held yesterday, while there was little selling below CAD1.38. Today it is trading quietly between about CAD1.3800 and CAD!.3815. Options for about $425 mln at CAD1.3785 expire today. The market showed little reaction to the heating up of US-Canada trade tensions as Canada hiked to 15% from 5% the amount of streaming services revenue that must go to local programming.

• The series of inside trading sessions, like a spring coiling, was challenged yesterday as the Australian dollar reached $0.7175, a three-session high. It has been confined to about a fifth of cent below yesterday’s high. Last week’s high was closer to $0.7185 and the 20-day moving average is a smidgeon above there.

• Risk-on and a larger than expected trade surplus helped lift the Mexican peso yesterday to its best level in six sessions. The dollar settled near MXN17.3380 at the of last week and fell to MXN17.2440 yesterday. It is consolidating today between about MXN17.2725 and MXN17.3085. Nearby support is seen around MXN17.20.

• The US dollar’s broad setback saw it fall to a new three-year low against the offshore yuan yesterday of almost CNH6.78. As is widely recognized, despite the sustained dollar’s downtrend, the moves are quite modest. Yet, for the third time in six sessions the dollar fell by 0.20% or more, pointing to a small acceleration. It is trading quietly today inside yesterday’s range. The dollar’s low from early 2023 is the next big chart area (~CNH6.6975). The PBOC is still signaling its approval and set the dollar’s fix yesterday at a new three-year low (CNY6.8318) and slightly lower today (CNY6.8288).

• A combination of the short squeeze engineered by reports of heavy intervention last week and the pullback in oil prices helped extend the rupee’s recovery. The dollar reached a two-week low (INR95.1150) and settled below the 20-day moving average yesterday for the first time since April 20. Indian equities rally the most in six weeks yesterday. However, today, the rise in oil prices, a retreat in Indian stocks and bonds saw the rupee pullback. The US dollar recovered and filled the gap created by yesterday’s lower opening. The greenback settled at the session high, and last Friday’s low (INR95.6850).

Other Markets

• Asia Pacific equities advanced for the third consecutive session yesterday. It is the longest rally in more than a month. Profit-taking saw most bourses in the region slip today, with the notable exception of South Korea’s Kospi (2.55%) and China’s CSI 300 (~0.55%). Europe’s Stoxx 600 has a six-day rally, the longest advance in a year, is being threatened today. It is off about 0.3% ahead of the open of the North American session. US index futures are firm (~0.50%-1.0%).

• Benchmark 10-year yields dropped sharply yesterday. The 10-year JGB yield fell by almost 5.5 bp and the yield in the Antipodeans fell 4-5 bp. European benchmark yield fell 10-12 bp. Yields are firmer today. The 10-year JGB yield rose almost two basis points, and the Aussie 10-year yield is up three basis points. European yields are mostly 2-4 bp higher today. The UK market was closed for the bank holiday yesterday and the Gilts are playing catch-up today. The 10-year yield is off almost four basis points, while the 10-year US Treasury yield is down a little more than six basis points to slightly below 4.50%.

• Gold traded higher with risk-assets yesterday and briefly saw $4580, a four-day high. It has come back lower today. It was sold to almost $4512 and stabilized in the European morning. Silver briefly traded above $78.80 yesterday but could not get above $78.50 today and retreated to almost $75.65 in European turnover.

• July WTI gapped lower yesterday and fell to almost $89.40 before steadying. The gap—from last Friday’s low (~$94.75) to yesterday’s high (~$93.90) is important from a technical perspective. The risk of escalation in the Middle East war sent the contract to about $93.65 in Europe today.

Data

• There are two US features today. Surveys, which include the Chicago Fed’s April national activity survey, and the May Philadelphia Fed’s non-manufacturing survey, the Dallas Fed manufacturing survey, and the Conference Board’s consumer survey. The market seems more sensitive to the Conference Board’s survey. The US also sees March house prices. US house prices rose in H2 25 but have steadied in the first two months of 2026.

• Mexico reported April trade figures yesterday. The $4.5 bln surplus was considerably larger than any economist projection in Bloomberg’s survey. Through April, Mexico’s exports have risen by nearly 22% year-over-year. Imports are up almost 20%. The central bank’s inflation report is due tomorrow. These are nominal figures, which means a combination of price and volume changes. Note that the first bilateral negotiating round to review the USMCA was held yesterday.

• Australia reports April CPI tomorrow. Government support pushed gasoline prices to pre-war levels The spike in gasoline prices added one percentage point to the headline rate. The pullback in April could unwind around half of that. In addition, the base effect may also make for better comparison as last April’s 0.7% increase drops from the 12-month measure.

• India’s state-run gas stations lifted the price of gasoline and diesel for the fourth tine in 10 days yesterday. The latest move brings the cumulative increase to 7.8% for gasoline and 8.6% for diesel. Prices are at four-year highs.

Disclaimer

Week Ahead: US Economic Resilience Supports the Dollar

noreply@blogger.com (Marc Chandler) — Sat, 23 May 2026 07:11:49 -0400

The resilience of the US economy is remarkable. The economy bounced back from near stagnation in Q4 25 (0.5% annualized pace) to 2% in Q1 26 and, and perhaps to 4.3% this quarter, if the Atlanta Fed's GDP tracker is accurate. Wall Street economists are less sanguine and the median forecast in Bloomberg's survey from last week is at a more modest 2.1%. The Bloomberg US economic data surprise model reached its highest level last week since mid-2022 . Since April 17, the implied yield of the December 2026 Fed funds futures has risen from about 3.47% to 3.86%. The flash composite May PMI remained below the 50 boom/bust level in the eurozone for the second consecutive month. It fell below 50 in the UK for the first time since last April. Japan's composite PMI fell for the third consecutive month, at 51.1, matches the weakest reading since last May. Of the major countries, only the US composite PMI did not fall.

The dollar traded with a firmer bias last week, and as we discuss below, while there is scope for additional near-term gains, we suspect this dollar advance may be nearly over. Interest rate expectations have adjusted and a hike by the Fed now seems base case rather than a tail risk. The momentum indicators are getting extended and retracement levels and technical targets have been approached. Still, the dollar's price action remains strong, and participants may be best served by waiting for a technical reversal pattern before picking a top to the greenback. That said, the dollar may be most vulnerable to signs that the war on Ukraine and/or in the Middle East is moving toward a resolution. There have been many false positives, which have seen the greenback recover from an initial negative reaction.

Drivers: Leaving aside theory, empirically, the dollar is positively correlated to US interest rates unlike several of the other major currencies. The re-acceleration of the US economy, with the Atlanta Fed's tracker at 4%. The Fed funds futures are discounting about an 85% chance of a hike this year, according to the Bloomberg model and a little more than 60% by the CME's calculation. At the start of the month, a small chance of a cut was still being discounted. The 10-year yield has risen by about 65 bp since the Middle East war began, with the 30-year yield up almost 50 bp. This can be explained by the roughly 80 bp increase in the anticipated year-end effective Fed funds rate. Market-based measures of inflation expectations have risen. The 10-year breakeven is a little less than 20 bp (~2.43%) and the five-year, five-year inflation swap rate has risen by about five basis points (~2.43%)

Data: The April personal consumption print, and durable goods orders are likely to confirm what we already know. The US economy is re-accelerating this quarter and headline price pressures. The PCE deflator is seen rising to 3.9% from 3.5%, with a more restrained core (3.3% vs. 3.2%). The plethora of Fed surveys (Chicago, Philadelphia, Richmond, and Dallas) and the Conference Board' s consumer confidence pose headline risk. April new home sales may have struggled to maintain the 7.4% jump seen in March and the April goods deficit is due at the end of the week. In Q1 26, the goods deficit was about $252 bln compared with a nearly $464 bln shortfall in Q1 25 and almost $275 bln in Q1 24.

Prices: The Dollar Index eked out a small gain last week. According to Bloomberg, last week's high was 99.515, a thousandth of an index point from closing the gap created on the sharply lower opening on April 8. The top of the gap, the April 7 low, was 99.516. The 99.50 area also corresponds to the (61.8%) retracement of the Dollar Index's retreat from the year's high on March 31 (~100.64). The momentum indicators are stretched but have yet to turn lower.

EMU

Drivers: While rising rates is supportive of the greenback, rising German rates is correlated with a weaker euro. That holds for the two-year as well as the 10-year yield. Meanwhile, the odds of an ECB hike next month now stand a little above 85%, little changed from the end of April. Two hikes and about 50% of a third is discounted in the swaps market. At the end of the previous week, the hike was fully priced.

Data: The EU confidence surveys typically do not move the market and aggregate data for the eurozone is otherwise light this week. At the end of the week, the four largest members of the euro area port May inflation. The only question is how much and how fast inflation is rising.

Prices: The euro met the (61.8%) retracement target of the rally from the year's low set in mid-March near $1.1410, which was found near $1.1580. The momentum indicators are getting stretched but may not prevent additional losses, especially if hostilities in the Middle East flare up. The next area of chart support may be $1.1500-25. It takes a move above $1.1660 to signal a low may be in place.

PRC

Drivers: While the PBOC manages the exchange rate, they do not do so randomly. The 60-day correlation between the dollar's changes against the offshore yuan is above 0.80 and appears to be near a record. Since the end of last September, the PBOC's daily reference rate has fallen on a weekly basis in all but three weeks. Over this stretch, it has fallen by 4%.

Data: China reports April industrial profits. In March, they rose 15.8% year-over-year. The risk is on the downside in April as rising commodity and input prices are passed on fully to the consumers.

Prices: The dollar consolidated against the yuan in recent days but finished last week with its lowest settlement since May 14, when the three-year low was recorded (~CNH6.7815). The PBOC campaign to manage the gradual appreciation of the yuan does not appear over. The median forecast in Bloomberg's survey seems too conservative at CNH6.75 at the year end. We suspect potential toward CNH6.60.

Japan

Drivers: The yen is sensitive to the overall dollar direction. The rolling 60-day correlation of changes in the Dollar Index and the dollar against the yen is above 0.75, it has rarely been higher over the past decade. The correlation between changes in 10-year US yields and the exchange rate is near 0.60, the most since last October, but it is recovering from a three-year low near 0.15 early February. Ironically, higher 10-year JGB yields are also positively correlated (albeit minor at less than 0.07) with the dollar against the yen. The correlation of 10-year interest rate differential was inverse briefly last December but is now near 0.54, which is also the highest since last October.

Data: Japan's key data is backloaded to the end of the week ahead. Tokyo's CPI is a reasonably good guide to the national figures, which are lagged by a few weeks. There are three real sector reports due the same day. April employment, retail sales, and industrial output. We learned last week that the Japanese economy grew by 1.7% annualized rate in Q1 26. It grew by 1.3% in Q4 25. The impact of the supply shock stemming from the Middle East war is expected to weigh on growth in Q2. Still, the market is confident (~80%) that the Bank of Japan will hike when it meets in the middle of next month.

Prices: Despite the ongoing threat of BOJ intervention and the decline in the US 10-year premium over Japan to four-year lows, the market has sold the yen in nine of the past 10 sessions. It reached its highest level since the April 30 reported intervention near JPY159.35 on May 21. The momentum indicators and price action suggest the market will likely continue to market to probe for official pain threshold.

Drivers: Sterling's rolling 30-day inverse correlation with changes in the US two-year yield is near -0.75. It has not been that extreme for two decades. Sterling is also inversely corelated with the UK's two-year yield (~-0.48). Sterling remains highly correlated with changes in the euro (0.88), the most since November 2023. It has rarely been higher in the past 20 years.

Data: The UK macro data is of little market significance in the coming days. There is no government data but private data, such as the BRC shop price index, CBI retail report, and Lloyd’s business barometer and price survey. The Bank of England meets next on June 18, and the swaps market is discounting slightly more than a 1-in-3 chance of a hike. At the end of April, a 60% probability was discounted.

Prices: Sterling posted an ostensibly bullish outside up days on Monday and Wednesday last week by trading on both sides of the previous day's range and settling above its high. However, progress was limited to about 15-ticks above Monday's high. It traded above Monday's high ($1.3450) in the last three sessions but was unable to settle over it. Initial support is seen in the $1.3375-85 area, and a break could spur a test on last week's low near $1.33.

Canada

Drivers: The broad direction of the US dollar is arguable the most important driver of CAD. The rolling 30-day correlation of changes in the Dollar Index and USD-CAD is around 0.70. It peaked near 0.85 in March but remained in the upper end of last year’s range. The exchange rate’s 30-day correlation with changes in the US two-year yield is a little above 0.50, having reached the highest level earlier last week in 6-7 months. Last September’s peak (~0.65) was the highest in three years. Yet counter-intuitively, the exchange rate is also positively correlated with higher Canadian yields too. The rolling 30-day correlation, above 0.30, the highest since last October, which was also a three-year high. The exchange rate is not so sensitive to the changes in the price of WTI. The 30-day correlation is around 0.20. It has been positive since mid-March but was inversely correlated from last November. The Canadian dollar is also sensitive to the risk environment. When the US S&P 500 sells off, the Canadian dollar tends to weaken. The inverse correlation between changes in the USD-CAD exchange rate and the S&P 500 is a little more than -45, which is among most extreme the inverse the 30-day correlation has been since the end of last September.

Data: The highlight of the week is saved until Friday, Q1 GDP. After contracting by 0.6% at an annual rate in Q4 25, the economy appears to have snapped back. The median forecast in Bloomberg's survey is for a 1.5% pace in Q1 26. The sum of the Q4 25 monthly GDP prints for flat but is up a cumulative 0.3% in Jan-Feb. The Bank of Canada meets next on June 10, and the swaps market is confident it will stand pat with its target rate at 2.25%. The odds rise to a little more than 30% for the following meeting in July.

Prices: The US dollar poked above CAD1.3815 ahead of the weekend for the first time in a little more than a month. It met the (61.8%) retracement objective of the decline from the year's high at the end of March (~CAD1.3965). The greenback finished the week above the 200-day moving average. The month's low, set May 1, is around CAD1.3550, and the subsequent rally has stretched the momentum indicators but there appears to be scope for additional, even if limited, near-term gains. The next technical target is in near CAD1.3870.

Australia

Drivers: The Australian dollar is the most sensitive to the broad movement of the US dollar as it has been for the past couple of years. The inverse 30-day correlation between changes in the Aussie and changes in the Dollar Index is more than -0.80. Recall that last the November, the correlation was briefly positive too for the first time since the pandemic. Changes in the Aussie and the S&P 500 are correlated by 0.75 over the past 30 sessions. In the past decade, the correlation has rarely moved above 0.80. The exchange rate's inverse correlation with changes in the US two-year yield is the most since at least 2000 at around -0.83. The 30-day correlation with Australia's two-year yield is less stable. It was, as one would suspect, positively correlated in the first two months of the year, peaking near 0.35, before signs switched and it became inversely correlated, reaching almost -0.30 in the middle of last month, the most inverse in three years. It swung back to a positive correlation in recent data and is approaching the year's high.

Data: After hiking rates three times in a row, the bar to another hike at the next RBA meeting in mid-June is high. Still, the futures market knows that it is not done. Another hike is fully discounted and about a 50% chance of a fifth hike before the end of the year. This week's data may boost the market's confidence. April CPI is due in the middle of the week. It is unlikely to repeat March's 1.1% surge (to 4.6% year-over-year), but it has not peaked. The median forecast in Bloomberg's survey is for a 0.6% rise, which would allow the year-over-year pace to soften slightly to 4.4% from 4.6%. Household spending in April may have pulled back for the first time this year, while private sector credit growth may show demand is still running at what the central bank sees as too strong (~8% year-over-year). The Reserve Bank of New Zealand meets on May 27. It is seen among the most aggressive in raising rates in the remainder of the year, with more than three hikes fully discounted in the swaps market. Still, it is not seen pulling the trigger this week (~22%) and instead waiting until its next meeting in July (~83%).

Prices: The Australian dollar has strung together three inside trading days, forging a symmetrical triangle, which is often understood as a continuation pattern. The Aussie was sold to $0.7080 last week, the lowest level in a little over a month. The momentum indicators are falling but are not over-extended. The next near-term technical target is around $0.7055, and a convincing break could send it toward $0.7000.

Mexico

Drivers: There are three main forces that appear to drive the peso's exchange rate. First is the broad direction of the dollar. The correlation of changes of the dollar against the peso and the Dollar Index over the past 30 sessions is around 0.60. It peaked last month above 0.80 but are still above where it was for most of last year. The dollar-peso exchange rate is inversely correlated to the JP Morgan emerging market currency index (~-0.80). The second driver is US rate expectations. The 30-day correlation of changes in the exchange rate and the US two-year yield is near 0.75, the highest since 2013. The third driver is the risk environment, for which we use the S&P 500 as a proxy. Over the past 30 sessions, the inverse correlation between changes in the exchange rate and the S&P 600 is around -0.65. It reached a 10-year extreme last month, a little more than -0.80.

Data: The week begins with the April trade figures. Mexico's trade balance tends to deteriorate in April (15 of 20 years). Moreover, the March surplus (~$5.93 bln) was the largest since the end of 2020. Still, it posted a trade deficit of slightly more than $1 bln in Q1. The deficit in Q1 25 was almost $270 bln and nearly $5 bln in Q1 24. The broader measure of trade, the current account is in a small deficit in Mexico. It was about 0.5% of GDP last year. The IMF expects it to be around the same proportion this year. In the middle of the week, the central bank will publish its inflation report when new economic projections are made available.

Prices: The dollar reached MXN17.43 in the middle of last week, a two-and-a-half week high. However, the consolidative tone continued, and the greenback remained mostly in the range set May 15 (~MXN17.21-MXN17.4030. Given the positioning of the momentum indicators, our working hypothesis is that the consolidation is a continuation pattern. If this view is correct, the US dollar can still rise to test the month's high near MXN17.55.

Disclaimer

Stocks and Bonds Rally Despite the Apparent Lack of Progress in the Middle East

noreply@blogger.com (Marc Chandler) — Fri, 22 May 2026 06:51:40 -0400

The dollar’s losses in the North American afternoon yesterday have been unwound as hopes that a framework for negotiations between the US and Iran have faded again. A drone strike on the UAE, ostensibly from Iranian proxies in Iraq, has helped lift oil prices and the greenback. Yet, stocks and bonds are higher. Still, ahead of the long holiday weekend in the US and UK, risk appetites may be limited as the risk of US strike on Iran seems to have risen.

In the US, Warsh will be sworn in as the next Fed chair and at 10:00 am ET Governor Waller addresses the economic outlook. The final University of Michigan consumer confidence report typically does not elicit as much of a response as the initial reading. The US Treasury market closes early today, ahead of the holiday, and liquidity will fall off in the North American afternoon. The US dollar in consolidating in narrow ranges with a slightly firmer bias.

Prices

G10

• The euro was sold to a new marginal low since April 7 yesterday in what appeared to be a response to the stronger than expected US May PMI. It was the only one among the high-income countries that did not fall. The euro slipped through the $1.1580 support area by a few hundredths of a cent. It recovered to about $1.1630 on reports that suggested an agreement between the US and Iran has been struck (again). The euro settled above $1.1600. However, the hopes of an agreement have not been sustained, and the euro is trading with a heavier bias between about $1.1595 and $1.1620.

• Since the BOJ’s intervention on April 30, the yen has strengthened in only three of the 15 sessions coming into today. The dollar rose to a new high for the month yesterday near JPY159.35. It has been capped at JPY159.15 today but has not traded below JPY158.90. We note that the US 10-year premium over Japan is hovering near four-year lows around 180 bp. It was around 290 bp at the end of May 2025. In the first 20 weeks of the year, Japanese investors have sold about JPY3 trillion (~$19.bln) of foreign bonds and bought JPY1.77 trillion of foreign stocks. In the same period last year, Japanese investors bought around JPY4.4 trillion of foreign bonds and JPY8 trillion of foreign stocks. To round out the picture, note that foreign investors have purchased JPY7.5 trillion of Japanese bonds this year and JPY10.7 trillion of Japanese stocks (compared with JPY4.4 trillion of Japanese bonds and JPY334 bln of Japanese stocks in the year ago period)

• Sterling continues to trade within Wednesday’s range, giving little obvious clue to the near-term outlook. It began the week with a test on $1.33, its lowest level in over a month and rebounded to reach nearly $1.3465 Wednesday. Despite the disappointing retail sales and the largest budget shortfall in six years, sterling is trading quietly, in about a quarter-cent range above $1.3415.

• The Canadian dollar fell to its lowest level since April 13 yesterday. The greenback reached CAD1.38, the lower end of a resistance band we identified that extends to about CAD1.3815. The US dollar pulled back and settled slightly below Wednesday’s high (~CAD1.3780). The greenback is firm but has held below CAD1.38.

• The Australian dollar rebounded from a test in the local session on $0.7100 to reach new session highs in the NY afternoon yesterday near $0.7165. The $0.7175-85 area has capped it in recent days. Two G10 currencies appreciated against the dollar since the Middle East war began: The Norwegian krone, which has appreciated by about 3%, and the Australian dollar, which has gained about 0.65%. The Aussie is in a little more than a quarter-cent range above $0.7125 today.

• As risk appetites improve in the North American afternoon yesterday, the Mexican peso traded higher. The dollar peaked on Wednesday before Moody’s downgrade was announced near MXN17.43. By late yesterday, the greenback had eased to a new low for the week near MXN17.26. The dollar has held above MXN17.2960 today and is trading firmly, but well within yesterday’s range.

• The dollar made a marginal new low for the week today against the offshore yuan. It slipped to CNH6.7955. Barring a recovery, it will be the sixth weekly loss for the greenback in the past eight weeks. The PBOC fixed the dollar slightly higher today (CNY6.8373 vs. CNY6.8349). On a weekly basis, the fix has fallen in all but three weeks since the end of last September.

• The central bank’s engineered short squeeze extended the Indian rupee’s gains today. The dollar slumped to INR95.6850, its lowest level in seven sessions. Estimates of the size of yesterday's intervention range from around $2 bln to $5 bln.

Other Markets

• The rally to new highs for the week in the US S&P 500 and Nasdaq set the tone for today’s gains in Asia Pacific and European equities. Nearly all the markets are higher today. The Nikkei led the move in the Asia Pacific region with a nearly 2.7% rise. Taiwan’s Taiex was close with an almost 2.2% rally. Europe’s Stoxx 600 is rising for the fifth consecutive session, for the first time since last November. US index futures are around 0.2%-0.3% firmer.

• Benchmark 10-year yields are mostly lower with the help of the pullback in oil prices and the rally in the US 10-year yesterday. The 10-year US Treasury yield fell to 4.55%, a new low for the week. European yields are 4-6 bp lower. In Europe, the 10-year Gilts yield has dropped the most this week, 19 bp. The US 10-year yield is off about four basis points this week, while the 2.5 bp rise in the 10-year JGB is the anomaly.

• Gold dipped below $4500 support for the fourth time this week yesterday but recovered on the back of the broader rally in risk assets and settled above the previous session’s high for the first time in a couple of weeks. A move above the week’s high, seen Tuesday near $4589, lifts the technical tone. Silver was firmer. The week’s high was set on Tuesday slightly below $79. That is the immediate hurdle. Still, both metals are consolidating with a slightly softer bias so far today.

• July WTI was sold yesterday in the North American afternoon on the optimism that a preliminary deal has been struck between the US and Iran. It was the third consecutive declining session, matching the longest since the Middle East war began. July WTI fell to almost $95.76, a five-day low and briefly traded below the 20-day moving average (~$97 today) for the first time in two weeks. However, the contradictory reports have seen oil trade firmer today. July WTI reached almost $99.45 before but it is pulling back ahead of the North American open and is probing the $98 area late in the European morning,

Data

• As the week draws to a close, the US sees the final University of Michigan survey. Recall that the preliminary results show a record low of consumer sentiment (48.2). It did not fall below 55 during the Great Financial Crisis or below 70 during the pandemic. One year inflation expectations softened in the initial read to 4.5% from 4.7%. It had fallen to 3.4% before war. The 5–10-year inflation projection slipped to 3.4% from 3.5%. It was at 3.3% before the war. The five-year breakeven (the yield differential between the US conventional yield and the inflation protected security is around 2.65%, up about 20 bp since the war on Iran began. The 10-year breakeven is slightly below 2.50%, up around 23 bp during the same time.

• Canada reports March retail sales today. StatCan has indicated that preliminary data point to a 0.6% increase after a 0.7% rise in February. Excluding auto sales, the median forecast in Bloomberg’s survey is for a 0.9% rise after 0.5% previously. Canada reports Q1 26 GDP next week. After contracting by 0.6% in Q4 25 at an annual rate, the economy appears to have returned to growth.

• Mexico is not expected to revise its estimate that the economy shrank by 0.8% quarter-over-quarter in Q1 26. Although the economy appears to be expanding this quarter, the pulse is weak. The IGAE economic activity report, which functions as a monthly GDP report may show the economy stagnating after a 0.11% rise in February. Note that Mexico and the EU hold a summit that will produce a new trade deal.

• Negotiated wage growth in the eurozone slowed to 2.46% from 2.86% in Q4 25. Negotiated wages rose by an average of 2.82% in 2025, down from around 4.5% in the previous two years. Still, the hawks have persuaded the market that the ECB will hike rates next month (~88%).

• Germany’s May IFO survey showed the first improvement since the Middle East war began. The sentiment towards the business climate rose to 84.9 from 84.5. The current assessment rose to 86.1 from 85.4 and the expectations component improved to 83.8 from 83.5.

• The UK reported April retail sales fell. Including gasoline, they tumbled by 1.3%, more than twice the expected fall (median forecast in Bloomberg’s survey was for a 0.6% decline). Yet, the story was mostly about gasoline. Excluding it, retail sales slipped by 0.4%. Unlike most countries, the UK’s retail sales ae reported in volume terms. In the first four months of the year, the headline retail sales rose by an average of 0.1% and the ex-gasoline measure rose by an average of 0.2%. In the first four months of last year, both measures rose by about 0.4% a month. Separately, the UK reported a GBP24.3 bln budget deficit in April, the largest since the pandemic.

• Japan reported softer than expected April CPI. Indeed, the results were weaker than any economist in Bloomberg’s survey anticipated. The headline CPI ticked slipped to 1.4% from 1.5% and the core measures, which is targeted fell to 1.4% from 1.8%. It is the third consecutive month below target. The measure that excludes both fresh food and energy eased for the sixth consecutive month and at 1.9% (from 2.4%), matching the lowest reading since September 2022. Process food prices eased and energy costs eased at a slower pace than in March. The price of rise, which rose 98% in the year through April 2025, is up 0.6% in the past 12 months. Pricing in the swaps market is consistent with about an 80% chance of a hike at next month’s BOJ meeting. The market has almost two hikes this year discounted.

Disclaimer

Flash PMIs Show War's Impact

noreply@blogger.com (Marc Chandler) — Thu, 21 May 2026 06:46:24 -0400

There have been no further developments to fuel optimism about the Strait of Hormuz. Polymarket shows little change in the assessment that there is around a 35% chance that the Strait is open by the end of next month and 47% chance opens by the end of July. Still Brent and WTI are trading with a slightly heavier today. Equities are mostly firmer as are bonds. Most of the preliminary May PMI estimates have shown the impact of the war with softer readings and higher prices.

The dollar is trading with a firmer bias, recovering from yesterday’s losses in the North American afternoon. A poor employment report and the weak PMI have the Australian dollar the weakest of the G10 currencies after it led the pack yesterday. The dollar continues to straddle the JPY159 area, but Japanese rhetoric has not escalated. The PBOC set the dollar’s reference rate today at a new multiyear low.

Prices

G10

• The euro tested the lower end of the range of support we identified in the $1.1580-$1.1600 area before recovering to new session highs (~$1.1645) amid a flight of fancy after President Trump indicated that negotiations with Iran were in the final stages. Oil tumbled and rates fell. Still, the feeling of “Groundhog Day” could not be shaken that the euro consolidated mostly between $1.1620 and $1.1640 in the North American afternoon. The euro reached the session low today, near $1.1595 after the disappointing French PMI but was already recovering before the German figures shortly after the French report. It stalled near $1.1635.

• The Japanese yen strengthened yesterday for the first time in eight sessions. Not, we think, coincidentally that US 10-year yields dropped by about 8.5 bp yesterday, the largest single day decline since February 5. The greenback eased to a two-day low near JPY158.60 and recovered to almost JPY159 in afternoon turnover. The dollar remains firm but is subdued in a JPY158.80-JPY159.10 range.

• Sterling posted an outside up day on Monday, consolidated on Tuesday, and posted an outside up day yesterday. It traded on both sides of Tuesday’s range and settled above it high. Sterling reached a new four-day high near $1.3465. The session low, near $1.3415 today was recovered before the soft PMI. It recorded the session high shortly thereafter, around $1.3455 before stalling, where options for about GBP935 mln expire today. The (50%) retracement of the losses since the month’s high on May 1 is around $1.3480. A move above there could target the $1.3510-20 area next.

• The Canadian dollar was the only G10 currency that did not rise against the US dollar yesterday. Even the Norwegian krone, which is more sensitive (higher correlation) with oil managed to eke out a small gain (~0.10%). The greenback reached almost CAD1.3780, a new high since April 15. For the past four consecutive sessions, the US dollar has traded above CAD1.3760, which is roughly the (50%) retracement the sell-off since the high for the year was posted at the end of March near CAD1.3965. However, it has not settled once above it. The US dollar is trading inside yesterday’s range but firmly today. The market may take another run at chart resistance in the CAD1.3800-15 area.

• The Aussie rebounded smartly yesterday. The nearly 0.65% gain put it atop the G10 performers. It posted its lowest settlement in a month on Tuesday slightly above $0.7105 and rallied to almost $0.7175, a few hundredths of a cent below Tuesday’s high. It is trading well within this week’s range today and confined to $0.7100-$0.7160 range. A convincing move above $0.7200 would suggest the downside correction may be over.

• The three factors that seem to drive the Mexican peso favored gains yesterday. First, the dollar was broadly weaker, and the JP Morgan Emerging Market Currency Index rose. Second, US rates fell. Third, risk-on was featured with strong gains in US equities. After setting a new two-week high slightly above MXN17.43, the dollar reversed low and fell to almost MXN17.26, a little through Tuesday’s low. Still, the broad consolidation continues. The dollar is trading between MXN17.29 and MXN17.3650 so far today. There seemed to be little reaction to Moody’s decision to cut Mexico’s sovereign rating to Baa3, which matches Fitches earlier move. S&P is one notch better at BBB.

• The dollar has moved mostly sideways against the offshore yuan so far this week. The range has been roughly CNH6.7960 and CNH6.8215. The dollar is in the lower end of that range today. The weakness of the dollar may have encouraged the PBOC to lower the dollar’s reference rate today (to a new multiyear low, CNY6.8349) after raising it yesterday for the third time in four sessions.

• The Reserve Bank of India intervened more aggressively today to support the rupee, including reportedly in the offshore market. That and more threats of action to stem the pressure, including rate hikes, helped trigger a short squeeze. The dollar gapped lower today after posting a record high yesterday. It peaked near INR96.9650 yesterday and fell to the low of the week near INR96.04 today.

Other Markets

• The rally in US equities and the favorable response to Nvidia’s earnings helped arrest the four-day slide in the MSCI Asia Pacific Index. Most of the large bourses outside China and India were higher. The last-minute deal between Samsung and its employees avoided a strike and a South Korea-flagged oil tanker made it through the Strait of Hormuz yesterday. The Kospi rallied by nearly 8.5% and Taiwan’s Taiex jumped almost 3.4%. Japan’s Nikkei gained a little more than 3%. Europe’s Stoxx 600 is rising for the fourth consecutive session. If sustained it would match the longest advance of the year. US index futures are narrowly mixed.

• Benchmark 10-year yields fell sharply yesterday in Europe’s afternoon. Most yields fell between 9 and 13 bp, The UK, Italy, and Greece led the charged with 13-14 bp declines. The 10-year US Treasury yield fell a little more than nine basis points to 4.57%. Asia Pacific bonds played catch-up today while European bond yields have edged lower, though the 10-year Gilt yield is off a little more than four basis points. The 10-year US Treasury yield is a little softer, near 4.57%.

• Gold made a marginal new low yesterday since the end of March near $4475 and set a new session high shortly before midday in NY a little below $4553. It reached almost $4571 today before being turned back. It needs to overcome the $4590-$4600 area to boost confidence that a low is in place. Silver held above Tuesday’s low (~$73.10) yesterday and settled around 3.25% higher. It reached nearly $77 but is now slightly lower on the day. A move above the $80-$81 area would lift the technical tone.

• July WTI tumbled from almost $103 to $97 in the first hour after the news broke of President Trump’s comment on Iran. It consolidated choppily for the remainder of the session and posted its lowest settlement in four sessions. It is consolidating in the lower end of yesterday’s range. It was capped a little above $100 and found support near $97.25. The 20-day moving average is a little below $97. It has not settled below for a month.

Data

• In a 75-minute window, the US reports weekly jobless claims, April housing starts and permits, the May Philadelphia Fed business survey and the preliminary PMI. Housing starts are expected to slow after jumping 10.8% in March. Although the US economy appears to be re-accelerating this quarter, it may not be picked up by the Fed survey or the composite PMI. The Atlanta Fed’s GDPNow sees the US economy tracking 4% annualized growth this quarter, which is accurate, would be the most since the end of 2021.

• Mexico is expected to report a rebound in March retail sales (0.5%) after falling by 0.9% in February. Still, with Q1 GDP in hand (the 0.7% quarterly contraction is subject to revision tomorrow), the retail sales report is unlikely to have much impact.

• The eurozone reported a March current account surplus of 14.86 bln euros. That brings the Q1 surplus to 80.6 bln euros compared with almost 75 bln euros in Q1 25 and nearly 117 bln euros in Q1 24. However, the flash PMI appeared to draw more interest. Manufacturing ticked down (51.4 vs. 52.2) while services contracted (46.4 vs. 47.6), with the composite slipping to 47.5 from 48.8 to remain below the 50 boom/bust level for the second consecutive month. It spent all last year above 50.

• The UK’s preliminary PMI, on the heels of the disappointing employment report earlier this week, seemed to show an economy losing its forward momentum. The 0.6% growth in Q1 matched the strongest since Q1 24. The manufacturing PMI was unchanged at 53.7, but the services PMI tumbled to 47.9 from 52.7. The composite fell to 48.5 (from 52.6). The composite stood at 51.4 at the end of last year.

• Australia saw the preliminary May PMI and the April employment data earlier today. The PMI softened. Manufacturing eased to 50.2 (from 51.3), and services to 47.7 (from 50.7). The composite fell to 47.8 (from 50.4) but held well above the shockingly poor March reading of 46.6 (which looks like a fluke). The unemployment rate jumped to 4.5% from 4.3%, while the participation rate slipped to 66.7% from 66.8%. Australia loss 18.6k jobs, in April (vs median forecast in Bloomberg’s survey for a gain of 15k. The March series was revised to show 23.3k jobs were created vs. 17.9k initially estimated. Full-time positions slipped by 10.7k after rising a revised 63.4k in March.

• Japan reported that the April surplus narrowed by half from April while the preliminary May PMI slowed. Japan’s trade balance often deteriorates in April (16 of the past 20 years), and this year was not an exception. Through April, Japan recorded a JPY184 bln trade deficit compared with a JPY1.8 trillion deficit in the first four months of 2025. The IMF projects Japan’s current account surplus to fall to 3.8% of GDP this year from 4.9% last year. The PMI does not draw much attention in Japan. The manufacturing and services PMI slowed but both remain above 50. The composite is at 51.1 (vs. 52.2 in April and an average of 53.3 in Q1 26).

• India’s preliminary May PMI held up the best. The services PMI actually edged up to 58.9 from 58.8. The manufacturing PMI eased to 54.3 from 54.7. The composite ticked lower to 58.1 from 58.2.

Disclaimer

Markets Wait

noreply@blogger.com (Marc Chandler) — Wed, 20 May 2026 06:42:27 -0400

The US dollar is mostly firmer, though the Australian and New Zealand dollars are resisting the pull. The euro is trading in almost a 15-tick range on both sides of $1.16, and even with a Gilts-rally spurred by lower-than-expected inflation, sterling is struggling to recapture $1.34. The yen has fallen for the past seven sessions and is little changed now, in a narrow band around JPY159. There has not been intervention, but the market knows it is tempting officials. At the same time, the fragile ceasefire in Iran may ended in the coming days and this is keeping investors on edge. Oil prices are softer amid reports of three supertankers have passed through the Strait of Hormuz today.

The preliminary May PMI surveys are due tomorrow and are expected to show more of the war’s disruption to both prices and activity. The minutes from the Powell’s last FOMC meeting as chair are due today and will likely show more support for a neutral stance than the three dissents indicated. After the markets close today, Nvidia will report earnings.

Prices

G10

• After Monday’s short-covering rally fizzled, the euro’s decline resumed yesterday. The single currency fell to almost $1.1590, its lowest level since April 8. Today, it has edged a little close to the (61.8%) retracement of the rally from the year’s low on March 16 (~$1.1410) found near $1.1580. The positioning of the momentum indicators warn of more downside potential, which could extend toward $1.1515-25 next. It has not traded above $1.1615 today.

• In the 13 sessions this month, the yen was weakened in all but two and that includes the seven-day slide coming into today. In the 13 sessions before the April 30 BOJ intervention, the yen weakened in 10 of the sessions. One-month implied volatility settled slightly below 7.4% yesterday, essentially flat since the day before the April 30 intervention.

• Monday’s potentially bullish key reversal failed to spur follow-through gains yesterday. In fact, sterling gave back half of yesterday’s advance from almost $1.33, its lowest level since April 8. Sterling has been confined to a narrow range so far today between about $1.3375 and $1.3405. A break of $1.3360 signals a retest on Monday’s low.

• Softer than expected inflation helped the greenback extend its gains against the Canadian dollar to almost CAD1.3775. It was the US dollar’s ninth advance in ten sessions. The greenback has edged up to almost CAD1.3780. We have suggested potential into the CAD1.3800-15 area. Initial support now is around CAD1.3740.

• The Australian dollar was sold to $0.7080 yesterday, its lowest level since April 14. It stopped shy of the $0.7055 area, which corresponds to a halfway mark of the Aussie’s rally from the March 30 low (~$0.6835). The momentum indicators have only recently turned down, giving plenty of scope for additional declines. Moreover, the five-day moving average crossed below the 20-day moving average for the first time since in over a month. It is trading quietly in the lower end of yesterday’s range, holding below about $0.7115 and above $0.7085.

• Amid the risk-off environment, the Mexican peso fell to two-week lows yesterday. The greenback settled above the 20-day moving average (~MXN17.3445 today) for the first time since May 5. It rose to almost MXN17.41. Today it briefly overshot the MXN17.4225 area that represents the (61.8%) retracement of this month’s decline before sellers emerged and pushed it back to almost MXN17.3750.

• The dollar is consolidate against the Chinese yuan. Yesterday, the dollar held a little below Monday’s high against the offshore yuan (~CNH6.8215) but the move does not appear over. A move above CNH6.8250 could signal gains into the CNH6.85 area. It is trading so far today within yesterday’s range. The PBOC set the dollar’s reference rate a little higher today (CNY6.8397 vs. CNY6.8375, multi-year low yesterday).

• The Indian rupee’s slide continues. The greenback reached a record high near INR96.9650. The central bank reportedly sold a small amount of dollars, but it was not sufficiently forceful to stem the tide. The pressure on the rupee continued even though Indian stocks and bond rose today.

Other Markets

• After extending their slide yesterday, the S&P 500 and Nasdaq recovered and reached new session highs in the NY afternoon before pulling back into the close. The index futures are trading higher now. Asia Pacific equities sold off today. The regional MSCI Index fell for the fourth consecutive session. Indian equities were a notable exception. Indonesian equities fell as well, despite the 50 bp rate cut by the central bank. The market anticipated a quarter-point cut. Europe’s Stoxx 600 is higher for the third session, which if sustained would be the match the longest rally since the Middle East war began.

• Benchmark 10-year bonds continued to sell off yesterday, despite the stability in oil prices and the sell-off in equities. The US 10-year yield rose every day last week, and after slipping by less than a basis point on Monday, tacked on another seven basis points yesterday. Yields have pulled back today. The Treasury yield is almost three basis points lower to 4.64%. The 10-year JGB yield slipped a basis point, while European benchmarks are 2-5 bp lower, though softer than expected UK CPI has pushed the 10-year Gilts yield eight basis points lower.

• Gold has struggled recently under the weight of the rising dollar and yields. The yellow metal traded on both sides of Monday’s range. Although it settled within Monday’s range it closed below $4500 support for the first time since late March. It has struggled to re-establish a foothold above $4500. It fell slightly below $4454 before recovering to about $4493 before stalling. Silver also posted an outside day but settled below Monday’s low. Yet, there has been no follow-through selling today and silver regained the $75 handle in Europe.

• July WTI remained firm yesterday. It traded in the upper end of Monday’s range when the contract high was recorded near $105.20. Yesterday’s range was about $102.10-$104.70. It is a bit softer today. So far, the range is about $1.01.60-$104.45. Reports suggest three supertankers were moving through the Strait of Hormuz, two of which were Chinese and the other South-Korean flagged.

Data

• In an otherwise quiet economic diary, the record from the recent FOMC meeting will be released late in the North American session today. The FOMC meeting saw four dissents—one by Governor Miran who has vacated his seat for the new chair Warsh. Three dissented over the statement though the minutes will likely show more were sympathetic and it seemed more an issue of timing than substance. Governor Barr addresses consumer financial health at a conference in Atlanta today.

• Despite a 0.7% jump in the UK’s headline CPI (0.9% expected), the year-over-year rate slipped to 2.8% from 3.3%. The counter-intuitive results were a function of last April’s 1.2% surge that was driven by the increase in administered prices for energy, water, train fares, and local authority taxes. The increase in core prices slowed to 2.5% from 3.1%, while services price inflation slowed to 3.2% from 4.5%. The chances of a hike at next month’s BOE meeting eased to about 15%, less than half of what it was at the end of last week and the lowest in two months. The odds have been pared in five of the last six sessions.

• As widely anticipated, Chinese banks left their one- and five-year loan prime rates steady at 3.0% and 3.5%, respectively.

Disclaimer

Asia and Europe were More Skeptical about Developments in the Strait of Hormuz than the US

noreply@blogger.com (Marc Chandler) — Tue, 19 May 2026 06:53:08 -0400

The US greeted the news late yesterday that the US would not bomb Iran, apparently as planned, as a constructive sign that would lead to a resolution of the conflict. Asia and Europe appear less sanguine. The dollar has recouped most of what it lost in yesterday’s North American afternoon. Benchmark 10-year yields are mostly firmer. Oil is softer but the July WTI contract held above $102 and July Brent, above $109. On Polymarket, there is slightly less than a 33% chance of the Strait of Hormuz opening by the end of next month.

The G7 finance and central bankers’ meeting concludes today. With the US turning on its allies and threatening to increase the tariffs on EU vehicles if the trade agreement is not approved by July 4, it makes for awkward meetings. Greenland officials have indicated that the US desire to control and own it remains intact. The US waiver on Russian oil was a unilateral decision and many European centers oppose it.

Prices

G10

• The euro snapped a five-day slide yesterday after initially the losses were extended slightly through $1.1610. It recovered to $1.1660 in late dealings after President Trump indicated at that the request of Gulf allies he agreed to call off today’s strike on Iran. Last Friday’s high was near $1.1675. There was no follow-through euro buying and the single currency returned to $1.1615 in Europe. Support is seen in the $1.1580-$1.1600 area. Options for almost 2.5 bln euros at $1.1650 expire today.

• The dollar rose for the sixth consecutive session against the Japanese yen yesterday. It matches the longest rally of the year. The dollar has edged higher today even though the stronger than expected Japanese Q1 GDP. The yen had fallen for seven of eight sessions when the BOJ apparently intervened on April 30, though as we noted at the time, the dollar has fallen for three consecutive weeks through April 17 before recovering a little less than 0.5% in the week prior to the intervention. The dollar reached slightly above JPY159.15 in European turnover though is in a narrow range of a little less than a half a yen. Options for nearly $635 mln at JPY159 expire today.

• Sterling rose for the first time in six sessions yesterday. It tested support near $1.33 before it recovered $1.3450. Sterling posted an ostensibly bullish outside up day as it traded on both sides of last Friday’s range and settled above it high. The roughly 0.75% gain was the most in two-and-a-half weeks. In one fell swoop, sterling overshot the (38.2%) of last week’s slide (~$1.3435). Sterling is trading in the upper end of yesterday’s range. It is straddling the $1.3400 area after the weak labor market report. Resistance is now seen around $1.3420.

• The Canadian dollar stabilized. Coming into this week’s activity, the Canadian dollar has declined in 10 of the past 11 sessions. It edged up a little yesterday. The greenback traded quietly inside last Friday’s range (~CAD1.3715-CAD1.3765). However, the Canadian dollar is on its back foot again today. The greenback is edging above last week’s high. Resistance is seen in the CAD1.3800-15 area.

• The Australian dollar initially extended last week’s decline and fell to about $0.7120, a new low for the month. It rebounded and set the session high, almost $0.7185 in the North American morning yesterday. Sellers took it slightly through $0.7110 today. A break of the $0.7100 area could target $0.7055 next. Options for nearly A$1 bln struck between $0.7135 and $0.7150 roll-off today.

• The dollar jumped almost 0.7% against the Mexican peso at the end of last week and consolidated in quiet turnover yesterday. The greenback recorded an inside session and found support near MXN17.2570. It is consolidating inside yesterday’s range today, though the price action looks constructive. The high recorded at the end of last week was around MXN17.4030.

• With the exception of last Friday, the offshore yuan has appreciated in 12 of the past 13 sessions. The greenback pierced CNH6.82 for the first time in eight sessions before being driven to the session low near CNH6.7975 in the North American morning yesterday. It is trading firmly, slightly below CNH6.81 in Europe. The PBOC set the dollar’s reference rate at CNY6.8375, a new multiyear low. The previous low was recorded last Thursday at CNY6.8401.

• The Indian rupee declined for the eighth consecutive session today, hitting a new record low. Some reports suggest the central bank may have intervened around INR96.34. The dollar reached almost INR96.6165. The roughly 1.7% decline this month brings the year’s rupee loss to 6.9%. We note that the Indonesian rupiah also has fallen to record low.

Other Markets

• Equities are mixed today, and this was reflected in Japan, where the Nikkei fell but the Topix rose. China and Hong Kong markets rose, but the liquidation in the tech sector saw Taiwan’s Taiex fall 1.75%, while South Korea’s Kospi got hit for 3.25%. Europe’s Stoxx 600 is up almost 0.7%, and with yesterday’s gain, it has almost recouped the nearly1.5% loss incurred before the weekend. US index futures are lower, warning the pullback from last week’s record-highs is not over.

• Benchmark 10-year yields are mostly firmer. The 10-year JGB yield jumped 5.5 bp following the GDP data. Japan sells 20-year bonds tomorrow. Most European yields are around one basis point better, while the 10-year Treasury yield is up nearly two basis points to poke above 4.60%.

• Gold was initially sold through $4500 yesterday for the first time since late March. It recovered and recorded session highs slightly above $4584. It consolidated mostly above $4535 in the North American afternoon. It has come back better offered after stalling near $4589. It could re-challenge the $4500 area. Silver traded at a seven-session low, a little below $74 and rebounded to poke above $78. Silver traded mostly between $76 and $77.25 in the North American afternoon. It reached almost $79 today before it was turned back to a little below $75.50.

• July crude reached new contracts highs year during the Asia Pacific session yesterday, near $104.35. It was sold to the session low (~$98.60) in early North American turnover. However, it recovered back to around $103.65 before consolidating above $102. It is trading between about $102 and $104 today and is near the middle of the range ahead of the US open. The US extended the waiver of sanctions on those who buy Russian oil that is already in tankers at sea for 30 more days. Previously, the US warned the sanctions would not resume. Some suggest that without the waivers, China is the most important buyer of cheap Russian oil.

Data

• In a relatively quiet data week, the US pending home sales for April are due today. A small gain is expected. Last week, we learned that existing home sales edged up in April by 0.2% after a revised 2.9% (from 3.6%) decline in March, when pending home sales rose by 1.5%. Governor Waller speaks early today and Philadelphia Fed President Paulson during the Asia Pacific session, ahead of tomorrow’s FOMC minutes.

• Another large rise in Canada’s CPI is expected. The median forecast in Bloomberg’s survey is for a 0.7% month-over-month increase in April for a 3.1% year-over-year pave. The underlying core measures at seen little changed (2.2%-2.3%). The Bank of Canada meets on June 10, and the swaps market sees little chance of a change in policy. A hike is nearly fully discounted by the end of Q3.

• With Q1 growth in hand, the eurozone's March trade balance drew little interest today. The trade surplus of 3.5 bln euros compared a 26 bln euro surplus in March 2025 and 14.1 bln in March 2024. At about 21 bln euros, the Q1 26 trade surplus was about half of Q1 25 (~56.2 bln euros). Tariffs have reduced US demand for EMU exports while imports from China are up about 12% since last April.

• The UK’s labor market report disappointed. Payrolled employees fell by 100k. The median in Bloomberg’s survey looked for a loss of 10k and the March figure was revised from a loss of 11k jobs to a loss of 28k. The claimant count rose by 26.5k in April after the 26.8k increase in March was revised to 4.9k. The unemployment rate, measured by the ILO, rose to 5.0% from 4.9%. Average weekly earnings, including bonus payments, rose 4.1% on the three-month year-over-year basis from a revised 3.9% in February. Private sector earnings, excluding bonuses, slowed to 3.0% from 3.2%. Tomorrow, UK reports April CPI. Due to the base effect, last April’s CPI jumped 1.2%, this drops out of the 12-month comparison, which will allow the year-over-year rates (headline and core) may slip. Despite some hawkish comments from BOE’s Greene, the swaps market discounts a little more than a 20% chance of a hike at next month’s meeting and it rises to almost 80% by the end of July.

• The record from the Reserve Bank of Australia’s meeting earlier this month when it hiked rates of third consecutive time this year reinforced the market’s sense that while the tightening cycle is not over, the central bank will standpat next month. The futures market has discounted one hike and around a 33% chance of another in H2 26.

• Japan reported it's economy grew by 2.1% at an annualized pace in Q1 26 after Q4 25 growth was cut to 0.8% from 1.3%. Consumption rose by 0.3%, a bit more than expected, but the consumption in Q4 25 was cut to flat from 0.3%. Government spending slowed (0.4% vs. 1.5%), as did private investment (1.1% vs. 5.6%). did capex. Inventories shaved 0.1% off GDP (-0.4% in Q4 25). Net exports contributed 0.3% after a flat Q4 25 contribution. The swaps market is pricing in almost a 78% chance of a hike next month, up from about 65% at the end of April.

Disclaimer

Takaichi Endorses Supplemental Budget, Trump Escalates Rhetoric toward Iran, and Markets Spooked

noreply@blogger.com (Marc Chandler) — Mon, 18 May 2026 06:44:54 -0400

The dollar initially extended its gains against most of the G10 currencies but was sold in Europe and will begin the North American session lower except against the Japanese yen. Japan’s Prime Minister Takaichi has reconsidered her initial reluctance and has endorse a supplemental budget to help households and businesses cope the with commodity shock. With the US-China summit over, President Trump’s rhetoric toward Iran has escalated following reports that Iranian drones targeted a nuclear facility in the UAE. July WTI reached a contract high near $104.35 today. We suspect the concrete outcome of the Trump-Xi meeting many not be known until the US decides on the $14 bln arms package to Taiwan. Yet even to consider the arms package as negotiable can not set easy in the capitols of the US allies and at the same time the US has announced a troop withdrawal from Germany and has halted the rotation into Poland.

The dollar’s setback in Europe has stretched the intraday momentum indicators and North American participants may see the dip as a new buying opportunity. There are few large option expirations today to note. First, there are almost 1.3 bln euros at $1.1650 (today’s high has been about $1.1645). There are a little more than 2 bln euros of options that expire there tomorrow. And at $1.1600, there are 3.75 bln euros of options that expire today. Turning to the Japanese yen, where the market seems to be challenges Japanese officials, there are $4.7 bln options at JPY159 that expire today.

Prices

G10

• The euro was sold below $1.1620 in the European morning before the weekend and spent most of the North American session below $1.1640. Its 1.4% weekly decline was the largest in two months. It fell every session last week. It made new lows for the week in late dealings ahead of the weekend and settled below the lower Bollinger Band. The losses were extended to slightly below $1.1610 in the Asia Pacific session before recovering to reach $1.1645 in Europe. If the session high is not in place, it seems nearly so. The next technical area of support is $1.1580-$1.1600. There are 3.75 bln euro in options that expire at $1.1600 today and nearly 1.3 bln euros at $1.1650. Tomorrow, options for a little more than 2.0 bln euros at $1.1650 expire.

• The dollar rose for the past five sessions against the Japanese yen and reached JPY158.85 before the weekend. The gains have been extended today to almost JPY159.10, its best level since the BOJ reportedly intervened on April 30. The dollar recorded a bullish outside up day last Thursday by trading on both sides of Wednesday’s range and settled above its high. Follow-through buying materialized Friday though the market knows it is tempting material intervention again. The dollar closed above the 20-day moving average for the second consecutive session before the weekend and surpassed the (61.8%) retracement of the intervention-spurred losses. Options for $4.7 bln at JPY159 expire today.

• The recovering dollar and the political drama as Labour looks to dump Starmer who led them into a strong victory two short years ago. Sterling, like the yen and euro fell every day last week. Sterling’s roughly 2.2% decline last week broke the five-week rally and was the largest weekly loss since November 2024. Sterling fell to $1.3315 before the weekend. It settled below the lower Bollinger Band for the second consecutive session. It edged a little closer to $1.33 today before rebounding to almost $1.3385. The lower Bollinger Band is near $1.3365 today. The pre-weekend high was slightly above $1.3400, and this may be enough to cap it today.

• Although the Canadian dollar was the best performing G10 currency against the US dollar last week, its 0.55% decline was sufficient to push its to its lowest level in a month. The US dollar reached slightly through CAD1.3765 before the weekend, overshooting a little the (50%) retracement of its losses since the March 31 high (~CAD1.3965). The greenback has held below the pre-weekend high and returned to around CAD1.3735. The Canadian dollar has fallen for the past eight consecutive sessions. The US dollar settled a little above the upper Bollinger Band (~CAD1.3760 today). In January and March when it did, the greenback was near a high. Initial support is seen near CAD1.37. Canadian markets are closed for Victoria Day today.

• The upside momentum had been stalling even though the Australian dollar reached a new three-year high on May 6 near $0.7280. The broad US dollar gains proved too much, and the Aussie broke down before the weekend. It reached $0.7140, the lowest level in10 days. Follow-through selling pushed the Australian dollar to a new low for the month today, near $0.7120. The Aussie caught a bid that lifted it back to almost $0.7170. While a marginal new high is possible, the $0.7180 area may cap it.

• The dollar forged a base against the Mexican peso around MXN17.16. After coiling most of last week, the greenback sprang higher ahead of the weekend. It traded a little above MXN17.40, the dollar’s best level since May 5. It is consolidating quietly today between roughly MXN17.29 and MXN17.37. The MXN17.4225 area corresponds to the (61.8%) retracement of this month’s decline. Similarly, the dollar based around BRL4.88 before jumping higher beginning in the middle of last week. It reached nearly BRL5.0820 before the weekend, its best level since April 9. A new funding scandal hit the Bolsonaro family. The next technical area of note is around BRL5.1050-BRL5.1200. Domestic political concerns and the doubts over the independence of the central bank have seen the Colombian peso sell-off for the past three weeks. The dollar rose in each session last week and reached almost COP3821 before the weekend. The high for the year was recorded in early January near COP3839.

• The PBOC may be willing to accept a stronger yuan, but the greenback’s broader strength makes for an opportune time to consolidate. The US dollar reached CNH6.8165 before the weekend, its best level since May 6 and slightly in front of the 20-day moving average. The dollar’s rise before the weekend snapped an 11-session drop. The dollar reached CNH6.8215 today before pulling back to almost CNH6.7975. The dollar can rise toward CNH6.85 without inflicting much technical damage. The PBOC set the dollar’s fix at CNY6.8435 (CNY6.8415 before the weekend and multi-year low last Thursday at CNY6.8401).

• Rising oil prices and higher global interest rates continues to drag the Indian rupee lower. Counting today, it has fallen for seven sessions. The dollar reached a record high of about INR96.3925 in late dealings. The central bank has begun investigating foreign investments by Indian companies.

Other Markets

• Equities fell heavily before the weekend and have yet to stabilize. Nearly all the bourses, but South Korea, Singapore, and India fell in the Asia Pacific region, while Europe’s Stoxx 600 is off about 0.25% after dropped nearly 1.5% before the weekend. US Nasdaq futures are off slightly while the S&P futures are off about 0.3%.

• Benchmark 10-year yields soared at the end of last week. The US, Germany, Japan, and UK saw their benchmark yield rise to the highest in more than a year. The 18 bp increase in the 10-year Treasury yield was second most in the G10 after the 20 bp increase in the 10-year JGB. Yields have begun the week with a firmer bias. Japan’s Prime Minister Takaichi has endorsed a supplemental budget in response to the rise in commodity prices and this weighs on supply concerns. While the 10-year JGB yield edged up to 2.71%, the long-end of the curve, the 30- and 40-year yields rose 6-9 bp. European benchmark yields are mostly a little firmer. The 10-year Gilt yield is an exception, off 2 bp. The 10-year US Treasury yield is almost a basis point firmer near 4.60%. The 30-year Treasury yield is a bit firmer at 5.13%.

• Rising rates and a stronger dollar pressed gold and silver lower before the weekend. Gold reached almost $4774 last Tuesday and probed $4512 ahead of the weekend. It slipped below $4500 today for the first time since the end of March. It recovered to almost $4560 in early European activity but stalled. A close below $4500 could target $4400. Silver was turned back after it approached $90 in the middle of last week. It settled the week below $77. Follow-through selling today saw it dip below $74 before steadying.

• July WTI settled at two-week-highs, a little above $101. It set a new contract high today around $104.35. The previous contract high was recorded on April 30 (~$103.80), the same day that the Bank of Japan reportedly intervened to support the yen.

Data

• It is a lighter week for US data. The May New York Fed’s service survey poses little more than headline risk. Its manufacturing survey, reported at the end of last week, softened to 7.3 from 11.0. Services were already under-performing in April at -14.0. The March TIC data is due toward the end of the session. Contrary to a common narrative of the drying up of foreign interest in US stocks and bonds, the TIC data showed foreign investors bought a net $1.41 trillion of US paper assets in 2025, up from $1.22 trillion in 2024 and almost $840 bln in 2023. It is a volatile series, and every quarter last year saw one month of net liquidation. In Q1 26, January saw a net outflow, but it was more than made up for by the $184.50 bln net inflow in February.

• Australia ordered the largest shareholders in critical minerals company to liquidate their stakes due to national security issues. Of the six largest owners, five are registered in China/Hong Kong, and one in the British Virgin Islands. The companies were given two weeks to divest. The six investors own a little more than a quarter of the company. The Australian government’s effort to reduce foreign ownership of the company began in 2024.

• Japan reports Q1 26 GDP first thing tomorrow. With less of a drag coming from inventories and a small contribution from net exports, the Japanese economy is expected to have expanded by about 0.4% after 0.3% growth in Q4 25. The annualized pace is projected to rise to 1.6% from 1.3%. Consumption and business spending are expected to slow. The GDP deflator may moderate to around 3.1% from 3.4%, according to the median forecasts in Bloomberg’s survey.

• China reported disappointing April real sector data earlier today. According to Beijing, the economy grew by 1.3% quarter-over-quarter in Q1 26 for a 5.0% year-over-year pace. The second quarter began poorly. Retail sales and industrial production slowed. Retail sales rose by 0.2% year-over-year after rising 1.7% in March. Industrial output rose 4.1% year-over-year, down from 5.7% in March. After falling, perhaps due to the anti-involution campaign (over-investment) in the last four months of 2025, fixed asset investment appeared to have stabilized in March but fell 1.6% in the year-to-date year-over-year measure after rising 1.7% in March. Despite years of efforts, the Chinese property market remains a drag. House prices continue to fall, property investment is contracting, and residential property sales are running almost 16% below last year’s sales through April.

Disclaimer

Week Ahead: Rising US Rates Underpin Greenback

noreply@blogger.com (Marc Chandler) — Sat, 16 May 2026 07:03:19 -0400

The US economy appears to be re-accelerating here in Q2 after nearly grinding to a halt in Q1 (0.5% annualized pace). April US CPI and PPI were more elevated than expected. The anticipated average effective Fed funds rate in December rose more than 15 bp in the past week and is up slightly more than 75 bp since the war on Iran began. The Dollar Index rose almost 1.4% last week, its best week since the first week of March.

In addition to the swinging pendulum of market expectations for the Federal Reserve, which has a new chair (and will likely usher in a new era for the central bank), UK political drama that appears likely to bring down Prime Minister Starmer, added to the pressure on sterling and UK stocks and bonds. The market has taken the yen to its lowest level since the end of April's apparent intervention. It will begin the week ahead testing the resolve of Japanese officials. Lastly, Trump-Xi meeting was heralded as a success by both sides. Despite Beijing promises to buy more beans, beef, planes, and energy) from the US, Washington is a dilemma. If it proceeds with the $14 bln arms package to Taiwan, it will risk the wrath of Beijing, but it is shelved, the administration's domestic critics will cry "appeasement".

Drivers: There are two main drivers of the Dollar Index now: Changes in US rates and risk-environment. The rolling 60-day correlation of changes in the Dollar Index and two-year yields is near a six-month high a little over 0.50. The correlation with changes in the 10-year yield is slightly higher. Changes in the two and 10-year yields are around 0.90 correlated over the past 60 days, which is the most in three years. Changes in the Dollar Index and the VIX are correlated over the past 60 days by the most since June 2024 (~0.4)9. The Dollar Index is inversely correlated with the S&P 500 itself, and the inversion over the past 60 sessions is the most since January 2023 (~-0.57).

Data: After the recent jobs and inflation data, this week's high-frequency reports are of a secondary importance. Economists pour over the March TIC report and the minutes from the recent FOMC meeting, but the impact on the capital markets may be minimal. May survey data (including the preliminary PMI, the Philadelphia Fed's monthly survey) may pose headline risk. The Atlanta Fed's GDPNow sees the economy tracking 3.7% growth here in Q2 after Q1's 2.0% annual pace.

Prices: With last week's advance, the Dollar Index has recouped a little more than half of what is lost in the pullback from the year's high set on March 31 (~100.65). The next retracement target is in the 99.50 area, which is also the top of an old gap (from the lower opening on April 8). The momentum indicators are constructive, and the five-day moving average crossed back above the 20-day moving average. A move toward 100.00 looks reasonable.

EMU

Drivers: The euro is more sensitive to changes in the short-term US rates than it is to short-term German rates. The 60-day correlation between changes in the euro and the US two-year yield is inverse by nearly -0.50, the most extreme since last November. Intuitively, this makes sense. Higher US interest rates make the dollar more attractive. Yet the 60-day correlation between changes in the euro and changes in Germany's two-year yield is also inverse (~-0.30). Theory says the differential should be more important but the rolling 60-day correlation with the exchange rate is much weaker and statistically insignificant (~-0.10).

Data: With Q1 GDP in hand (0.1%), the eurozone's March trade and current account surplus are largely old news, as is the final April CPI and March construction spending. The preliminary May PMI is due on Thursday. The market remains confident that the ECB will hike rates when it meets on June 11. The swaps market has nearly 80% probability discounted and is pricing in two hikes fully and a little more than a 60% chance of a third.

Prices: For the third time this year, the euro declined for five consecutive sessions. The drop has seen int retrace about half of what it gains since the mid-March low near $1.1410. With the momentum indicators falling and the five-day moving average crossing below the 20-day moving average, there appears to be scope for additional near-term losses. Initial support is seen in the $1.1580-$1.1600 area and a break could signal a move toward the April lows near $1.1500. It may take a push back above the $1.1685 area to stabilize the technical tone.

PRC

Drivers: The PBOC has continued to use the fix to signal its tolerance for a stronger yuan and weaker dollar. While some observers linked to it last week's Trump-Xi meeting, we see it has having begun around the middle of last year. Moreover, the rolling 60-day correlation between changes in the Dollar Index and the offshore yuan is near 0.80, the highest in nearly a decade.

Data: China reports April macro data early Monday. Both retail sales and industrial output are expected to rise sequentially on a year-over-year basis. Several large Chinese cities have taken measures to support the housing market but new and used house prices likely continued to decline, and property investment looks weak. Beijing appears to be relying more on fiscal policy to support the economy than new monetary measures, and the market has backtracked from earlier speculation of a rate cut. Without new signals from officials, the prime loan rates will remain steady when set on May 20.

Prices: The dollar's broad recovery points to a consolidation of the yuan after it rose to new three-year highs. The greenback was sold to about CNH6.7815 on May 14. Ahead of the weekend, the dollar settled above the five-day moving average for the first time this month. It reached CNH6.8140. A band of resistance may extend from CNH6.8150-CNH6.8250. The CNH6.85 area may offer a more formidable cap.

Japan

Drivers: The threat of intervention tempers the bearishness toward the yen. Still, the yen seems to be driven by two main considerations. The first is the dollar's general direction. The rolling 60-day correlation between changes in the dollar-yen exchange rate and the Dollar Index is near 0.75, the upper end of this year's range. The second is the 10-year US yield. Changes in the dollar-yen exchange rate and the 10-year Treasury yield are hovering near 0.60, the highest since last October. The rolling 60-day correlation between the exchange rate and Japan's 10-year yield has a positive sign, and while the less than 0.10 correlation is statistically insignificant, it is near highest in four months.

Data: Japan reports Q1 GDP on Tuesday. The median forecast in Blomberg's survey calls for a 0.4% quarter-over-quarter growth (0.3% in Q4 25) and 1.4% at an annualized rate (1.3% in Q4 25). The GDP price deflator is seen slightly softer at 3.2% from 3.4% in the previous quarter. The April trade figures are also due, and there is a strong seasonal pattern (16 of 20 years) that balance deteriorates in April. Despite the undervalued yen on most metrics, Japan continues to run a trade deficit. The 12-month average shortfall in March was a little more than JPY145 bln. The rolling 12-month average was last positive (surplus) in October 2021. The average monthly deficit in Q1 26 was JPY162.1 bln. At the end of the week, the national April CPI is due. The Tokyo report out in late April hints at little changed to slightly firmer headline rate but it is all about fresh food and energy, without which Tokyo CPI eased to 1.9% from 2.3%. The median forecast in Bloomberg's survey was for 2.2%. Recall that the national core measure, which excludes fresh food, was below the 2% target for the second consecutive month. Meanwhile, the swaps market has almost a 75% chance of a hike discounted for next month's BOJ meeting and about the same probability of another hike before the end of the year.

Prices: The yen fell every session last week and slumped to its lowest level since the BOJ is believed to have intervened on April 30. The apparent common front offered by US Treasury Secretary Bessent and Japanese officials did not deter the market from lifting the dollar to around JPY158.65 before the weekend. Note the day before the April 30 intervention, the one-month implied volatility set a new four-year low near 6.6%. The implied three-month vol made a new four-year low early last week near 7.6%. Still the market may turn cautious as the JPY159 area is approached.

Drivers: Sterling is highly correlated with the euro. Around 0.90, the rolling 60-day correlation is near the highest since the end of 2023. However, unlike the dollar, sterling moves inversely to UK rates. What is striking is not the actual correlation, which is modest at best (~0.20) but the sign. And for the record, the exchange rate is more inversely correlated with US than UK rates (~-0.45).

Data: This is an important week for UK data. It includes the data points for which investors and policymakers place much emphasis. This includes an update on the labor market, consumption (retail sales), and prices. Then there are the preliminary May PMI and April government finance figures. Before the BOE meets on June 18, it will have the May CPI in hand, but this is the last report on retail sales and employment. The swaps market has about 30% chance of a hike discounted, which is the lower end of where it has been since mid-March.

Prices: Sterling's advance from the year's low at the end of March (~$1.3160) stalled in front of $1.3660 twice earlier this month. The greenback's broad recovery and the political drama unfolding in the UK saw sterling drop every session last week. It overshot the (61.8%) retracement of the rally since the end of March, found near $1.3350. Although the momentum indicators are still falling, sterling settled below the lower Bollinger Band for the second consecutive session before the weekend. Initial support is now pegged around $1.3300. On the upside, the $1.3400-25 must be overcome to stabilize the technical tone.

Canada

Drivers: There is a US dollar-driven move now and the USD-CAD exchange rate's rolling 60-day correlation with changes in the Dollar Index has eased from the near 0.80 seen in March, the highest since July 2024, but above 0.60 is still fairly strong for it. Also, there seems to be some sensitivity to general risk appetite. Using the S&P 500 as a proxy, the correlation with changes in the exchange rate is around -0.50, which is among the most extremes it has recorded for the last couple of years.

Data: The Canadian economy is struggling. It lost almost 47k full-time positions in April, the third consecutive monthly loss. The composite PMI has risen in four of the last five months but is still below the 50 boom/bust level. StatCan reports April CPI and March retail sales in the week ahead. April CPI accelerated and the question is magnitude, and last April's 0.1% decline drops out of the 12-month comparison will amplify the increase. March retail sales are due at the end of the week. They will be flattered by the rise in prices (CPI rose 0.9% in March). The market has pushed a Bank of Canada rate hike further it. The swaps market recognizes little chance of a hike before late Q3. It is pricing in 40 bp of hikes this year, down from 60 bp earlier this month and a peak of almost 80 bp on March 20.

Prices: The US dollar begins the new week with an eight-session advance in tow. It has risen in 10 of the past 11 sessions. The gains were sufficient for it to retrace (61.8%) of its losses from the year's high recorded at the end of March near CAD1.3965. The momentum indicators suggest the greenback has more room to appreciate, though it did settle above its upper Bollinger Band. The next technical target is in the CAD1.3800-10 area. A close below CAD1.3690 could be an early sign that a top is in place.

Australia:

Drivers: The rolling 60-day inverse correlation of changes in the Australian dollar and the Dollar Index is near -0.80. It was briefly more extreme in early Q4 25 but not by much. The 60-day correlation between the exchange rate and the US two-year yield is almost -0.50, the extreme since September 2025. The Aussie's correlation with its own two-year yield is also inverse (~-0.15). Higher oil prices are correlated with a weaker Australian dollar. The inverse correlation with Brent is around -0.40. It reached -0.45 last August, which appears to be the most extreme for at least 20 years.

Data: With the third rate cut of the year delivered recently, the central bank seems to have signaled that it will pause but it is not sure that it has tightened sufficiently. The futures market has the next hike fully discounted for September. This week's data might not materially impact expectations, but the market will get some insight into how the central bank is thinking about the risks as the record of recent meeting will be published. The preliminary May PMI will likely the moderate expansion continues, but the most important report is on the labor market on Thursday. While changes in full-time employment are often volatile, it is doing well. It grew such positions by an average 26k a month in Q1, the most since Q3 24. In Q1 25, it lost about 22k full-time jobs. With one exception (September 2025), Australia's unemployment rate has been steady between 4.1% and 4.3% since the end of 2024.

Prices: The Australian dollar's consolidation was resolved to the downside at the end of last week. The Aussie had been trading within the May 6 range (~$0.7180-$0.7280 until May 15, when it was pushed to $0.7140. It settled below the 20-day moving average (~$0.7190) for the first time since April 7. The momentum indicators are curling lower. The next technical target is near $0.7100, and potential may exist toward $0.7050.

Mexico

Drivers: Changes in the US dollar-Mexican peso exchange rate and the Dollar Index are nearly 0.70 correlated over the past 60 sessions. It rarely has gotten much higher. The exchange rate is also sensitive to the changes of the two-year US yield (~0.43), the most in three years. The dollar tends to rise against the peso when oil prices are rising. The 60-day correlation is a little above 0.50, the highest in at least two decades. The exchange rate is sensitive to the overall risk environment. The 60-day rolling correlation between changes in the exchange rate and changes in the S&P 500 is around -0.75, the most in six years.

Data: The Bank of Mexico left open the possibility of a rate cut at next month's meeting. The data due in the coming days may not impact expectations. March retail sales are due, but Q1 GDP is already out, and although its 0.8% contraction could be revised this week, there is no doubt that the economy is weak. In the three months through February, retail sales were flat. And remember this in nominal in the face of CPI that is above 4%. The CPI for the first half of May likely confirmed it remained above the upper end of the target range.

Prices: The dollar jumped out of its consolidative range against the peso ahead of the weekend. The greenback poked above MXN17.40 and settled above the 20-day moving average for the first time this month. Near-term potential may extend toward the recent highs, ~MXN17.55-MXN17.58.

Disclaimer