Marc to Market

August 2026 Monthly

noreply@blogger.com (Marc Chandler) — Sat, 1 Aug 2026 07:15:00 -0400

Fifty-five years ago this month, US President Nixon closed the gold window. It was presented as temporary, but it became permanent and launched the dollar into a half-century of dominance nobody sitting in the room that weekend would have bet on. Now, on the anniversary, the cracks are getting harder to paper over.

Let's go back to the beginning because the origin story explains everything that follows.

How We Got Here

The Bretton Woods agreement was struck between Dexter White for the US and John Keynes, nominally for the UK but really negotiating on behalf of debtor countries everywhere. The deal pegged the dollar to gold at $35 an ounce, and everyone else pegged to the dollar. Simple, elegant, and doomed. It institutionalized power relationships as if the post-war situation was going to be sustained. Although Bretton Woods allowed for adjustments of the pegs, political considerations made them more rigid.

Still, it worked until it didn't. By the late 1960s, the US was running persistent balance-of-payments deficits, and foreign central banks were sitting on more dollar claims than Fort Knox could cover. Europe, in particular, wanted more gold than Nixon was willing to hand over.

What followed Nixon's unilateral announcement, which some argue was a default, was two years of improvisation: The Smithsonian Agreement. The snake in the tunnel. A string of half-measures trying to rebuild some version of fixed rates. All of it fell apart by 1973. Currencies floated, and the interesting part is what didn't happen next: the dollar didn't lose its throne.

Why the Dollar Stayed King

Nothing else was deep enough, liquid enough, or legally robust enough to take the dollar's place. The mark and yen were regional currencies playing a global role they weren't built for. Sterling was already a memory of empire. The dollar's advantage was self-reinforcing then, and it still is now. That's not an accident of history. It's a structural moat.

The early weaponization of the dollar, against the US special ally, the UK, gave birth the offshore dollar, dubbed the Eurodollar market. US banks booking deposits in London to dodge domestic rate ceilings, foreign holders (the Soviets included) parking dollars offshore to keep them out of Washington's reach. In the 1956 Suez Crisis, Washington had already shown it would use the dollar as leverage. It threatened to withhold IMF support that London sought and possibly sell sterling from its reserves unless the UK pulled out of Egypt.

The Eurodollar system underpins global trade finance to this day. The Federal Reserve has supported the market that it does not regulate. The Federal Reserve has standby liquidity swap lines with several major central banks and in past crisis has offered the facility to other central banks on ad hoc basis.

The Federal Reserve launched the Foreign and International Monetary Authorities repo facility in 2022. It allows approved foreign central banks and international monetary authorities to temporarily exchange their Treasury holdings for dollars. Quantitative Easing (QE) and broad dollar liquidity easing during the Great Financial Crisis and again during the pandemic, also support the offshore dollar market.

Weaponization

September 11 changed the calculus. Treasury's Office of Foreign Assets Control turned the dollar's centrality into an actual policy weapon, cutting terrorist financiers off from SWIFT and correspondent banking. That started as counterterrorism. It didn't stay there. Iran, Venezuela, North Korea, Russia, didn't quit the dollar system. They got fired from it. Secondary sanctions made sure other countries fell in line too.

Freezing roughly $300 billion in Russian central bank reserves after 2022 was a different order of escalation entirely. The message landed everywhere, not just in Moscow: Dollar reserves, and euro reserves too, are not sovereign in any absolute sense. They sit at the pleasure of Washington and its allies. When the US then threatened Canada and Denmark, both NATO members, that drove the point home even harder. If treaty allies aren't insulated, nobody is.

You can see the response building in the data. IMF COFER figures show the dollar's share of global reserves sliding from roughly 72% at the turn of the century to under 58% today. A recent Official Monetary and Financial Institution Forum (OMFIF) survey found emerging-market central banks actively planning to trim dollar allocations over the next few years, with the euro and yuan the likely beneficiaries, and real curiosity building around smaller currencies like the Singapore dollar.

Gold is having its own moment in this story. A net 30% of central banks surveyed expect to add to gold holdings over the next one to two years. If you're a reserve manager worried about confiscation risk, bullion is the obvious answer. Nobody can freeze what sits in a vault at home.

The Counterweight Nobody Wants to Talk About

Yet this isn't the whole picture. The US runs a current account deficit near $1 trillion a year. By simple accounting identity, foreigners have to absorb an equivalent volume of US assets: bonds, equities, real estate, direct investment. There's no way around this arithmetic.

And the money keeps showing up. Foreign investors bought $1.43 trillion of US stocks and bonds last year, up from $1.2 trillion in 2024 and $840 billion in 2023. That's not the behavior of capital fleeing the dollar system. That's capital voting with its feet, over and over again, for dollar assets.

So, which is it? Is the dollar being abandoned, or is it still the destination of choice? The honest answer is both, just not in the way headlines suggest.

The real question isn't whether foreign capital keeps showing up. It's which assets it buys and at what price. A rotation out of Treasuries into equities, or out of long-duration debt into bills, would hit the term premium and raise the cost of financing the deficit. That's the mechanism worth watching. Not some cinematic exit from dollar assets that never actually arrives. De-dollarization is a slope, not a cliff, and the slope's angle is what matters here, not the direction.

Where This Leaves Us

Fifty-five years on, the dollar is still the world's number one reserve currency, the transaction currency of choice, and the ubiquitous unit of account. But something intangible, and essential, has slipped away: trust. The weaponization of the dollar crossed a line somewhere along the way, and the broader turn toward economic nationalism and short run transactionalism has alienated exactly the allies who used to provide the system's quiet stability.

Expect the erosion in reserve share to continue even if at glacial speeds. Expect alternative payment systems to keep chipping away at pieces of monetary sovereignty. But a genuinely multipolar currency order, if it ever arrives, is a story measured in years, not months.

And it would be naive to think the midterms this year, or the 2028 election, arrest any of this. The dynamic is bigger than any single election cycle. It's bigger than any single administration.

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. In July, it recouped about half of the 1.1% it lost in June. It is up about 0.70% this year after it rose by 3.7% last year, which was the first increase since 2020.

Turning to the components of the index, the greenback itself was unchanged, of course. It accounts for about a third of the index and dampens the volatility of the BWCI. The other five G10 components rose against the dollar. The euro's roughly 0.65% gain was the least. The others rose by at least 1%. The intervention on July 30 helped lift the yen by nearly 2%, which was the strongest of the major currencies.

Turning to the emerging market components, two of the six fell. The Russian ruble fell the most in the index, losing about 1.15%. The Indian rupee fell by about 0.75%. Intervention seemed most effective in South Korea where the won rose by about 7.7%, making it the strongest component. Yet, its weight is slightly less than 2.0%, means marginal impact. . The Chinese yuan, which has about a 21.5% weight rose by 0.25%, while the Brazilian real, with almost a 2.5% weight, rose by about 1.65%.

BWCI rose from late June through the middle of July. It stalled and drifted lower before the combination of the uninspiring Federal Reserve and BOJ intervention weighed on the greenback broadly. BWCI finish July at its best level since mid-June.

U.S. Dollar: The dollar fell against the G10 currencies in July but the Swiss franc. The greenback had been mixed until late in the the month when the market took the dollar down after the FOMC failed to convince the market that is was serious about reaching the 2% inflation target, which it has missed more more than five years. Rhetoric has less heft than action and what was expected to be a hawkish hold turned out saw US short-term rates fall despite the three regional presidents dissents in favor of an immediate hike. The following day, it appears the Bank of Japan intervened. A preliminary review of the changes in the Bank of Japan's balance sheet suggests it sold almost $53 bln, and reports suggest that as was the case earlier this year, the Federal Reserve checked prices and indicated it was doing so on behalf of the US Treasury. The US Q2 26 GDP slowed to 1.5% from 2.1% in Q1. It was dragged down by trade (-1 percentage point) and inventories (-2/3 of a percentage point). Real final sales to private domestic purchasers (excludes trade, inventories, and government) accelerated to 3.9% from 1.7%. Consumer spending rose 3.2% the most in three quarters. The US labor market is proving resilient, with the four-week moving average is below 200k for the first time in almost four years. The Fed funds futures imply about 36 bp tightening, little changed on the month.

Euro: The euro rose by about 0.7% in July, which pared its loss to about 2.1% for the year. The regional economy continues to struggle under three shocks, China's growing market share, especially in autos, the energy shock, emanating from the war in the Middle East, and the ongoing US tariff threats. In addition to the ongoing investigation into "excess capacity" the US has threatened an investigation into the EU's $1 bln (890 mln euros) fine on Google for self-preferencing and app store anti-steering restrictions, with a new levy the expected outcome. The eurozone economy continues to struggle. After stagnating in Q1 26, the eurozone grew by 0.2% in Q2 26, while the year-over-year growth is uninspiring at 0.5%. Inflation remains elevated and the preliminary July estimate was 2.9%. It was at 1.9% before the Middle East war began. August, the month of summer vacations in Europe, will likely be quiet on the political front. However, Le Pen is leading the opinion polls for next spring's presidential election. There are three state elections in Germany in September, and the AfD could win its first state (Saxony-Anhalt). There is speculation at Italy's Meloni will call for national elections next April.

(As of July 31, indicative closing prices, previous in parentheses)

Spot: $1.1527 ($1.1384) Median Bloomberg One-month forecast: $1.1512 ($1.1493) One-month forward: $1.1541 ($1.1398) One-month implied vol: 5.2% (5.6%)

Japanese Yen: The 10-year Japanese government bond yield has risen by slightly more than 70 bp this year, well more than any other G10 country, including the US, where the 10-year Treasury yield has risen by about 56 bp. Yet, the yen has continued to trend lower, reaching new 40-year low in late July. While the yen is sensitive to interest rate developments, many observers are looking in the wrong place. The rolling 60-day correlation between changes in the dollar-yen exchange rate and changes in US two- and 10-year yields is 0.25-0.40, while the correlation with changes in Japanese rates is less than 0.10. Moreover, the correlations with US interest ratees is greater than the correlation with the two- and 10-year interest rate differentials. The core measure of CPI (excludes fresh food) has not been above the 2% target this year. Among the G10, only Switzerland has lower inflation than Japan. Nor will another quarter-point rate hike necessarily make much of a difference, given the external factors, like elevated oil prices, ongoing Middle East tensions, and a hawkish Fed outlook. The Japanese government opened a new front in efforts to support the yen and JGB market. It wants Japanese pension funds and households to boost domestic investment. And that is what appears to be taking place this year. Weekly data shows that Japanese investors have sold about JPY24.3 trillion (almost $153 bln) of foreign bonds this year after purchasing JPY10.1 trillion in the same period last year. Equity flows are considerably less, but Japanese investors have bought about JPY9.6 trillion of foreign equities this year compared with JPY6.2 trillion in the year ago period. Preliminary indications suggest the Bank of Japan intervened on July 30 to sell almost $53 bln to support the yen. The US stepped up its verbal intervention into the month end and the greenback finished July below the 200-day moving average (near JPY158) for the first time since last October.

Spot: JPY157.40 (JPY161.74) Median Bloomberg One-month forecast: JPY158.81 (JPY160.11) One-month forward: JPY157.04 (JPY161.35). One-month implied vol: 9.1% (6.8%)

British Pound: The rally that began from the year's low in late June ($1.3140) continued through mid-July when sterling reached a two-month high, near $1.3560. It stalled amid a broader US dollar recovery and fell back to $1.3300, meeting a technical retracement target. However, it recovered and reached almost $1.3500 at the end of the month. As widely expected, the UK got its seventh prime minister in the decade since the Brexit referendum in 2016. Prime Minister Burnham nearly immediately announced several small measures meant to signal concern about "affordability", including the removal of the value-added tax from electric bills, capping bus fares, and reduction of taxes for pubs, social clubs, and live music venues. The new government inherits a fiscal situation that leaves minimal flexibility. The government borrowed GBP2.7 bln more than the Office for Budget Responsibility forecast in March in the first three months of the new fiscal year (revenue was GBP2.4 bln higher but spending rose by GBP3.6 bln). Higher market interest rates will boost the debt servicing costs. After growing by 0.6% quarter-over-quarter in Q1 26, matching the strongest since Q1 24, the economy likely slowed to a 0.1%-0.2% in Q2 26 and in the second half of the year. The Bank of England stood pat at the July meeting, and the swaps market has about a 30% chance of a hike at the next meeting in September.

Spot: $1.3483 ($1.3200) Median Bloomberg One-month forecast: $1.3378 ($1.3235) One-month forward: $1.3485 ($1.3205) One-month implied vol: 5.6% (6.3%)

Canadian Dollar: The US dollar reached nearly CAD1.4250 at the end of June, its highest level since April 2025. As the US two-year premium over Canada narrowed, the greenback pulled back to slightly below CAD1.4000 in late July. After contracting by 1.0% in Q4 25 and -0.1% in Q1 26 (annualized rates), growth appears to have returned in Q2 26, helped by an increase in government spending. US trade policy is still a headwind, and it may be intensifying if the 50% tariffs threatened on a $20 bln of variety of Canadian products (e.g., electrical equipment, packaging, hockey gear, beer, and dairy) that could be implemented as soon as August 19. Under Prime Minister Carney's leadership, Canada is taking strong measures that will diversify exports away from the United States. Still, his Liberal Party needs to win at least one of three byelection in late August to retain its slim control of the House of Commons. The Bank of Canada cut its overnight lending rate (now 2.25%) last October. It will likely remain on hold in the coming months, but the swaps market is pricing in about a 70% chance of a hike before the end of the year.

Spot: CAD1.4021 (CAD 1.4196) Median Bloomberg One-month forecast: CAD1.4010 (CAD1.4159) One-month forward: CAD1.4005 (CAD1.4192) One-month implied vol: 4.0% (4.5%)

Australian Dollar: The Australian dollar recovered from a three-month low at the end of June ($0.6865) to $0.7045 at the end of July. It has risen in four of the past five weeks, and is up 5.25% this year, which is the second-best in the G10 behind the Norwegian krone (up about 6.25%). The Reserve Bank of Australia hiked rates three times between late February and late May. The economy remains resilient and June employment data and preliminary July PMI suggest that the rate hikes have had minimal impact on the economy, including private sector credit, household spending, and inflation expectations. Meanwhile, Australia's goods trade balance is deteriorating. The May deficit, reported in early July, of A$3.02 bln, the largest monthly gap since 2015. Exports fell 6.9% in May The average monthly trade surplus fell to A$820 mln in the first five months of 2026 compared with an average of nearly A$4.2 bln a month in the January-May 2025 period. Goods exports have fallen by an average of 0.1% this year, while goods imports have soared by an average of 2.8% a month. The disruption from the Middle East war has seen prices for fuel and lubricants rise dramatically, but the softer than expected June and Q2 CPI saw the futures market downgrade the likelihood of another hike this year to about 50%.

Spot: $0.7019 ($0.6896) Median Bloomberg One-month forecast: $0.7009 ($0.6964) One-month forward: $0.7015 ($0.6893) One-month implied vol: 7.3% (7.7%)

Mexican Peso: Within the broad consolidation seen last month, the dollar approached the upper end of our target range (MXN17.58-MXN17.65 in the July monthly) and remained slightly below the June high (near MXN17.6765). At the end of the month, the dollar pushed through the shelf it had forged in the MXN17.35-MXN17.37 area and fell slightly through MXN17.3150. The Mexican economy found better traction in Q2. After contracting by 0.6% (quarter-over-quarter) in Q1 26, the Mexican economy grew by 1.3% in Q2. However, growth is uneven. Consumption slowed as did government spending. The external sector improved. After it recorded trade deficit of a little more than $1 bln in Q1 26, Mexico's trade balance swung back into surplus in Q2 26 to the tune of $10.87 bln. That was the largest quarterly trade surplus since the end of 2020. The June unemployment rate rose to 2.9%, the highest since September 2024. On the other hand, the headline and core inflation rates have slipped back into the 2-4% target range. The central bank meets on August 6 and the swaps market has about a 40% chance of a hike discounted, which seems a bit rich. Lastly, we expect Mexico to acquiesce to US pressure to boost steel tariffs and offer greater protection for domestic truck makers.

Spot: MXN17.3426 (MXN17.5053) Median Bloomberg One-month forecast: MXN17.39 (MXN17.5310) One-month forward: MXN17.4470 (MXN17.5490) One-month implied vol: 7.6 (8.5%)

Chinese Yuan: The JP Morgan Emerging Market Currency Index fell for the second consecutive month in July. It was the first back-to-back monthly decline since the end of 2024. The Chinese yuan rose by about 0.5% on the month. Still, year-to-date the RMB has appreciated by about 3.5%, which leads the region and is the fourth strongest emerging market currency this year behind the high-yielding Colombian peso, Brazilian real. and Mexican peso The PBOC gradually reduced the dollar's fix over the course of the month. It fell from CNY6.8109. at the end of June to a 3.5-year low of CNY6.7892 on July 30. China's Q2 26 growth disappointed at 4.3% year-over-year, its slowest pace since the end of 2022. Many observers anticipate new measures to come after the conclusion of the late July Politburo meeting, but it may opt for implementing previously announced efforts. Meanwhile, given the shifting US tariff regime, the average effective US tariffs on China appears to have fallen to 25.5%-26% from almost 34% at the end of last year, according to Penn Wharton Budget model. Moreover, the pending Section 301 excess-capacity investigation covering 16 economies including China is still outstanding and could raise Chinese electronics rates by another 10 points before year-end. The US and China ae reportedly moving toward establishing investment and trade boards ahead of the likely trip by President Xi to the US in September. Chinese shipments rare-earth magnets to the US remain below pre-trade war levels. Beijing has also weaponized its near monopoly it enjoys on processing critical materials to the detriment of Japan and Europe, as well.

Spot: CNY6.7515 (CNY6.8005) Median Bloomberg One-month forecast: CNY6.7525 (CNY6.7900) One-month forward: CNY6.7525 (CNY6.8121) One-month implied vol: 2.3% (2.3%)

Disclaimer

Greenback Consolidates after Being Rocked by the US Fed and Japan's Ministry of Finance

noreply@blogger.com (Marc Chandler) — Fri, 31 Jul 2026 06:59:32 -0400

The Federal Reserve’s reluctance to take action despite pledges to respect the inflation target, which has not been met in over five years, put the dollar under pressure. Then yesterday, it appears that Japanese officials may have intervened in the foreign exchange market, and as was the case earlier this year, the Federal Reserve reported checked on prices and indicated they were doing so at the request of the US Treasury. If true, it illustrates a notable difference between Japan, which tries to overwhelm the market with size (intervention and the BOJ’s balance sheet expansion), while the US tries finesse. Still, the MOF’s decision to intervene, and a preliminary review of the BOJ’s balance sheet suggests intervention involved selling almost $53 bln was not matched by the BOJ itself, which not only did not raise interest rates but shaved this year’s core inflation projection.

After the large moves in the foreign exchange market between the FOMC and MOF/BOJ, the currency market is mostly confined to narrow ranges (except the yen where officials have injected volatility), with most pairs not seeing any follow-through action. Oil prices are firm, but September WTI is poised to snap a three-week 30% surge. Chip and AI stocks are back in favor, with surges in the Japan, South Korea, and Taiwanese markets today. The Nasdaq looks poised to gap higher.

Prices

G10

• The euro held above the three-month downtrend that was violated after the FOMC meeting on Wednesday. It comes in near $1.1410 today. As US short-term interest rates continued to fall, the euro rose to almost $1.1540. It is consolidating, but in a little less than a 1/3 of cent range today below $1.1530. Some of the buying may have been related to the 3.6 bln euros in option at $1.1500 expire today and another 2.5 bln euros there that expire next Tuesday and Wednesday. The euro settled above the upper Bollinger Band yesterday, found near $1.1505 today.

• In late Tokyo yesterday, Prime Minister Takaichi confirmed speculation that the government will cut the sales tax on food and soft drinks to 1% starting in the new fiscal year near April. It also will help eligible families with cash subsidies. She denied the funding would come from new bonds and instead will seek non-tax revenue through a review of special accounts and government funds. The dollar was sold aggressively against the yen. It fell below JPY158 for the first time since May 14. The sharpness of the move spurred talk that the BOJ may have intervened and as was the case in January, the Federal Reserve reportedly checked on rates (usual event) but acknowledged it was on behalf of the US Treasury (unusual), though the timing was said to be late in the North American afternoon Early estimates based on changes in the BOJ’s balance sheet points to intervention of around JPY8.45 trillion (almost $53 bln). With the sharp drop, the greenback surpassed the (61.8%) retracement of the gains since the last intervention low (in May ~JPY155), found near JPY158.45. The dollar barely held above the 200-day moving average comes in today slightly below JPY158, which is also about the halfway mark of this year’s rally. The greenback has not traded below the 200-day moving average since last October. The dollar settled below the lower Bollinger Band, which is found near JPY160.25 today. The BOJ standpat decision helped the dollar recover to almost JPY160.90. Market nervousness over another possible intervention operation drove it back to around JPY158.55 in the European morning and is now hovering near JPY160. Japanese and US officials have in the past cited concerns about volatility, and what they did yesterday lifted one-month implied volatility to nearly 8.5%, a three-month high from around 6%, the lowest in around four years.

• Sterling reached the slightly above $1.3405 before the Bank of England’s 6-3 decision to stand pat. The central bank noted that inflation risks are tilted higher relative to the July Monetary Policy Report. Despite the optics, BOE Governor Bailey denied that the central bank was getting closer to a hike. In the broad dollar sell-off in the North America, sterling rose slightly through $1.3475. The upper Bollinger Band comes in near $1.3520 and the July high, which was a two-month high, nearly $1.3560. It is consolidating today in about a third of a cent range below $1.3470.

• The Canadian dollar edged higher yesterday, but as is often the case in a weak US dollar environment, it underperformed. The Canadian dollar’s 0.25% gain was the least among the G10 currencies. The US dollar slipped a little below CAD1.40 for the first time since mid-June but settled above it. Below the psychological support at CAD1.40, the CAD1.3980 area corresponds to the (38.2%) retracement of the US dollar’s rally from the May 1 low. A break could spur a move toward CAD1.39. The greenback has held above CAD!.40 so far today, but below CAD1.4025.

• After falling to a two-week low near $0.6920 on Wednesday, the Australian dollar recovered to almost $0.6990 in response to the FOMC decision. The gains were extended to nearly $0.7035 amid the broad greenback sell-off in the North American morning. It is one of the few currencies that extended yesterday’s rally today, albeit marginally. It rose to $0.7045, the highest since June 17. The upper Bollinger Band comes in slightly below $0.7040 today. The next technical target may be near $0.7055. It has found initial support near $0.7020.

• The broad dollar decline pushed it to nearly MXN17.32 yesterday and a little further today (~MXN17.3165), a new low for the month. Nearby support is seen in the MXN17.28-30 area, and last month’s low was slightly below MXN17.16. The Mexican peso’s 0.90% gain in July, depending on today’s action, offsets the June decline. Latam currencies did well yesterday, led by the nearly 2.7% rise in the Colombian peso (9.8% gain on the month coming into today).

• The offshore yuan settled yesterday at its best level since January 2023, and the dollar closed slightly below CNH6.7450. The minor follow-through sales today took to aroundCNH6.7425. There is little on the charts now ahead of CNH6.70. The market’s caution may have been spurred by the firm fix. With the greenback’s broad weakness, it seemed like the PBOC would lower the dollar’s reference rate. Instead, it was set slightly higher: CNY6.7894 vs. CNY7.7892 (which was a new low since February 2023.

• The Indian rupee reached three-week highs today, helped by the broad setback in the US dollar, and softer oil prices. Last week’s reserve figures will be released shortly, and speculation was intervention was heavy. The dollar settled near INR95.3925. This week was the first in six that the greenback fell.

Other Markets

• Equities are finishing the month on an upbeat note, helped by the Nasdaq snapping of a six-day slide yesterday with its biggest gain since mid-June. Huge moves in the some of the largest Asia Pacific bourses today with renewed interest in chips. Japan’s Nikkei rose 4%, Taiwan’s Taiex jumped nearly 8%, while South Korea’s Kospi surged almost 18%. Europe’s Stoxx 600 is up about 0.65%, its fifth gain in six sessions. It is up about 1.5% this week and has only declined one week in the past eight. Nasdaq futures are up nearly 1.2%, while the S&P 500 and Dow futures are up a little more than 0.5%.

• Benchmark 10-year yields unwound early gains yesterday and finished lower. The European bond market recovery was led by the UK Gilts (~-5 bp) on what was seen as a dovish hold by the Bank of England. The UK two-year yield fell 11 bp, the most since late May. Today’s two-year yields in Europe are 3-4 bp higher, while the 10-year rates are around two basis points higher. The 10-year Treasury yield is up almost one basis point to push slightly above 4.25%. It is off around 6.5 bp this week.

• Gold rose higher for the second consecutive session and reached $4120, its best level in a week, and settled slightly above $4100. The break today of the $4070 area suggests the yellow metal is still in a choppy trading range. It is near $4050 in late in the European morning. Silver was somewhat less impressive, though it settled at its best level in six sessions. Yet there was no follow-through buying today and silver is slipped below $58 in the European turnover after peaking a little above $59 yesterday.

• New hostilities in the Middle East lifted the September WTI contract to almost $86 in early European activity yesterday. The momentum was not sustained in North America, where participants still (want to suspect) the war is winding down. The session low, a few pennies below $83, was seen before the US cash equity markets opened. It was sold to almost $81 earlier today before it rebounded to new session highs near $84.30. It settled about five dollars higher last week. It will snap a three-week 30% rally.

Data

• The US reports Q2 Employment Cost Index. It measures direct costs (compensation) and indirect costs (benefits, Social Security contributions, training, taxes). They have moderated in the last three years but remain above the where they were pre-pandemic. The ECI rose on average by 0.80% a quarter in 2025 and that is what it is expected to have risen in Q2 after a 0.90% increase in Q1. Between the University of Michigan’s preliminary and final July survey results, we suspect sentiment deteriorated. That seems to be what the Conference Board’s survey picked up.

• Canada reports May GDP. StatCan says that the preliminary data points to 0.1% growth, while the median in Bloomberg’s survey is for 0.2%. In any event, the Bank of Canada has already acknowledged that economic activity is broadening.

• The consumer price index in the eurozone rose by 0.2% in July for a 2.9% year-over-year pace, on a preliminary basis. It was at 2.8% in June and had fallen below 2% before the Middle East war. The core rate was edged up to 2.5% from 2.4%. It was at 2.2% in January, the lowest since October 2021.

• Australia reported another robust rise in private sector consumer credit in June. The 0.8% increase is above this year’s average (0.6%) and appears to have seen no slowing despite the three rate hikes that have been delivered this year. Separately, it reported 1.3% increase in Q2 PPI (0.4% in Q1) for a 3.6% year-over-year rate (from 3.0%).

• It is a busy day in Japan. As widely expected, the Bank of Japan left its policy rate at 1.0%. Its revised forecasts include a small increase in this year and next growth forecast (0.6% from 0.5% this year, 0.8% vs. 0.7% next). It shaved this year’s core inflation forecast to 2.5% from 2.8%. A slew of economic data was also released. The highlights include an uptick in the pace of Tokyo’s July CPI, though the headline and core remain below 2%. The headline rose to 2.0% from 1.7%, while the core (excluding fresh food) rate rose to 1.9%. The June unemployment rate was steady June at 2.5%. Retail sales slumped a dramatic 4.1% in June, which offset the gains of the past two months. It was the largest decline since the early days of the pandemic. June industrial output rose a strong 1.3% (0.1% in May). It was the largest increase since last September.

• China’s July PMI reflects an economy struggling to sustain forward momentum. The manufacturing PMI fell to 49.2 from 50.3. The non-manufacturing fell to 49.0 from 50.2. The composite stands at 49.3 (50.6 in June), the lowest since the end of 2022.

Disclaimer

Federal Reserve's Thunder and no Rain Weighs on Dollar

noreply@blogger.com (Marc Chandler) — Thu, 30 Jul 2026 07:02:09 -0400

The decision to standpat on a 9-3 vote at the FOMC yesterday looked like a hawkish hold but it seemed like the more Chair Warsh affirmed the central bank’s commitment to achieving the inflation target, the more short-term interest rates and the dollar fell. The expected year-end effective Fed funds rate fell 15 bp from the session high yesterday. The 2-10-year yield curve steepened by 12 bp, completely unwinding the flattening of the last six consecutive sessions, and is now near 44 bp is the steepest since the end of May. The Bank of England, as widely expected, stood pat today, and the swaps market is discounting about 50% chance of a hike at the next meeting in September. There were three dissents. The Bank of Japan meets tomorrow, but it is also widely understood to be on hold.

The US two-year yield remains soft today and the dollar is consolidating with a softer profile against most currencies. The US Nasdaq has been unable to sustain upticks and has fallen for the past six sessions coming into today. Better tech earnings (Microsoft and Samsung) appear to be encouraging investors to try again today. Meanwhile, despite the new hostilities in the Middle East, oil prices are narrowly mixed, with WTI slightly lower and Brent slightly higher.

Prices

G10

• The euro jumped from a little below $1.1400 before the Fed’s standpat announcement and reached almost $1.1470 as short-term US interest rates fell. It settled at its best level in two weeks and above the 20-day moving average (~$1.1420 today). The euro is consolidating between about $1.1435 and $1.1485. The three-month downtrend was violated on a closing basis yesterday. The trendline is slightly below $1.1420 today.

• The yen approached its 40-year low yesterday. The dollar peaked around JPY163.90 shortly after midday in NY and was sold to about JPY163.25 after the Fed’s announcement. However, the dollar did not settle below Monday’s low, the neckline of a potential double top (~JPY164.00) that projects to around JPY162.60. It is still under pressure today, though with the dollar slipping to around JPY163.20 in the European morning. Perhaps, another way to look at the price action: the greenback is pinned between two large option strikes. There are options for $2 bln at JPY163 and $1.5 bln at JPY163.50 the expire today.

• Sterling held above Tuesday’s low (~$1.3275) and reached above $1.3370 after the FOMC announcement. It frayed resistance in the $1.3380 area, which houses the 20-day moving average and the (38.2%) retracement objective of sterling’s losses from the July 15 high (~$1.3560). It settled at $1.3370. The 200-day moving average is near $1.3400 and the (50%) retracement objective is around $1.3415. Sterling was sold in Asia to around $1.3335 before it rebounded in Europe to session highs near $1.3410.

• The Canadian dollar strengthened for the second consecutive session yesterday, and the US two-year premium over Canada narrowed for the second day, too. The greenback fell to a seven-day low yesterday, slightly below CAD1.4025. Last week, the dollar bounced smartly after approaching CAD1.4000. It is consolidating between about CAD1.4030 and CAD1.4070 today. Options for $1.12 bln at CAD1.4015 expire today.

• The Australian dollar recovered from (~$0.6920), its lowest level since July 14. It reached a new session high, slightly shy of $0.6990 and left an ostensibly bullish hammer candlestick. It is consolidating between about $0.6945 and $0.6975 so far today. Regaining a foothold above $0.7000 lifts the technical tone.

• The dollar approached the upper end of its recent range against the Mexican peso yesterday, near MXN17.54. The momentum was not sustained after the FOMC meeting and the greenback was sold to new session lows near MXN17.40 low, a four-day low. Despite trading on both sides of Tuesday’s range the settlement was near the middle of the day’s range, neutralizing the technical signal. The greenback was pressed back to MXN17.40 today and it is holding. The lower end of the recent range extends toward MXN17.35.

• The dollar posted an outside down day against the offshore yuan. It traded on both sides of Tuesday’s range and settled below its low. The US dollar was sold slightly below CNH6.7525 to record a new three-year low. The PBOC set the dollar’s fix at a new low since Q1 23 (CNY6.7892 vs. CNY6.7899 yesterday).

• The dollar recorded an inside day against the Indian rupee. Equity inflows appeared to have blunted the negative impact of firmer oil prices. The dollar rose for the first time in three sessions today and reached nearly INR95.7540. The three-day bounce in the rupee was the longest this month.

Other Markets

• Equities were uninspired by the decline in US short-term interest rates after the FOMC announcement. The Nasdaq briefly turned positive, but the upticks were sold into, and it finished lower for the sixth consecutive session ahead of Microsoft and Meta earnings. The former did better than the latter and Samsung’s reported upbeat sales today. Still equities were mixed most mostly lower in the Asia Paciifc region today. Europe’s Stoxx 600 is up a little more than a third of a percent to recoup yesterday’s loss. US index futures are trading higher, led by a nearly 2/3 of 1% gain by the Nasdaq.

• The jump in oil prices and renewed hostilities that dashed the creeping optimism earlier in the week saw benchmark 10-year yields rise mostly 6-8 bp in Europe. The 10-year US Treasury yield rose seven basis points yesterday to 4.66%. Asia Pacific yields played catch-up today, rising mostly 5-8 bp. European yields are a little firmer today, and the 10-year Treasury yield is up nearly two basis points to 4.70%. On the other hand, the US two-year yield slumped yesterday. It initially rose four basis points and fell sharply after the FOMC meeting. It is a little softer today, a little below 4.27%.

• Gold was already recovering from the dip below $4000 in the North American morning but surged after the FOMC decision. It reached a little above $4116, a new three-day high by a few cents, but could not sustain the momentum and finished slightly below the 20-day moving average (~$4072 today). It was greeted with sellers today as it tried pushing above $4100. Silver settled firmly, up almost $1, but failed to impress. It is consolidating inside yesterday’s range.

• September WTI dipped below $77.80 on Tuesday and reached almost $85.60 yesterday as hopes that the Middle East war was winding down again were dashed. After being marked up following new US threats to hit Iran hard in retaliation for its strike on Jordan, September WTI held above $84 though most of the North American session. The new hostilities in the region saw the contract extend its gains to almost $86 but stabilized and is below $85 ahead of the North American opening.

Data

• With the FOMC meeting concluding yesterday, today’s data poses possible headline risk but in terms of policy or investment decision, the impact will be marginal. The June CPI and PPI remove most of the guess work around today’s US PCE deflators. The headline pace is expected to moderate to 3.7% from 4.1%, while the core rate may slip to 3.3% from 3.4%. Personal income itself is seen rising by 0.3% and consumption by 0.4%. Weekly jobless claims will get extra attention today after last week’s report showed the lowest claims since 1969 (187k). Many observers are skeptical, but another low print may be taken more seriously. Tomorrow’s headlines, though, will be about the first estimate of Q2 GDP. The Atlanta’s Fed’s GDP tracker is for a 1.6% annualized pace, while the economists in Bloomberg’s survey are more optimistic, looking for 2.0% growth (weekly survey) and 2.2% (monthly survey).

• Canada reports its May establishment employment survey today. The household survey showed an 87.8k increase in jobs, after a loss of nearly 18k in April. The market tends to react more strongly to the household survey than the establishment survey.

• Mexico reports Q2 GDP today. After a 0.6% contraction in Q1, the economy is expected to have grown by 1.3% quarter-over-quarter. If accurate, it would be the fastest growth since Q1 22. Private consumption is projected to have slow and government spending may have fallen as investment likely did, too. The big improvement came from the external sector, with stronger exports and weaker imports.

• Growth in the eurozone surpassed expectations, rising 0.4% after a flat Q1. Although the first estimate lacks many details, Germany grew by 0.2% (and Q1 was marked up to 0.4% form 0.3%). France and Italy also grew by 0.2%. Spain reported an impressive 0.7% expansion in Q2 after 0.6% in Q1. Unemployment in the region was stable at 6.3% in June after May was revised from 6.2% to 6.3%. Ahead of tomorrow’s aggregate estimate, Germany and Spain reported July CPI figure. The German state figures point to a national increase of about 0.7%-0.8% for a 2.7%-2.8% year-over-year pace. The EU harmonized measure was 2.4% in June. Spain’s EU-harmonized measure eased by 0.1% in July after rising 0.6% in June. The year-over-year rate ticks up to 3.8% from 3.6%. Lastly, French consumer spending rose 0.4% in June, better than the 0.1% contraction expected in the Bloomberg survey and the May series was revised to 0.3% from 0.5%.

• As widely expected, the Bank of England left policy steady, with the base rate unchanged at 3.75%. The swaps market has a little more than a 50% chance of a hike at the next meeting in mid-September and sees about a 50% chance of another one before the end of the year.

• Australia’s June building permits soared by 7.2% in June, snapping a three-month fall (May was revised to -1.6% from -1.1%). Approvals for private sector homes edged up by 0.4% after surging a revised 2.4% (initially 2.8%) in May. Separately, export and import price indices for Q2 warned that Australia positive terms of trade developments stalled. For the first time in three quarters, import prices rose faster than export prices.

Disclaimer

Hump Day: War and the FOMC

noreply@blogger.com (Marc Chandler) — Wed, 29 Jul 2026 06:48:16 -0400

New hostilities in the Middle East have lifted oil prices for the first time in four sessions and is snapping the three-day decline in European and US bond yields. The US dollar is mostly narrowly mixed against the G10 currencies. Softer than expected CPI has reduced the perceived chances the Reserve Bank of Australia will hike rates again this year, after delivering three hikes in H1 26. The Australian dollar is at more than two-week lows today and is off almost 0.5%; the weakest in the G10. Among emerging market currencies, despite the continued volatility in the equity markets, the South Korean won and the Taiwanese dollar are among the strongest today. The PBOC set the dollar’s fixing at a new three-year low.

The outlook for today’s FOMC meeting is among the most uncertain it has been for some time. This may become a new feature with Chair Warsh, who eschews “forward guidance”. Most observers lean against a hike, but at the last meeting half of the “dots” implied a rate hike this year. And despite the softer June CPI and PPI, the war and tariffs continue to underpin price pressures. The Fed funds futures have almost 44 bp of tightening discounted before the end of the year.

Prices

G10

• Falling oil prices and the drop in US yields helped fuel the euro’s recovery from a new low for the month in early North American activity (slightly below $1.1355) to new session highs, near $1.1410. It stopped shy of the Monday’s high (~$1.1420) and the 20-day moving average (~$1.1415). It probably requires a move above the $1.1430 area to suggest a low may be in place. It is confined to about a quarter-of-a-cent range today above $1.1380. About 1.1 bln euros of options at $1.1415 expire today and nearly 2 bln euros at $1.1375 expire tomorrow.

• The dollar initially crept up to JPY163.95 against the yen early North American turnover yesterday before it returned to the session low near midday in NY (~JPY163.65), arguably dragged lower by the decline in US rates. It frayed Monday’s low, near JPY163.30 today, but has recovered to JPY163.70 by early European activity and has found support near JPY163.50., where options for $1.45 bln expire tomorrow. A convincing break of JPY163.30 would suggest a potential double top is in place, which projects toward JPY162.60.

• Sterling was sold to about $1.3275 yesterday, its lowest level since July 2 before the greenback’s broader retreat saw sterling recover to around $1.3310. It has held below $1.3310 today and found bids near $1.3280. Still, it must recapture the $1.3320-30 area to lift the technical tone.

• The US dollar reached a new two-week high against the Canadian dollar yesterday, near CAD1.4130, before the greenback’s broad setback. It fell to nearly CAD1.4085. It is holding today. Options for ~$500 mln at CAD!.4100 expire today. A break of CAD1.4050 could signal a retest on last week’s low around CAD1.40.

• The Australian dollar fell to a two-week low yesterday (~$0.6965), though it held the 20-day moving average and recovered, it was unimpressive. Softer than expected inflation data early today pushed the Aussie slightly below $0.6940 today. Since the low was recorded, it has not been above $0.6960.

• The Mexican peso traded mostly inside Monday’s range yesterday. The US dollar traded between about MXN17.4175 and MXN17.4930. It is in a narrower range today of roughly MXN17.4275-MXN17.4600. The first estimate of Q2 GDP will be reported tomorrow. Economists expected a trade-related recovery after a 0.6% quarter-over-quarter contraction in Q1.

• The dollar recorded an inside day against the offshore yuan yesterday. The greenback has been in a CNH6.7630 to CNH6.7820 range for two weeks. It has traded in a CNH6.7655-CNH6.7745 range so far today. The PBOC set the dollar’s reference rate at CNY6.7899 (CNY6.7928 yesterday), a marginal new three-year low.

• The Indian rupee rose today for the third consecutive session, which is its longest advance this month. Rising equities and the generally softer dollar buoyed the rupee. The dollar settled near INR96.57 at the end of last week and briefly slipped through INR95.49 today, its lowest level since July 10. The S&P 500 and Nasdaq futures are 0.2%-0,3% higher. Microsoft and Meta report earnings today.

Other Markets

• Most large equity markets in Asia Pacific recovered some of the ground lost in yesterday’s onslaught, helped perhaps by the stabilization of the Nasdaq, which initially fell to new three-month lows before recovering and settling near its highs. Still the chip space remained under pressure and took South Korea’s Kospi down another 6%, with Taiwan’s Taiex dropping 3.75%. Europe’s Stoxx 600 has a three-day advance coming into today—less exposed to tech and energy—but is off almost 0.2% in the morning session.

• Benchmark 10-year yields have stabilized today after a three-day drop in Europe and the US. Over those three days, the 10-year Treasury yield and German Bund yield both fell by 10 bp. The yield on the 10-year Gilt fell by 16 bp. Yields are mostly 2-4 bp higher in Europe today and the 10-year US Treasury yield is up a little more than one basis point to 4.62%.

• Gold has not found much traction in recent days despite the drop in yields and lower oil prices. It recorded a five-day low yesterday, slightly below $4012. The attempt to recover stalled in front of $4050. It made a marginal new low today but held above $4010. The upside remains blocked around $4050. Silver also recorded a five-day low yesterday (~$56.65). Upticks were capped, near $57.50. It rose to nearly $58.25 today, where it stalled.

• Optimism over ongoing US-Iran talks drove the price of September WTI slightly through $77.80 yesterday, a few cents from the 20-day moving average and a little above the (61.8%) retracement of the rally from earlier this month. However, new hostilities today lifted the contract to $83.30. It has straddled the $82 area throughout the European morning.

Data

• The conclusion of the FOMC meeting is today’s highlight. The Fed funds futures are discounting about nine points of a hike. This is about a 1-in-3 chance of a hike, which seems somewhat elevated to us. The softer than expected June jobs growth and moderating June CPI and PPI would seem to buy officials some time given the lack of visibility (Middle East war and impromptu tariffs). The Fed funds futures have fully discounted a hike at the September meeting and have slightly more than a 70% chance of another hike at the end of the year. Chair Warsh will hold a press conference afterwards, as has become customary.

• The UK reported a slight sequential improvement in mortgage lending in June and a nearly steady increase in net consumer credit. The data have not impacted expectations for the outcome of tomorrow’s Bank of England meeting. The swaps market is pricing in practically no chance of a change in policy. There is about a 55% chance discounted for a hike at the September meeting, and a hike is fully discounted for the early November meeting.

• Australia’s June CPI was softer than expected and this has seen the futures market downgrade the chance of a rate hike, which has, in turn, weighed on the Australian dollar. Given the base effect, unexpected 0.1% decline in Australia’s June CPI saw the year-over-year pace ease to 3.8% from 4.0%. The Q2 reading rose by 0.6% after it rose 1.4% in Q1 26. The quarterly trimmed mean rose by 0.8% (the same as in Q1 26) for a 3.6% year-over-year rate, up from 3.5% in Q1. This is the fastest quarterly pace since Q2 24 and the fourth consecutive quarterly increase. The probability of a hike next month has been modest and now negligible. Arguably, more significant is that the implied odds of a hike this year have fallen for the third consecutive session. At the end of last week, 30 bp of tightening was discounted and now slightly less than 13 bp are priced into the futures strip.

Disclaimer

Oil Falls Further, China Claims Chip Break-Through, and Market Contemplates Fed Hike Tomorrow

noreply@blogger.com (Marc Chandler) — Tue, 28 Jul 2026 06:48:14 -0400

There are three developments to note today. First, the lack of hostilities in the Middle East has oil prices continue to unwind this month’s surge. This has also taken some pressure off major bond markets. Second, reports that China has started to mass produce its own chipmaking tools and has developed DUV lithography tools that etch chip patterns onto silicon weigh on the equities in this space, which had already been hit with profit-taking. South Korea’s Kospi fell nearly 11% today and Taiwan’s Taiex slumped a little more than 4.5% today. The Nasdaq is poised to gap lower today.

The third development is the heightened speculation of a rate hike by the Federal Reserve tomorrow. On July 16, the Fed funds futures were pricing in about a 10% chance of a hike and now about a 33% chance. The US dollar itself is trading with a clear firmer bias. It is made a new high for the month against several pairs, including the euro, sterling the Australian dollar.

Prices

G10

• The euro reached the session high a little before in early European turnover yesterday slightly below $1.1420. It gradually declined from there and slipped below $1.1370 before European markets closed. It traded in a narrow range and settled on its lows. The euro slipped to a little below $1.1355 today and made a marginal new low for the month. There is little standing in the way of the year’s low, set June 24 near $1.1325.

• Lower oil prices and lower US yields dragged the greenback slightly below JPY163.35 yesterday. The US dollar recovered and approached the session high that was shy of JPY163.80. It has firmed JPY163.95 today to approach the 40-year high from last week near JPY164. The level does not appear to hold much in the way of stops or optionality. The next inflection point might be nearer JPY165.

• Sterling snapped a six-day fall before the weekend but recorded an ostensibly bearish outside down day yesterday. It traded on both sides of last Friday’s range and settled below its low. In fact, it settled below $1.33 for the first time since July 1. That was the (61.8%) retracement of sterling’s rally from the June 24 low of the year (~$1.3140). Follow-through selling today has pushed sterling to about $1.3275. Options for GBP375 mln at $1.3280 expire today. The next area of chart support may be in the $1.3240-50 area.

• The US dollar edged higher against the Canadian dollar yesterday and reached CAD1.4120, its best level in nearly two weeks. The CAD1.4125 area marks the halfway point of the greenback’s decline this month. The 20-day moving average is near there as well. The US dollar reached a high near CAD1.4130 in Asia today. Above there, the CAD1.4155 area holds the next retracement objective. The two-year US premium widened a little yesterday and reached near the highest level in 14-months recorded last week around 144 bp. It is a couple of basis points softer today.

• Yesterday, for the eighth consecutive session, the Australian dollar traded on both sides of $0.7000 and failed to close above it even once. The Aussie tested last week’s low and the 20-day moving average, slightly below $0.6965 today. That area also corresponds to the (38.2%) retracement of this month’s rally. The next retracement level is near $0.6945.

• MXN consolidated in the North American session yesterday. The dollar reached the session high near MXN17.49 in early Asia Pacific trading on Monday and recorded the session low in early European turnover (~MXN17.4120). The peso rose by about 0.2% yesterday. The greenback is testing yesterday’s high in the European morning. Resistance is seen in the MXN17.54-MXN17.56 area. The Chilean peso led the regional advance with a 0.85% gain followed by the Colombian peso’s 0.65% gain. The Brazilian real was the weakest in the region. It fell by almost 0.5% as the greenback settled above BRL5.10 for the first time in a week.

• The dollar was sold to session lows against the offshore yuan a little after midday in NY yesterday, near CNH6.7630. It is also a new low for the month. Last month’s three-year low was about CNH6.7540. The dollar is bid above CNH6.77. Last Friday’s high near CNH6.79 offers the nearby target. The PBOC set the dollar’s reference rate slightly higher today (CNY6.7928 vs. CNY6.7911 yesterday. The first fix below CNY6.80 in three years was on July 10. It has not been fixed above there since then and July 23 was the new low (CNY6.7906).

• Reports of continued intervention by the Reserve Bank of India heled to initially push the dollar to INR95.6275, its lowest level since July 13. However, the greenback’s strength emerged late in the session, and it settled near the session high around INR95.86, though slightly below the 20-day moving average for the first time this month.

Other Markets

• Equities are mixed today. As was the case before the weekend, the Nasdaq was unable to sustain early gains. After gapping lower last Thursday, it posted an ostensibly bearish outside down day yesterday. The futures are trading around -0.85% lower. A break of the 24700 area could signal a test on the 23940-retracement area, which also holds the 200-day moving average. The S&P is off marginally. Most of the large bourses in Asia fell today, led by a precipitous 10.8% plunge in South Korea and a 7.7% drop in Taiwan. Hong Kong, India, Australia and New Zealand posted small gains. Europe’s Stoxx 600 is up about 0.4%, its third consecutive gain, if sustained.

• The sharp drop in oil prices saw a modest 3-6 bp decline in US and European benchmark 10-year yields yesterday. And yields continue to pull back today. They are 2-4 bp lower in the Europe and the 10-year US Treasury yield is off three basis points to about 4.62%. The two-year Treasury yield is off around the same to dip slightly below 4.30%.

• Gold gapped higher yesterday, and after it reached a little above $4116, it reversed lower and filled the opening gap that extended to the pre-weekend high (~$4082). It settled below there and remains uninspiring. IT has pulled back to around $4020 today. The price action of silver tells a similar story. It popped above $60 briefly but has not settled above it in three weeks. It was sold below $57 today but has steadied late in the European morning.

• September WTI surged ~30% in the past three weeks and gapped lower yesterday amid new hopes for the end of the Middle East war, which the IEA has said was the most disruptive in history. Momentum traders and trend followers go caught leaning the wrong way. The session low was recorded late in the North American session a cent below $82.00. Follow-through selling today took the contract to $79.80, a little beyond the halfway point of this month’s range is about $80.30. The next retracement (61.8%) is found around $77.20 and the 20-day moving average is ~$77.80.

Data

• There is a flurry of US economic data that will be reported today in a two-hour window (8:30-10:30 AM ET) but outside of headline risk, the reports will be overshadowed by the outcome of tomorrow’s FOMC meeting (hawkish hold) and the first estimate of Q2 GDP on Thursday. The merchandise goods balance (deficit) may be the most political sensitive. The goods deficit widened in May by the most in more than a year. Exports pulled back (-5.4%) from record levels and imports rose (3.6%). Consumer goods imports increased to their highest level in six months. The trade and inventory data (US businesses have been re-stocking in Q2) will help drive last-minute adjustments to Q2 GDP forecasts. The median forecast in Bloomberg’s survey is for 2.1% annualized growth in Q2 (that same as in Q1). The Atlanta Fed’s GDP tracker has it at 1.7%. House prices and the Richmond and Dallas Fed surveys may draw passing interest. The Conference Board’s July survey is expected to see small improvement in confidence and the current assessment, but softer expectations.

• Spain reported a decline in Q2 unemployment but at 9.87% in Q2 (10.83% in Q1), it remains elevated despite solid growth (Q2 GDP due Thursday and it is expected to have grown by 0.6%, the same as Q1, making it among the strongest EMU members). June retail sales rose 2.4% year-over-year in June in constant prices, after a revised 0.3% decline in May (-0.4% initially). The wildfires in Spain (and France) will likely spur an emergency fiscal response.

• India reported June industrial output rose 7.3% year-over-year after a revised 5.0% pace in May (initially 5.1%). It matches the largest rise since March 2024. The gain was broad-based. Capital goods output jumped by a little more than 14% followed by electricity and gas production (10.6%) and manufacturing rose 7.8%.

Disclaimer

Pause in Middle East Hostilities Spark Stock and Bond Market Rally

noreply@blogger.com (Marc Chandler) — Mon, 27 Jul 2026 06:49:18 -0400

There is one major driver in the capital markets today: A sharp drop in oil prices as the US and Iran have inexplicably not attacked for the past three nights. There is speculation in the press that the US decision was partly motivated by concerns over diminishing supplies of air defenses (e.g., Patriot interceptors) after the two-week assault, but the Trump administration played this down. Crude oil prices are off 7-8% and this encouraged further unwinding of the rise in bond yields seen last week. Equities are rallying today and China’s CXMT chip maker IPO was launched in Shanghai today and it is the largest list company after today’s surge. It is big week for US tech earnings (MSFT and Meta on Wednesday and Apple and AMD on Thursday).

The dollar was marked down initially early Asia Pacific trading but has not made much further progress. The euro continues to struggle to sustain gains above previous support (~$1.14), sterling has not distanced itself convincingly from $1.33 support. The Australian dollar is struggling to sustain the recovery above $0.7000. The US dollar is above CAD1.4100. The dollar pulled back to about JPY163.35 but remains within striking distance of the 40-year high set last week near JPY164.

Prices

G10

• The euro consolidated at the lower end of last Thursday’s range ahead of the weekend. The range on Thursday, when the euro record an ostensibly bearish outside down day, may be key to the near-term outlook. The range that day was roughly $1.1365 to $1.1435. The euro held above $1.1375, where options for 1.3 bln euros expire today. The upside has been capped in front of $1.1420, and the euro is struggling to sustain the push above $1.1400, where another set of options for nearly 1.5 bln euros expires today.

• The dollar continues to hover within striking distance of the 40-year high reached against the yen last week near JPY164. Japanese officials could hike rates this week, intervene, and, possibly, secure US support. However, this seems little more than a remote tail risk. Still, the drop in oil prices and lower US yields has pushed the greenback slightly through JPY163.35, its lowest level since last Thursday’s high was recorded. US and Japanese officials have referred to the yen’s volatility, but the implied one-month vol reached a multi-year low week near 5.9%. It is now around 6.3%.

• Sterling snapped a six-day slide before the weekend and rose from almost $1.3300 to $1.3350. The gains have been extended to almost $1.3365 today. Still, more work needs to be done to boost confidence that a low is in place. Nearby resistance is seen in the $1.3375-$1.3400 area.

• The greenback made a marginal new high for the week against the Canadian dollar on Friday, near CAD1.4115. On the midday pullback, the US dollar slipped to ~CAD1.4075 where buyers re-emerged. The US dollar held above CAD1.4070 earlier today but resurfaced above CAD1.4100 in late European morning turnover. Nearby resistance is seen in the CAD1.4125-55 band.

• The Australian dollar held support before the weekend near $0.6965 and recorded in the session high near midday in NY, ever so slightly above $0.7000. The Australian dollar was one of two G10 currencies to have risen against the greenback last week; the other being the Norwegian krone. It is firm today and is trying to establish a foothold above $0.7000, which it has settled above one in the past nine sessions despite trading above it on an intraday basis. Last week’s high was a little shy of $0.7030, where options for almost A$600 mln expire today.

• Currencies from Latam accounted for three of the top five emerging market currencies last week. The Colombian peso rose 1.3% for second place behind the South Korean won. The Brazilian real rose almost 1%, while the Russian ruble appreciated by 0.60%. The Mexican peso’s nearly 0.4% gain put it in fifth place. Before the weekend, the US dollar consolidated against the peso within the previous day’s range. The peso is firmer today, amid the stronger risk appetites but it remains within last Thursday’s range (~MXN17.3775-MXN17.5400).

• The dollar slipped against the offshore yuan before the weekend but held above the previous day’s low (~CNH6.7675). The broadly heavier greenback fell to a four-day low against the offshore yuan near CNH6.7650, today. It was confined to a CNH6.7635-CNH6.7790 range last week. The PBOC set the dollar reference rate lower today (CNY6.7911 vs CNY6.7939 at the end of last week).

• A combination of lower oil prices and aggressive intervention by the Reserve Bank of India, helped lift the rupee by a little more than 0.7% today. It is the largest gain since early June. RBI Governor Malhotra indicated that the central bank’s measures to attract foreign capital with subsidized rates have drawn around $32 bln. The controversial education minister resigned over the weekend. The dollar gapped lower and fell to around INR95.7840, a two- week low and frayed the 20-day moving average (~INR95.81) for the first time in more than three weeks but settled above it.

Other Markets

• The pressure on the AI and chips was still evident before the weekend. The Nasdaq fell to a new low since early May, and although it recovered, the intraday bounce was sold and the composite finished lower for the third consecutive session and the sixth in the past seven. However, the de-escalation of tensions, at least for the moment, and the sharp drop in oil prices are boosting equities today. The large bourses in the Asia Pacific region rallied but Taiwan. China’s CXMT (important chip maker) surged by more than 450% at its is Shanghai debut today and is the largest onshore-listed company. Europe’s Stoxx 600 is about 0.7%, and US index futures are 1.0%-1.6% higher.

• Benchmark 10-year yields slumped ahead of the weekend as oil pulled back. The 10-year US Treasury yield slipped for the first time in five session last Friday, and the yield of the two-year note fell for the first time in seven sessions. Most European 10-year yields fell by 3-5 bp, but the 10-year UK Gilt outperformed with a seven-basis point pullback. Yields continue to fall today. The 10-year JGB slipped by one basis points, but in Europe, benchmark yields are off mostly 4-7 bp, led by Italy and France. The 10-year US Treasury yield is off four basis points (to almost 4.63%) and the two-year is off three basis points to 4.30%.

• Gold recovered from a three-day low before the weekend and settled above the 20-day moving average (~$4070). The yellow metal rose by about 1.4% last week. It gapped higher today. Today’s low is slightly below $4083.80, while the pre-weekend high was a little above $4082. Still, last week’s high is still a distance away at $4166. Silver rose by about 5% last week after losing more than 10% in the previous two weeks. It rose a little more than 2% before the weekend, the fifth advance in six sessions. It, too, gapped higher today and poked through $60 but could not sustain it and it is near $59 in late European morning activity.

• September WTI reached $93.50 on July 23 and pulled back to about $87.70 before the weekend. Reuters reported that Pakistan was exploring ways to resume peace talks between the US and Iran. There have been no strikes over the last couple of days. Without an explanation for either side, it allows speculation to fill the gap. The contract finished a little more than 8.5% higher last week but is off nearly 7.8% ahead of the North American open. Sept WTI gapped lower today and continued to decline. It reached a low slightly above $82 today. The halfway mark of the rally since early this month is around $80.30.

Data

• Helped by stronger Boeing orders, June durable goods orders are expected to have rebounded from May’s 4.5% drop. Boeing orders rose to 121 from 27 in May and deliveries edged up to 64 from 60. Excluding defense and aircraft orders, the median forecast in Bloomberg’s survey is for a 0.9% increase after 1.4% gain in May. Durable goods orders rose by an average of 1.5% a month in H1 25 and a 1.5% increase in June would put the H1 26 average at about 0.9%. While the FOMC’s decision on July 29 is a highlight, two days later the US publishes the first estimate of Q2 GDP. The median forecast in Bloomberg’s survey is for a 2.3% annualized pace (2.1% Q1 26). The Atlanta Fed’s GDPNow tracker says 1.7%.

• Mexico reports June trade figures today. Mexico’s trade balance has improved markedly. In the first five months of 2025, Mexico recorded a trade surplus of almost $920 mln. In the Jan-May 2026 period, its trade surplus is $5.77 bln. Mexico’s Q2 GDP will be reported Thursday, and the median forecast in Bloomberg’s survey is for 0.6% growth quarter-over-quarter after a contraction of that magnitude in Q1 26.

• The markets showed little reaction to steady eurozone money supply growth (M3 3.3% year-over-year vs 3.0$ in May)). The ECB’s Q2 bank survey warned that credit supply and demand may weaken even if at a slower pace than in the previous three months. In June, lending figures were largely in line with May. The first estimate of the region’s Q2 GDP is due Thursday and the median forecast in Bloomberg’s survey is for a 0.2% quarter-over-quarter increase after a flat Q1.

• Germany’s July IFO business survey showed an improvement in expectations that was greater than the deterioration of the current assessment, and this helped lift the overall measure of the business climate. At 86.6, perceptions of the business climate were the strongest since February, when the Middle East war began.

• Japan’s producer service prices slowed last month to 3.2% (from a revised 3.4% from 3.3% initially). The BOJ meets later this week and is widely recognized to be on hold until possibly October. Ahead of the meeting, Tokyo’s July CPI will be reported. The core is expected to remain below 2% and underscores the lack of a compelling case for faster rate hikes.

• China’s June industrial profits rose 15.1% year-over-year in June, down from 21.1% in May. A breakdown showed profit-growth in tech related industries slows. Furniture and automakers reported significant drops in earnings, according to reports. The Politburo meets this week, and many observers anticipate more stimulative measures.

Disclaimer

Week Ahead: War, Tariffs, and Three G10 Central Bank Meetings

noreply@blogger.com (Marc Chandler) — Sat, 25 Jul 2026 07:09:29 -0400

The escalation of the Middle East war sent oil prices sharply higher and pulled interest rates up, too. September WTI rose by more than 10% for a three-week increase of more than 25%. Neither side seems prepared to back down. However, judging by the largest spread this year (~$11) between the September WTI and the December contract suggests many participants suspect the current high level of stress will not be sustained. Yet, reports of the movement of munitions and people are consistent with a dramatic escalation. Moreover, last week, for the first time in the conflict, the Houthis struck ships in the Strait of Bab-el-Mandeb. At the same time, there are two other disruptive forces. First is the US tariff regime. The US has replaced the expiring Section 122 tariffs (balance of payments) with Section 301 tariffs (lax forced labor standards). But in addition, in recent weeks the US threaten 25% tariffs on Brazil, 50% on Canada (and no USMCA compliant exemption) and announced a 100% tariff on generic drugs in two years (to induce the production in the US).

The highlights for the week ahead include three G10 central bank meetings: The Federal Reserve, the Bank of England, and the Bank of Japan. The rise in oil prices spurred boosted speculation that the Fed could raise rates. The derivatives market has about a 33% chance of a hike discounted but has the moved fully discounted for the next meeting in September. The market sees the Bank of England on hold. And while the odds of hike at the September meeting eased a little, a move is fully discounted in Q4. The swaps market shows practically no chance of a BOJ hike. Earlier in the cycle, Governor Ueda was criticized for not preparing the market sufficiently. There has been no preparation now. The odds of a hike in October increased to a little more than 80% from around 70% a week ago.

Drivers: The dollar continues to be sensitive to changes in short-term interest rates. The 30-day correlation between changes in the Dollar Index and the December Fed funds futures contract is around -0.63. It has been fairly stable. The 60-day correlation is around -0.69. Changes in the Dollar Index and the US two-year yield are around 0.65 correlated over the past 30-day, while DXY correlation with the US 10-year yield is slightly above 0.50.

Data: There are two highlights in busy week ahead. The first is the FOMC meeting that concludes on July 29. Given that some officials have been edging toward a hike and the jump in oil prices, the odds of a rate hike have risen from about 14% on July 17 to about 33% before the weekend. The other highlight is the first estimate of Q2 GDP, which is due the day after the FOMC meeting. The Atlanta Fed's GDP tracker has diverged from the Bloomberg survey. The Atlanta Fed's model puts growth at 1.3% while the median forecast in Bloomberg's survey is 2.5%. The former warns of slower growth after 2.1% in Q1 26, while the latter anticipates a slightly strong pace. Other real sector data out, such as durable goods orders and shipment, June goods trade, retail, and wholesale inventories will feed into Q2 GDP forecasts.

Prices: Rising rates helped lift the Dollar Index to its highest level since July 1 on July 23 (~101.55). It consolidated ahead of the weekend. The momentum indicators are turning up. With the US seen as among the most able to cope with the disruption of the war in the Middle East, the Dollar Index looks poised to move to new highs for the year in coming days. A move above the 101.80 seen in June 24 would target 102.00 (May 2025 high) and then the 102.70 area, the (50%) retracement of the losses from the 2025 high set last February (~109.90).

EMU

Drivers: Over the past 30 sessions, changes in the euro are inversely correlated to changes in the US December Fed funds futures and the US two-year yield by about -0.65. The euro is more sensitive to changes in US short-term rates than German short-term rates, though it is inversely correlated with the German two-year yield. The euro is less sensitive to changes in the longer end of the US curve, but from the first time since the end of February, the euro's 30-day rolling correlation with changes in Germany's 10-year yield has turned positive.

Data: This week's two highlights are in the second half of the week. On July 30, the eurozone provides its first estimate of Q2 GDP. It is seen strengthening to 0.2% quarter-over-quarter. Recall that Q1 26 GDP was revised to -0.2% in June from 0.1% flash estimate (April). The revision was almost entirely a function of developments in Ireland. Ireland's Q1 GDP was initially estimated at 2% growth. The final figure came in at -12.1%. The culprit was Ireland's multinational-dominated sector, which contracted 27.1% in the quarter, as pharma and tech firms unwound the export front-loading in 2025 to beat U.S. tariff deadlines. Domestic Irish activity actually grew by up 0.6% in the quarter. The second highlight is the preliminary July CPI. The risk is that higher oil prices, after a four-month slide, will lift the CPI after a 0.1% decline in June. The year-over-year rate is likely to rise back above 3% from 2.8% in June. Before last week's ECB meeting, the market was confident that another rate hike will be delivered in September, and nothing President Lagarde said dissuaded the market expectations.

Prices: The euro's high this month, ~$1.1485, was recorded on July 15 after softer US inflation gauges. However, the surge in US rates dragged the euro to $1.1365 on July 23, a few hundredths of a cent above the low for the month set July 1. The momentum indicators are curling lower and a return to the low for the year (~$1.1325) seems increasingly likely. This area corresponds to a (38.2%) retracement of the euro's rally from the February 2025 low (~$1.0140). The next retracement (50%) is a little above $1.11. That is not a forecast at this point but identified to illustrate the significance of the recent lows and the potential of a convincing break.

PRC

Drivers: Changes in the dollar against the offshore yuan have become somewhat less correlated with the changes in the Dollar Index. The rolling 30-day correlation has eased from the year's high in late April from almost 0.90 a little more than 0.52 now. It is around levels seen in March. Since early May, the correlation between changes in the dollar against the offshore yuan and China's CSI300 equity index has been inverted (the offshore yuan tends to appreciate when Chinese equities rise). The exchange rate is not sensitive to changes in China's one-year yield. The 30-day correlation has moved between around -0.30 and +0.20 this year and is now about -0.10.

Data: China reports June industrial profits and the July PMI. Industrial profits rose 21.1% year-over-year in May. In May 2025, they had fallen by 9.1% year-over-year. In May 2024, they were virtually flat. For some context, consider that US corporate profits rose by about 12.8% in Q1 26 year-over-year and 5.5% in Q1 25. The June PMIs give some hope that as the quarter ended the economy was finding some traction. The June manufacturing PMI stood at 50.3, up from 50.0 in May. The Q1 high of 50.4 was the highest since March 2025. The non-manufacturing PMI stood at 50.2, which is the highest for the year so far, but simply returned to where it was at the end of last year. The 50.6 composite reading is also the year's high. It fell below 50 in January and February. China's Politburo meeting in the last week of July is expected to evaluate second-quarter economic performance, set the macro policy tone for the second half of 2026, and guide the rollout of the opening year of the 15th Five-Year Plan.

Prices: The dollar looks rangebound against the offshore yuan. The range seems to be about CNH6.7635-CNH6.7815. The 20-day moving average is around CNH6.7845 and a move above there could target the July high (~CNH6.81). The 20-day moving average of the dollar against the onshore yuan is ~CNY6.7815 and the July high is about CNY6.8060.

Japan

Drivers: A common claim is that if the BOJ would only hike rates a little faster that the yen would find support. Yet, the correlations suggest otherwise: that the influence of US rates is greater than Japanese rates or the interest rate differential. The dollar-yen correlation with US changes in the US two-year and 10-year yields over the past 30 days is around 0.44 and 0.32, respectively. Changes in the exchange rate and Japan's two- and ten-year yields is around 0.06 and 0.19, respectively. Changes in the dollar-yen and the two-year rate differential are about 0.32 correlated and with the 10-year differential, the 30-day correlation is slightly inverted for the first time this year.

Data: The highlight of the week is the Bank of Japan meeting that concludes on July 31. The issue is not whether it will hike rates. It is nearly a foregone conclusion it will not after it delivered a 25 bp hike last month. However, it will also provide updated forecasts, which would ostensibly lay the groundwork for another hike later this year. After recording its fastest growth in three years in 2025 (1.1%), Japan's economy is expected to slow to 0.5% this year and 0.7% next year, according to the April forecast. There is some speculation that officials will upgrade their forecasts. However, the economy appears to have lost some momentum after the 1.8% annualized rate in Q1 26, which was bolstered by stronger net exports and stronger consumption. Q2 GDP will be reported on August 17, and the early forecasts are for 0.2% (annualized), according to the median forecast in Bloomberg's survey. This week's industrial production and retail sales will help economists update their forecasts. Slightly before the outcome of the BOJ meeting, Tokyo's July CPI will be reported. Tokyo's CPI is reported a few weeks ahead of the national figure but does a decent job anticipating the national forces. The BOJ targets CPI core rate at 2%. Tokyo's core rate has not been above the target this year and neither has the national core.

Prices: The dollar reached almost JPY164 last week, a new 40-year high. Official rhetoric has not escalated. Since the high was recorded on July 23, the dollar has not traded below JPY163.65. Additional support may be around JPY163.25. A surprise rate hike by the BOJ next week could see the yen spike higher, but as the correlation work shows above, the exchange rate is more sensitive to US rates. A rate hike followed by intervention could have more meaningful impact, and explicit support by the US, could also be helpful. However, this does not seem like a high-probability scenario.

Drivers: The Burnham government is taking shape. Many observers are not convinced that the corner has been turned on the political conditions that have produced now seven prime ministers in a little more than a decade. Sterling's rolling 30-day correlation with changes in the euro has eased to around 0.82 from a peak in May of almost 0.94. Sterling's 30-day inverse correlation with US two-year yield bottomed in mid-June near -0.80 and is now around -0.60. Sterling is slightly inversely correlated with changes in two-year and 10-year UK yields.

Data: The UK reports consumer credit and mortgage lending on July 29, but the highlight of the week is the Bank of England meeting the following day. The swaps market is pricing in a little less than a 10% chance of change in policy. The BOE last cut the base rate by 25 bp to 3.75% at the end of last year. In both Q3 25 and Q4 25, the British economy grew by 0.1% quarter-over-quarter. It jumped to 0.6% in Q1 26, but that is not sustainable and Q2- growth looks to be about 0.2% (due August 13). CPI averaged 3.8% in Q3 25 and 3.4% in Q4 25. Inflation average 3.1% Q1 26 and slightly below 2.8% in Q2. The swaps market has around a 65% chance of a hike at the BOE meeting in September.

Prices: Sterling reached almost $1.3560 on July 15, its highest level in a little more than two months. It fell for the following six sessions and reached $1.33, which is the (61.8%) retracement of sterling's rally from the June 24 low, which is also the year's low (~$1.3140). It held below $1.3350 ahead of the weekend. With the momentum indicators turning lower, the risk may be on the downside, unless sterling can regain a foothold above the $1.3400 area.

Canada

Drivers: The most important driver of the USD-CAD exchange rate appears to be changes in the US two-year premium over Canada. The 30-day correlation is a little below 0.75, the highest since Q1 18. The correlation of the exchange rate and changes in the two-year US yield is near 0.40. The correlation between changes in the exchange rate and Canada's two-year yield is slightly inverse for the first time since mid-March (~-0.06).

Data: Sometimes, at the risk of confusing investors if not policymakers, the US reports the establishment and household labor surveys at the same time. The results are not always congruous. Canada separates the two reports and with a lag. On July 30, it will report May's establishment survey. The May household survey showed an almost 88k increase in overall employment, with an outsized surge of 154k full-time posts. The following day, Canada reports May monthly GDP. The economy contracted by 1.0% at an annualized rate in Q4 25 and another 0.1% in Q1 26, but Q2 is off to stronger start with a 0.5% expansion reported in April. The Bank of Canada projects Q2 growth around 2.5%, while the median in Bloomberg's survey is for 1.9%.

Prices: The US dollar held barely above CAD1.40, a new low for month, at the start of last week and never looked back. The greenback posted a key upside reversal last Monday and rose to a new high at the end of the week, a little above CAD1.4115. The CAD1.4125 area marks the halfway point of this month's range. The 20-day moving average is near CAD1.4135 and chart resistance is seen in the CAD1.4150-CAD1.4155 area. The momentum indicators look poised to turn higher early next week.

Australia

Drivers: The Australian dollar is sensitive to the broad direction of the US dollar. The 30-day correlation between changes in the Aussie and the Dollar Index is around -0.63. Over the past 30 sessions, the Australian dollar slightly less correlated to gold (-0.58) as with DXY. The 30-day correlation of changes in the Australian dollar and the two-year US yield is around -0.50. The Aussie is positively correlated with changes in Australia's two-year yield (~0.23).

Data: Australia reports June and Q2 CPI. The 0.7% decline in May will not be repeated, and given the base effect, the risk is that the year-over-year pace moves above 4%. It peaked at 4.6% in March. Central bank officials put more emphasis on the quarterly reading. CPI rose 1.4% in Q1, which matched the most since the end of 2022. The Q2 CPI is expected to rise by half as much. Australia will also report June private credit growth. It has risen by an average of 0.65% in the first five months of the year, compared with a 0.56% average increase in the first five months of last year and 0.48% in the Jan-May 2024 period to a 0.65 average After delivering three rate hikes earlier this year, the Reserve Bank of Australia is on the sidelines. It has not ruled out additional hikes, but the market is not convinced, especially at next month's meeting (August 11). The futures market has about a 1-in 3 chance of a hike discounted. Still, the market has another hike fully discounted at the November meeting.

Prices: The Australian dollar was bid to a new high for the month, slightly above $0.7025, early last week before being sold to a marginal new low for the week on July 23. It stabilized before the weekend but could not recapture $0.7000. This month's up trendline is found near $0.6955 at the start of the new week and about $0.6975 at the end of next week.

Mexico

Drivers: The 30-day correlations show that the Mexican peso is a better proxy for the JP Morgan Emerging Market Currency Index (~-0.73) than the major currencies in the Dollar Index (~0.64). The 30-day correlation between changes in the exchange rate and the two-year US yield is near 0.50. It peaked near 0.80 in mid-June, which was the highest in more than three decades. The 30-day correlation of changes in the exchange rate and Mexico's two-year yield is also positively correlated near 0.47. This year's peak in February was near 0.70, the highest since September 2022.

Data: There are two highlights for Mexico in the coming week. First, Mexico reports the June trade balance on July 27 and then Q2 GDP on July 30. Mexico's trade surplus has grown through May this year. In the first five months, Mexico recorded at trade surplus of almost $5.77 bln compared with a $918 mln surplus in the Jan-May 2025 period, and an $8.51 bln deficit in the same period in 2024. Second, on July 30 Mexico reports Q2 GDP. The economy likely rebounded. After contracting by 0.6% in Q1 26, the economy is expected to have grown by 0.6% in Q2, according to the median forecast in Bloomberg survey. The median projection is for a similar pace of growth here in Q3.

Prices: The US dollar continues to trade choppily in a new and higher range against the Mexican peso. From early May through late June, the greenback was in a roughly MXN17.16-MXN17.50 range. In the past month, it has been around a MXN17.37-MXN17.65 range. Last week, it found support near the lower end of the new range and peaked near MXN17.55. Although the momentum indicators are not generating strong signals, it remains vulnerable to a further escalation and broadening of the Middle East war and a risk-off environment. The Colombian peso, backed by a 12% policy rate and favorable political development, led the regional currencies with a nearly 2% advance last week. It reached its best level since 2020 ahead of the weekend.

Disclaimer

Oil Pulls Back, Takes Some Pressure off Interest Rates, Leaves the Greenback Slightly Softer

noreply@blogger.com (Marc Chandler) — Fri, 24 Jul 2026 06:46:32 -0400

The price of crude oil is consolidating today after yesterday’s surge and this has taken some pressure off bond markets after several countries, including the US, saw 10-year yields rise to new highs for the year. The pullback in yields is also occurring despite unexpectedly strong preliminary July PMIs. Nevertheless, there are reports that suggest the Middle East war could be on the verge of a significant escalation. The prospects could deter significant risk-off moves ahead of the weekend. Meanwhile, the US has announced 10%-12.5% tariffs on 60 countries for either not having or not sufficiently enforcing safeguards against forced labor. These tariffs are meant to replace the expiring tariffs imposed for the past 150 days that were justified on the deterioration of the balance-of-payments.

The US dollar has followed the decline in US rates and is softer against the G10 currencies today. The dollar is little changed against the Japanese yen, where it has held slightly below JPY164, the 40-year high approached yesterday. Japanese rhetoric did not change significantly. Intervention is threatened “whenever necessary”.

Prices

G10

• The jump in oil prices and interest rates pressed the euro to about $1.1365 in North America yesterday, its weakest since July 1, the day before the disappointing June jobs growth was reported. The year’s low was recorded on June 24, near $1.1325. The euro posted a bearish outside down day yesterday. It traded on both sides of Wednesday’s range and settled below Wednesday low. Yet, there has been no follow-through today and the euro is mired in about a quarter of a cent range below $1.14. Options for 1.3 bln euros at $1.1360 expire Monday.

• The dollar rose to nearly JPY164 in North America yesterday, a new 40-year high against the yen. Rising oil and US yields were the arguable the driving force. Yesterday’s high has held and since then the dollar found support near JPY163.65. Options for around $900 mln at JPY163.30 expire today. The strong correlation between US rates and the exchange rate suggests BOJ intervention may be more effective if it waited for some sign US rates are peaking.

• Sterling fell for the sixth consecutive session yesterday. That is the longest losing streak of the year. It tested support around $1.3300, which also corresponded to the (61.8%) retracement of rally from the June 24 low (~$1.3140). It is holding today, though a break could signal a move toward $1.3240-50. On the top side, sterling has not traded above $1.3345.

• The Canadian dollar has been unexpectedly resilient in the face of the greenback’s climb in the last couple of sessions. There have been two developments: the rise in the price of oil and the narrowing of the US two-year premium over Canada. The correlation of the changes in the exchange rate and the Us premium is more robust than the correlation between the exchange rate and oil prices. That said, the 30-day rolling correlation between changes the US dollar-Canadian dollar exchange rate and September WTI futures contract turned negative early this month for the first time since mid-March, but at around 0.18, it is not particularly strong. The greenback is consolidating in a narrow range so far today: ~CAD1.4065-CAD1.4085.

• The Australian dollar posted an outside down day yesterday. It fell from around $0.7020 to almost $0.6960. It held a couple of hundredths of a cent above the week’s low set Monday. A band of support extends toward $0.6945. The Aussie is trading with a firmer bias today but has been capped near $0.6990.

• The Mexican peso and Brazilian real snapped three-day rallies yesterday and were both tagged for about 0.60%-0.70%. All but a handful of emerging market currencies fell yesterday. The Colombian peso eked out a minor gain. The dollar posted an outside up day against the Mexican peso. It rallied from about MXN17.3775 to almost MXN17.54. It stopped slightly shy of the week’s high set Monday near MXN17.5540. It has not been above MXN17.5235 today but found support slightly below MXN17,47, The greenback rose a little above BRL5.09 to reach a three-day high against the Brazilian real.

• The dollar posted its highest close of the week against the offshore yuan yesterday, near the session high, slightly below CNH6.78. It is largely consolidating inside yesterday’s range today. A trendline connecting the late April, June 25 and July 8 highs comes in around CNH6.8020 on Monday. Given the greenback’s broad gains, the PBOC seemed to have little choice but to fix the dollar higher today, and indeed it did: CNY6.7939 vs. yesterday’s three-year low of CNY6.7906.

• Reports suggest Indian officials directly or indirectly intervened in the foreign exchange market to support the rupee today. The dollar traded on both sides of yesterday’s range against the rupee and settled little changed around INR96.57. It was the fifth consecutive weekly loss for the rupee, during which time it fell by about 2.4%.

Other Markets

• After Asia Pacific equity markets advanced yesterday, sharp losses in Europe and North America set the stage for today’s sell-off. The large bourses in the Asia Pacific region fell, led by South Korea’s 5.7% drop. Japan’s Nikkei 225 was off 2.7% and its 3.3% loss on the week was the most among the large regional markets. China’s CSI 300 fell almost 1.7% today but was the strongest in the region this week with a 2.65% gain. Europe’s Stoxx 600 has recouped about half of yesterday’s nearly 1.2% decline. It is little changed on the week. US index futures are firmer but nursing around 0.3%-0.5% losses for the week.

• Benchmark 10-year yields jumped 3-6 bp in Europe yesterday and five in the US. Yields in the Asia Pacific region played catch-up today. Lower oil prices appear to be helping European bonds recover from yesterday’s losses. Yields are off 2-4 bp today. The 10-year US Treasury yield is off around a basis point to 4.68%.

• The rising dollar and interest rates proved too much for gold, which unwound Wednesday’s gains in full, with a little less than a 2% drop. Losses were extended to almost $4022 today before gold recovered to a little below $4062. The week’s low on Monday was a little below $3983 and last Friday’s low was the low for the month (~$3960). It is up about 1% this week, which is sustained would be the first weekly advance in three weeks. Silver’s four-day rally was snapped with prejudice and marked by a 3.60% decline. It is firmer today near $58.50 in late European morning turnover. If today’s gains are sustained, it will be the fifth day in the past six that the price of silver has risen. Monday’s low was slightly below $55.40 and last Friday’s low (for the year) was almost $54.75.

• September WTI climbed steadily yesterday through the European and North American session. It reached $93.50 in the North American afternoon before settling near $92.20. It was the fifth consecutive gain and the eighth in the last nine sessions. Since July 10, the price of WTI for Sept delivery has risen from about $71.35 to $93.40 (~30%). It is trading lower today and reached about $88.75. Yesterday’s low was about $87.30. We see the price action as consolidative in nature and reports warn that the war could be on the verge of a major escalation. September WTI is up about 9% this week after it surged 14.6% last week. According to AAA, the average price of unleaded gasoline has risen by almost 6% over the past two weeks to around $4.10, the highest since June 11.

Data

• The preliminary estimate for the US July PMI is expected to have edged up. Recall that the June composite of 51.9 matched the highest reading since January. It finished last year at 52.7 and was at 55.1 last July. June new homes sales also will be reported. After a 7.3% slump in May, they are expected to have bounced by around 4.5%. Through May, new family home sales are off about 15% since the end of last year and about 7% below the first five months of 2025.

• The eurozone’s flash July PMI was stronger than expected. The manufacturing PMI edged up to 52.0 from 51.4. The high this year was in April (52.2) after finishing last year at 48.8. The services PMI rose to 51.6 from 49.4. It had not been above 50 since March and was at 52.4 at the end of last year. The composite is at 51.9, up from 50.0 in June. The year’s peak was in February, before the Middle East war began, 51.9.

• The UK reported an unexpected 1.0% rise in retail sales (the median forecast in Bloomberg’s survey was for a 0.3% decline after the outsized 1.2% jump in May). Excluding gasoline, UK retail sales, which are reported on a volume basis, rose by 1.1%. Separately, the preliminary July PMI was also stronger than expected. Manufacturing rose (52.8 vs. 52.5), while services improved and rose above 50 for the first time since April (51.8 vs. 48.8). The composite jumped to 52.1 from 49.3. It peaked this year at 53.7 in January and February.

• Australia’s preliminary July PMI improved. The manufacturing reading edged up to 51.7 from 51.5 in June. The services PMI rose to53.0 from 50.5. The composite now stands at 52.6 (50.4 in June). The year’s high was in January at 55.7, which was its best level since before the pandemic. It was 53.8 last July and 51.0 at the end of 2025.

• As tipped by the Tokyo CPI report a few weeks ago, Japan’s national CPI crept up in June. The headline rose to 1.7% from 1.5% and the core, which excludes fresh food, rose by 1.6% (1.4% in May). The BOJ targets a 2% core rate. It has not been above there this year. The measure that excludes fresh food and energy slipped to 1.7% from 1.8%. Separately, the preliminary July PMI showed continued strength albeit slightly less, though the market typically does not react much to the report. The manufacturing PMI is 54.7 (54.8 in June) and the services PMI is 51.9 (52.2 in June). The composite is at 53.1 (52.8 in June). It averaged 51.5 in Q4 25, 53.3 in Q1 26, and 52.0 in Q2 26.

Disclaimer

Yen Sold to New 40-Year Lows, while PBOC Sets Dollar's Reference Rate at a 3-Year Low

noreply@blogger.com (Marc Chandler) — Thu, 23 Jul 2026 06:46:49 -0400

The foreign exchange market is quiet, and the US dollar is trading with a firmer bias. The widening Middle East war has lifted September WTI to $90 and October Brent to $93. Interest rates are firm and 10-year benchmark rates in a few European countries, and the United States are at new highs for the year. These developments overshadow today’s ECB meeting, for which there is practically no chance of a hike after last month’s move. Still, there is not reason to expect President Lagarde to push back against strong expectations of a hike in September.

The dollar’s climb to new 40-year highs against the Japanese yen met little more than the mantra about taking “decisive action” if necessary. At the same time, the PBOC set the dollar’s reference rate at a new three-year low. Lastly, the US is expected to make a new tariff announcement today or tomorrow given that the 10% Section 122 tariffs (balance-of-payments grounds) expire tomorrow.

Prices

G10

• In Europe and North America yesterday, the euro was confined to about a 1/5 of a cent above $1.1400. After recording lower highs for the past five consecutive sessions, the euro traded through yesterday’s high, slightly above $1.1420 and reached $1.1435 before stalling. The sideways to lower price action has seen the five-day moving average slip back below the 20-day after pushing above it last week for the first time since mid-May. Options for nearly 1.7 bln euro expire today at $1.1400. Another set of expiring options, for nearly 2 bln euros at $1.1450, also expires today.

• The dollar recovered against the yen from the nervous drop in late Asia yesterday (to ~JPY162.70) and remained above JPY163 for most of the North American session. The greenback held a little below the 40-year high recorded on Tuesday near JPY163.25 but reached nearly JPY163.45 today, even though Finance Minister Katayama reiterated the threat of “decisive action”. Initial support is seen near JPY163.20.

• Sterling was sold to a six-day low yesterday near $1.3355, which was the first time traded below the 20-day moving average since July 2 (before the disappointing US June job growth was reported). Sterling reached a two-month high last week (~$1.3560). Yesterday’s low is holding but the upside has been capped slightly below $1.3400, where options for GBP405 mln expire today. A band of resistance extends toward$1.3435.

• The US two-year premium over Canada narrowed slightly for the first time in three days and the Canadian dollar traded with a firmer bias. The greenback peaked near CAD1.4110 and pulled back to almost CAD1.4075 yesterday in quiet turnover. It slipped to almost CAD1.4055 today, Tuesday’s low but has bounced in the European morning to around CAD1.4085. The intraday momentum indicators are stretched, but the two-year rate differential is a little wider and risk-off mood may limit the Canadian dollar’s strength despite jump in oil prices.

• The Australian dollar traded in a narrow range as it straddled $0.7000 yesterday. Recall that it had posted a key upside reversal on June 30 after it hit a three-month low near $0.6865. It might begin looking tired if it cannot establish a foothold above $0.7220, which it retested today but is hovering around $0.7000 in late European morning turnover.

• The Mexican peso traded within Tuesday’s range yesterday, leaving the greenback pinned near the lower end of its recent range. The dollar is traded narrowly on both sides of MXN17.40. There is little momentum in either direction. The dollar is posting an outside day today, trading on both sides of yesterday’s range. The close is important, especially if it is above yesterday’s high (~MXN17.4355). Brazil, which offers a significantly greater carry than the Mexico, saw the real firm to its best level since June 16, the day before the FOMC delivered its hawkish hold. The US dollar traded slightly below BRL5.05 but settled slightly above it. Moody’s played a little catch-up yesterday as it upgraded Argentina credit status to B3 from Caa1. This is in line with Fitch’s decision in May and S&P in June.

• The dollar approached a five-week low against the offshore yuan on Tuesday (~CNH6.7635) and rose to CNH6.7760 yesterday. It is trading inside that range today (~CNH6.7675-CNH6.7755). Initial resistance may be around CNH6.7815. The PBOC set the dollar’s reference rate at CNY6.7906 (CNY6.7933 yesterday), a marginal new three-year low.

• Intervention by the Reserve Bank of India helped steady the rupee today, though the dollar settled firmly near yesterday’s high. The implications of the rally in oil have seen the rupee unwind the gains made after the recently announced measures to attract foreign capital.

Other Markets

• Most of the Asia Pacific equity markets rallied today, with South Korea’s Kospi jumped 4.4% and Hong Kong’s Hang Seng rising almost 1.3% to lead the move. India and Singapore were noted exceptions. Europe’s Stoxx 600 is off about 0.6% to give back yesterday’s gain. US index futures are off around 0.3%-0.4%

• Benchmark 10-year yields in France, Spain, and Sweden are at new highs for the year today. The 10-year Treasury yield is also at new highs for the year. The US two-year yield has risen for the past five sessions. Its yield has risen by 17 bp. The implied yield of the December Fed funds futures has risen by nearly the same amount. Over the same period, the US 10-year yield rose by about 11 bp.

• Gold rose by 1.7% yesterday, roughly the same as on Tuesday. It is the largest two-day advance since July 2-3. The yellow metal reached $4166 yesterday, its best level in two weeks. However, it has been sold to nearly $4087 today and the session low does not appear in place. A close below $4070 weakens the technical tone. Silver rose 2% yesterday after a 4.2% advance on Tuesday. It is the strongest two-day rally since June 11-12. It reached almost $61, its highest level since July 7. It has come back offered today and has been sold through yesterday’s low (~$58.75). Nearby support is seen near $58.

• September WTI reached $88.60 yesterday, which it has not seen since June 11. The high was recorded shortly before the US markets opened. It trended gently lower and briefly dipped below $86 but settled near $86.85. With Hormuz and Bab-el-Mandeb nearly shut, September WTI is testing resistance is seen around $90, a two-month high. The contract high (May 18) is $95.30.

Data

• The light US economic calendar continues today, with weekly jobless claims, Chicago Fed’s June national activity index and the KC Fed’s July manufacturing survey. None are typically market movers. Still, after rising mostly in May and into early June, weekly jobless claims have fallen in four of the last five weeks. The four-week moving average stands at 214.25k, the lowest in two months.

• Canada is expected to report a 1% increase in May retail sales. The monthly average in the first four months of the year was 0.8% (compared with -0.2% average in the Jan-Apr 2025 period). The time series is flattered by higher prices. In real GDP terms, consumption is understood as having slowed in Q2 to about a 1% quarter-over-quarter from 1.5% in Q1 26.

• Mexico reports consumer prices for the first half of July. The headline and core rates have slipped back into the 2-4% target range. The headline CPI is approaching the middle of the range, while the core is just re-entering it.

• The outcome of the ECB meeting is nearly a foregone conclusion. After last month’s hike, it will remain on the sidelines today. The swaps market has around a 90% chance of a hike discounted for the September meeting, and there is no reason for ECB President Lagarde to push against expectations. She may be asked about her future amid speculation she can re-enter French politics to compete for the presidency in next year’s contest. Previously, there was speculation she could lead the World Economic Forum.

• Australia grew 76.3k jobs in June, mostly part-time posts. In the first half of the year, Australia created 161k jobs compared with about 128k in H1 25. Of those jobs, about 88k were full-time posts compared with almost 20.5k in the H1 25. The participation rate rose to 67.0 in June from 66.7% in May, but the unemployment rate was steady at 4.4%. The futures market boosted the odds of a rate hike at next month’s meeting to about a 33% chance from about 20% yesterday. It is the highest since early June.

• Shortly before the preliminary July PMI tomorrow, Japan reports June CPI. The Tokyo report, released a few weeks ago, put the market on notice that Japan’s inflation likely rose. It would be the second consecutive monthly increase, the first back-to-back rise since last September-October. The core rate is expected to rise to 1.6% from 1.4%. It has not been above the 2% target since the end of last year.

Disclaimer

USD is Little Changed as Oil Jumps

noreply@blogger.com (Marc Chandler) — Wed, 22 Jul 2026 06:47:07 -0400

While there is much consternation from the American pundits and think tanks about China’s shock as it dominates auto manufacturing and value-added manufacturing, the two shocks from the US are more pressing for investors. First, The IEA says this is the biggest disruption in the oil market in history. The war in Middle East is escalating and the disruption has lifted September WTI to its highest level since mid-June and encourages investors and policymakers to look through energy-led decline in inflation measures, like we saw in the US last week and the UK earlier today. The disruption of helium, a byproduct of natural gas and essential for semiconductor fabrication, is also being felt. Second, the US is threatening to replace expiring tariffs (implemented on due “balance of payments” issues) with a new set later this week (claiming violation of “forced labor” standards) and this is after threatening Brazil with 25% tariff earlier this month and a 50% tariff on some Canadian goods threatened this week.

The US dollar is narrowly mixed against the G10 currencies, and excluding the oil sensitive Norwegian krone, the other currencies for the most part are +/- 0.1%. Benchmark 10-year yields are mostly firmer, while equities are mixed. The economic calendar for North America is light today and the Fed is in the middle of the “quiet period” ahead of next week’s FOMC meeting. Corporate earnings today include Alphabet and Tesla.

Prices

G10

• In quiet turnover yesterday, the euro settled slightly below $1.1400, where options for around 2.9 bln euros expire there today. The lower end of this month’s range is in the ~$1.1360-80 area. The US two-year yield rose for the past four sessions for a cumulative increase of around a dozen basis points and the US two-year premium over Germany widened from a two-month low last week (~138 bp) to around 146 bp now. A move above yesterday’s high (~$1.1430) would help stabilize the technical tone after lower lows have been recorded for five consecutive sessions.

• The dollar rose for the fourth consecutive session against the Japanese yen yesterday and reached a new 40-year high, almost JPY163.25. This has held today. The recent rhetoric about intervention, if necessary, was repeated earlier today. The dollar settled above the upper Bollinger Band (~JPY163.20 today). It is straddling JPY163 in Europe, where options for nearly $1.6 bln expire today. Speculation that the next rate hike could come sooner saw short-term Japanese rates rise today and the swaps market now has about an 83% chance of a hike discounted in October, up from less than 60% at the end of June.

• Sterling fell for the fourth consecutive session yesterday. It is the longest slump in two months. It was also offered against the euro, where it suffered one of its largest losses since mid-May. The 10-year Gilt yield reached a two-month high yesterday, seemingly a shot across the bow of the new government. Sterling was sold to a five-day low near $1.3360 yesterday. It is holding so far today despite the soft CPI report. That area holds the 20-day moving average and the (50%) retracement of sterling’s rally from the year’s low (June 24, ~$1.3140). A break could spur a move toward $1.3300 next.

• A widening of the US two-year premium over Canada and the new threat of 50% tariffs on an estimated $20 bln of US imports from Canada pressured the Canadian dollar lower yesterday. The US two-year premium jumped nearly seven basis points yesterday and almost six on Monday. At 143 bp, it reached a new high since May 2025. The US dollar pushed to about CAD1.4110 and met the (38.2%) retracement objective of this month’s pullback. It is consolidating in quiet turnover today between about CAD1.4085 and CAD1.4110. The next hurdle is seen in the CAD1.4125-55 area. Options for around $635 mln at CAD1.4075 expire today.

• The Australian dollar traded firmly yesterday but the upside stalled late in the European morning, slightly above $0.7025. It pulled back in North America and settled slightly below $0.7000. Today, the Aussie is struggling to re-establish a hold above $0.7000. The high is a little below $0.7015. Although it has held above $0.6990, it looks vulnerable. A return to Monday’s low (~$0.6965) is a risk.

• Disappointing Mexican May retail sales (-0.6% vs. median forecast in Bloomberg’s survey for a 0.1% increase) stalled the peso’s gains after it reached a three-day high. The greenback straddled the MXN17.40 level for most of the North American session. It spent little time below MXN17.40 today and looks poised to move above yesterday’s high (~MXN17.4375). After weakening in the previous two sessions, the Colombian peso retook the leadership of emerging market currencies yesterday, with around a 0.7% gain. The Colombian peso reached its best level since early 2020 late last week when the US dollar approached COP3200.

• The dollar fell to a new low for the month yesterday against the offshore yuan (~CNH6.7635). The three-year low was recorded on June 17, near CNH6.7540. The greenback is trading with a firmer bias and reached CNH6.7760 today, slightly shy of Monday’s high (~CNH6.7785). The PBOC set the dollar’s reference rate at CNY6.7933 (CNY6.7917 yesterday).

• Rising oil prices helped the US dollar extend its gains against the Indian rupee today. The dollar reached INR96.5760 and settled slightly below there. It reached its highest level since the record was set two months ago, near INR96.9650. A trendline drawn off the lows from late June and early July comes in today around INR95.90 and INR96.10 at the end of this week.

Other Markets

• Yesterday’s rise in the Nasdaq was the largest this month. This coupled with Beijing’s efforts to support local equities, has had limited spill-over today. Large bourses in the Asia Pacific region were mixed, though Taiwan and South Korean markets advanced. Europe’s Stoxx 600 is advancing for the second consecutive session, while US index futures point to a lower opening. Alphabet and Tesla report earnings today.

• Benchmark 10-year yields are firmer today. The 10-year US Treasury yield settled above 4.60% yesterday for only the third time this year. The high for the year was seen on May 19, slightly below 4.69%. It is near 4.63% now. In the past three sessions, the 10-year breakeven (the difference between the conventional yield and the inflation protected security) has risen by about three basis points and the expected year-end Fed funds target rate rose almost three basis points. Between the two, they seem to account for the bulk of the rise of the 10-year yield. Asia Pacific yields were mostly 2-3 bp higher and European yields are 1-2 bp higher as many are pushing to new three-month highs today.

• Gold rose by about 1.5% yesterday, its largest advance since July 2 (disappointing US June jobs growth was reported that day). The yellow metal reached slightly through $4084, s six-day high. Good buying emerged on the pullback in the North American morning to a little below $4045, but sellers blocked the upside on the move back above $4080. Follow-through buying today has lifted gold to almost $4142 but has pulled back to a little under $4120 in late European morning turnover. Silver jumped 4% yesterday, which was its biggest advance since June 11. The session high was recorded in the European morning (~$59.25). On the nearly $1 drop in the North American morning, buyers re-emerged. Silver stalled a fraction of a cent below $60 today and is finding support in Europe near $59.

• September WTI rose another 2.25% yesterday after rising around 5.3% in the previous two sessions. The contract briefly traded above $85. The $84.55 area corresponds to the (61.8%) retracement of the decline from the contract high from May 18 (~$95.30). It has reached $88.60 today and is up almost 4.5% in late European morning activity. There is a band of congestion that extends to about $90.

Data

• The UK reported June CPI edged up by 0.1%, and this allowed the year-over-year rate to slipped to 2.6% from 2.8%. The core rate was steady at 2.6%. It is the third consecutive month that core prices rose less than 3% year-over-year. They had been rising faster than 3% since the end of Q3 2021. Services prices, which remain sticky, pulled back to 3.6% from 3.7%. Lower energy and food prices, coupled with heavy discounting on clothes, were reported. Among the first initiatives of the new government was to eliminate the VAT on electricity, which is estimated to be worth about GBP45 per household this year. The government said it will pay for the break by scrapping the previous government’s plan to create a national digital ID. However, an official in Starmer’s government said that the ID program was not funded.

• Japan reported a larger than expected JPY407 bln June trade deficit. Deviating from the powerful seasonal pattern, it deteriorated from the JPY392 bln shortfall in May. Although the yen is undervalued by various metrics, it has not translated into a trade surplus, but the deficit is shrinking. The average monthly deficit in H1 25 was about JPY393 bln and averaged about JPY169 bln in the first six months this year. Exports have risen 19.3% year-over-year, while imports have risen 25.4% year-over-year.

Disclaimer

Aided by China, Equities Bounce Back, and the Canadian Dollar Recovers from the Drop on US Threat of 50% Tariffs

noreply@blogger.com (Marc Chandler) — Tue, 21 Jul 2026 06:47:10 -0400

The US dollar is mostly softer against the major and emerging market currencies. The yen is an exception, and the market is pushing the dollar closer to the 40-year high recorded at the start of the month near JPY162.85. Oil prices are firm as the de-escalation efforts are proving tricky. Meanwhile, reports that Beijing is supporting the equity market by mobilizing state-backed investors may have encouraged bargain hunting after the tech and chip pullback.

Late yesterday, the US threatened 50% tariffs on some Canadian goods for actions it claims discriminate against US companies. At first the Canadian dollar extended yesterday’s losses, but it has recovered and is now a little higher on the day. The new UK government’s honeymoon may be short-lived following today’s report that the former government borrowed more than forecast in the first three months of the new fiscal year.

Prices

G10

• True to the recent pattern, the rise in short-term US rates yesterday saw the euro sold to four-day lows slightly above $1.14, where large options expire today and tomorrow. It has stabilized today alongside the US two-year yield. Still, the euro has not gone anywhere. While $1.1400 held, it has not been above $1.1430. Yesterday’s high was about $1.1450 and last week’s high was closer to $1.1485.

• The dollar reached a seven-day high against the yen near JPY162.60 yesterday and crept up to JPY162.70 today. The 40-year high was recorded on July 1 around JPY162.85. Finance Minister Katayama warned last week that officials are prepared to intervene at any time if necessary. Tokyo is keen to come up with ways that will encourage Japanese savers and pension funds to boost domestic investments, though the weekly MOF data suggests this is already taking place.

• Sterling appeared to fall victim to buy the rumor, sell the fact, as Andrew Burnham replaced Keir Starmer as UK Prime Minister. There was little reaction to the appointment John Healey, former defense secretary, as Chancellor of the Exchequer. Sterling extended its pullback after approaching $1.3560 in the middle of last week and fell slightly below $1.3415 yesterday. Soft employment data today has left sterling in about a quarter-of-a-cent range, mostly above $1.3425.

• From the late June low for the year, the Canadian dollar rose by about 1.7% through early yesterday before retreating in North America. It was already falling before the softer than expected June CPI (-0.4%, matching the largest monthly decline since the end of 2022). The combination firmer US two-year yields and softer Canadian rates saw the differential widen by nearly seven basis points, the biggest one day jump in two months weighed on the Loonie. The US dollar recorded a bullish outside up day but trading on both sides of last Friday’s range and settled above Friday’s high. The US has threatened a new 50% tariff on some Canadian products under old Smoot-Hawley legislation, and the greenback initially extended yesterday’s gains to CAD1.4085, but the new levy does not come into effect for 30 days, ostensibly giving negotiators time. The greenback was sold to about CAD1.4055 in Europe. The intraday momentum indicators leave room for some additional but limited US dollar losses. Nearby support is around CAD1.4040. The latest Commitment of Traders report, which covered the week through last Tuesday, showed non-commercials (speculators) in the CME futures had amassed the largest net short Canadian dollar position since early 2025.

• The Australian dollar posted an outside up day yesterday and pushed a little above of last week’s high near $0.7020 today. The $0.7025 area corresponds to the (38.2%) retracement of the Australian dollar’s downtrend since the year’s high on May 6 (~$0.7280). A move above there may target the $0.7070-90 area. Still, today’s gains have left the intraday momentum indicators over-extended, warning of the risks of chasing it higher in early North American turnover.

• US and Mexico hold the third round of USMCA talks today. Yesterday, the peso fully recouped its pre-weekend loss. The 0.65% gain meant it was the best performing emerging market currency, squeezing ahead of the South Korea won. Latam currencies were four of the top five emerging market currencies yesterday. The greenback peaked near MXN17.5540 yesterday and fell to almost MXN17.41. Follow-through selling today pushed it to about MXN17.3770. Last week’s low was about MXN17.3575.

• The offshore yuan edged higher yesterday and approached last week’s best level. The US dollar reached CNH6.7815 before the weekend and reached CNH6.7660 yesterday. It slipped to CNH6.7635 today, a new low for the month. The three-year low was recorded on June 17 (when the Fed delivered its hawkish hold) near CNH6.7540. The PBOC set the dollar’s reference rate slightly lower after setting it higher for the previous two sessions, (the first back-to-back increase this month).

• The Indian rupee rose by about 0.2% today, its biggest gain in about two weeks. Reports suggest the central bank intervened yesterday, but not today. Steadier oil prices today may have arrested the rupee’s slide, which approached the record low yesterday. The dollar settled near INR96.24 today, compared with about INR96.28 before the weekend.

Other Markets

• Equities are firmer today. MSCI’s Asia Pacific Index fell nearly 3.8% last week and slipped further yesterday. The large bourses in the region rallied today but Hong Kong and India. China’s CSI 300 was aided by reports that large state-backed investors, insurers, and asset managers were supporting the equities. It rose by a little more than 3%. The Nikkei 225 rose 3.25%, while South Korea’s Kospi gained 3.5% and Taiwan’s Taiex jumped 4.2%. Europe’s Stoxx 600 eked out less than a 0.1% gain last week before falling 0.3% yesterday. It is up 0.45% in late morning turnover. US index futures are trading higher, with the Nasdaq up around 1.3% and the S&P 500 about 0.5% better.

• Benchmark 10-year yields were firmer yesterday. The 10-year Gilt yield jumped eight basis points as investors balked at the new prime minister’s effort to secure “flexibility” within the existing fiscal rules. The 10-year Gilts yield ended June near 4.75% and reached 5.03% yesterday, its highest level since May 19. It is a little softer today. Most European yields are slightly firmer. The 10-year US Treasury yield rose almost six basis points to poke above 4.60% but is near 4.59% now.

• Gold remains pinned its recent trough, and for the third consecutive session yesterday, it traded on both sides of $4000. It is trading firmer today and reached $4084. Last week’s high was near $4102. Silver recorded the year’s low before the weekend (slightly below $54.80). It traded higher yesterday and reached nearly $57.50. Follow-through buying today lifted silver to almost $59.25. The 20-day moving average is ~$58.75 and silver has not settled above it in two months.

• The escalation and widening of the Middle East war over the weekend sent September WTI to $84.60 early yesterday, its best level since June 11. Talk of a new ceasefire proposal saw oil pare its gains and recorded a low in early North American trading yesterday near $79.60. Still, with the lack of visibility and some general skepticism. It is trading in around $1 on both sides of yesterday’s settlement (~$82.50).

Data

• Last week, the -0.2% decline in US June retail sales, excluding auto sales, overshadowed new that the July Philadelphia Fed’s business outlook soared to 41.4 from 10.3. That was its best level since late 2021. Gains in new orders and unfilled orders are promising. Today, the Philly Fed’s July non-manufacturing survey is due. It likely rebounded from the -25.8 reading in June, weakest since May 2025. Friday’s preliminary July PMI (expected to show slight improvement) is the data highlight of the week.

• Mexico reports May retail sales today. It is unlikely to match the 0.8% jump in April, which was the strongest since January. In the first four months of the year, Mexico’s retail sales rose by an average of 0.3% a month. In the Jan-Apr 20025 period, retail sales rose by an average of 0.2% a month.

• Germany’s ZEW investor survey showed a continued recovery in July from the setback seemingly spurred by the Middle East War. Expectations jumped to 59.6 in January from 45.8 in December 2025. That was the highest since July 2021. It had fallen to -17.2, the weakest since the end of 2022 in April. It reached 26.3 in July, up from 10.5 in June, and its best since the Middle East war began. The assessment of current conditions improved in each of the first three months of the year deteriorated in each month in Q2. However, it has begun Q3 with a modest improvement. It rose to -77.6 in July from -81.0 in June, which is also where it finished 2025.

• The UK reported government finances and the provided fresh data on the labor market today. The government finances that the Burnham government is inheriting leaves little room for fresh fiscal initiatives if former Chancellor Reeves’ fiscal rules will be followed. The UK borrowed more than forecast in the first three months of the new fiscal year, and the deficit was GBP2.7 bln more than the Office for Budget Responsibility had forecast in March. The labor update was mixed. Bonus payments saw the average weekly earnings (3-month, year-over-year) slip to 4.3% from 4.4%, but excluding bonuses and private earnings (excluding bonuses) were steady at 3.4% and 2.9%, respectively. The number of employees on payrolls slipped by 4k in June and was the fourth decline in past five months. The ILO measure of unemployment was steady at 4.9%. The claimant count rose by 6.7k in June compared with an average monthly increase of 12.3k through May. In the H1 25, the claimant count fell by an average of 4k a month. The BOE meets next week but the chances of a change in policy are remote. The swaps market has about a 60% chance of a hike discounted at the following meeting in September.

Disclaimer

Markets in Wait and See Mode

noreply@blogger.com (Marc Chandler) — Mon, 20 Jul 2026 06:40:37 -0400

The capital markets are off to a mostly quiet start today, with Japanese markets closed and mixed signals from the Middle East after the war expanded over the weekend. Crude oil prices initially rallied but have come back off. The line-up of the new UK government is awaited. The tech sell-off continued in Asia but US index futures are trading firmer.

The preliminary July PMIs are due at the end of the week, and the ECB meeting on July 23 is seen as paving the ground for the next hike in September. At the end of the week, the US Section 122 tariffs expire. The Section 301 (10%-12.5%) tariffs for using forced labor might not be ready to be implemented before the others expire. The Trump administration will likely address these issues in the coming days.

Prices

G10

• The euro traded in about quarter-of-a cent range before the weekend above $1.1425 and remains in that range today. Options for 1.6 bln euros at $1.1425 expire today. Around 4.7 bln euros of options at $1.1400 expire tomorrow and Wednesday. The high for the month, almost $1.1485, was recorded last Wednesday after the softer than expected US inflation gauges.

• The Japanese yen consolidated last week and remained in the previous week’s range. The small decline in US rates and the threat at the end of the week of material intervention did not give the yen much traction. For the fourth session today, the dollar did not trade below JPY161.90. It did record a marginally new seven-day high today near JPY162.60. The dollar appears bounded by two strikes today. One set, for nearly $3 bln is struck at JPY162 and the other for about $560 mln is struck at JPY162.50. Local markets were closed today for a national holiday (Marine Day).

• Sterling fell to $1.3425 before the weekend. It had recorded a one-month high in the middle of last week (~$1.3560), after the soft US CPI and PPI, and amid speculation that Mahmood would be the next Chancellor of the Exchequer. A formal announcement of the new cabinet is expected later today. Sterling has rallied around a nickel since the late June lows. It is consolidating today between about $1.3450 and $1.3480.

• The US dollar’s May and June gains against the Canadian dollar continued to unwind last week, helped, we think, by narrowing of the US two-year premium over Canada. The premium has narrowed for the past four sessions coming into today. The US dollar fell to a marginal new low since June 17 (the Federal Reserve delivered a hawkish hold that day), almost CAD1.40 today, but has recovered to new session highs late in the European morning near CAD1.4035. The pre-weekend high was about CAD1.4050. The CAD1.3980 area holds the (38.2%) retracement of the greenback’s gains since May 1. A break of CAD1.3955 could signal a move to the next retracement target near CAD1.3900.

• The Australian dollar fell to a three-day low before the weekend near $0.6965. It recovered but stalled around $0.6990. Still, it managed to settle above the previous week’s high (~$0.6970), suggesting that the two-day pullback was corrective in nature. It has traded on both sides of last Friday’s range today and the close is important from a technical perspective. A close above the pre-weekend high (~$0.7000) would be constructive.

• The Mexican peso fell to new lows for the week ahead of the weekend. The dollar reached almost MXN17.5575. It has come back offered today and was pushed to about MXN17.4850. The dollar appears to be in a large channel in recent weeks. The upper end is near MXN17.60, while the lower end is around MXN17.35.

• The offshore yuan slipped to three-day low at the end of last week. The dollar traded above CNH6.7800. Still, it was the third consecutive weekly decline for the greenback. It has held below CNH6.78 today and found support near CNH6.7660. While the offshore yuan was confined to its recent ranges, the PBOC set the dollar’s fix at a new three-year low of CNY6.7909 last Thursday before raising it to CNY6.7934 before the weekend. Today’s reference rate was set at CNY6.7948.

• Intervention by the Reserve Bank of India in both the onshore and offshore markets failed to do more than stabilize the rupee at lower levels. In fact, the dollar settled around INR96.45, its highest level since the record high was set on May 20 (~INR96.9650).

Other Markets

• The S&P 500 and Nasdaq gapped lower before the weekend and although they traded higher than the opening for most of the session, the gap remained open. They extend to about 7504 in the S&P 500 and 25765 in the Nasdaq. US index futures are trading firmer now. Asia Pacific equities were not as fortunate. Most large markets fell, except Hong Kong and China’s CSI 300. Europe’s Stoxx 600 is treading water, and is little changed through almost midday.

• Benchmark 10-year yields were mostly softer before the weekend, though on the week, among the major markets, only the 10-year Treasury, Gilt and JGB yield finished lower. Yields are firmer today, with the 10-year Gilt rising 2.5 bp, the most in Europe. The 10-year US Treasury yield is a single basis point to almost 4.56%.

• Gold was sold to a new low for the week ahead of the weekend, slightly below $3960. It recovered and settled above $4015. It is little changed today but firmer. A move through $4075 is needed to lift the technical tone. Silver recorded a new low for the year before the weekend, a little below $54.80. It recovered and settled higher on the day. It is near $57 now. Still, it must re-establish a foothold above $60 to improve the technical tone.

• September WTI jumped 3.8% before the weekend to around $81.50, its best level since June 12, a couple of days before President Trump suggested a ceasefire with Iran was going to be struck. It has now retraced half of the decline from the May 18 high (~$95.30). It reached $84.60 today before reversing lower amid some hopes of a new mediated effort despite the escalation over the weekend. It found initial support near $81.

Data

• It is a light week for US economic data, and it begins with the Conference Board’s June index of leading economic indicators. It edged up in April and May. The last time it rose in a quarter was Q4 21. Yet, the Atlanta Fed GDP tracker warns that growth likely slowed sharply in Q2 (~1.3% vs. 2.7% in Q1). The median forecast in Bloomberg’s survey is for 2.2% growth in Q2 but anticipates it slowing to 1.7% in the here in Q3.

• Canada reports June CPI today. Given the decline in energy prices, the 1.0% increase in May will not be repeated. An outright decline, as in the US, is possible. The last time Canada’s monthly CPI declined was in December. Bank of Canada puts more weight in the underlying core measures (median and trimmed), which average 2.05% in May compared to 2.65% at the end of last year.

• The eurozone reported a 0.4% increase in construction in May. It was the third consecutive monthly rise, something that has not experienced since 2020. It rose by an average of 0.1% a month last year and fell by an average of 0.1% a month in 2024. The median forecast in Bloomberg’s survey sees 0.2% Q2 GDP after a flat Q1.

• The UK has a new prime minister: Andrew Burnham. He is the seventh British prime minister since the Brexit referendum a decade ago. Despite the political drama, sterling has done relatively well. In Q2, it was one of only two G10 currencies to have risen against the US dollar (the Australian dollar was the other). Sterling also rose to a new 12-month high against the euro.

• Chinese banks let the one-year and five-year loan prime rates steady at 3.0% and 3.5%, respectively.

Disclaimer

Week Ahead: Tug-of-War between Softer US Rates and Safe-Haven from Escalating Middle East War

noreply@blogger.com (Marc Chandler) — Sat, 18 Jul 2026 07:15:00 -0400

The US dollar fell against all of the G10 currencies last week but the Japanese yen. The softer than expected US CPI and PPI saw the US two-year yield fell by nearly eight basis points. As we show below, in current context, several of the dollar pairs are very sensitive to the changes in short-term US rates, or the like Canadian dollar, the two-year rate differential. Still, as the Middle East war re-escalated, the greenback seemed to catch a safe haven bid. In addition, the pressure on equities, especially in the Ai and tech sector continue to come under strong profit-taking pressures. It is widely recognized that foreign demand for US equities is the primary channel that is funding the US current account deficit. Yet, over the last 30 and 60 sessions, changes in the Dollar Index are more correlated with changes in the S&P 500 than Nasdaq.

The Middle East war and the sharp sell-off in equities in recent days weighs on risk-taking sentiment. These issues will carry into next week. Next week's highlights include the ECB meeting, which will most likely leave rates on hold. President Lagarde will likely keep the door open to more action, and this will support ideas of a September hike. She may also be asked about her intentions in terms of French politics. In the UK, Andrew Burnham will formally become the seventh UK prime minister since the Brexit referendum in June 2016. At the end of the week, the US Section 122 tariffs expire. The Section 301 (10%-12.5%) tariffs for using forced labor might not be ready to be implemented before the others expire. The Trump administration should be expected to address these issues in the coming days.

Drivers: US interest rate expectations continue to arguably be the key driver for the dollar. The 30-day correlation of changes in the Dollar Index and the two-year US Treasury yield is near 0.60, and the correlation with changes in the December Fed funds futures contract is closer to -0.70. The 60-day correlation are around 0.65 and -0.70, respectively. After the Fed delivered its hawkish hold in mid-June, the December Fed funds futures were pricing in about 38 bp of tightening this year. As recently as July 13, following the escalation of hostilities in the Middle East and hawkish comments by Federal Reserve Governor Waller, the nearly 43 bp of tightening was priced. After last week's inflation gauges and real sector data, there are about 26-27 bp of tightening discounted, the least since June 16, the day before the June FOMC meeting concluded.

Data: After the US jobs report and inflation gauges, the high-frequency data turns lighter this week ahead of next week's FOMC meeting. The market does not appear to react much to the regional Fed survey. The preliminary July PMI headline at the end of the week. The composite averaged 51.7 in Q1 26 and Q2 26. This was the lowest quarterly average since Q1 24. June new home sales are also due at the end of the week. Existing home sales were reported earlier this month and unexpectedly fell by 2.4% and were off about 4.2% in H1 26. They fell a little more than 5% in H1 25. Existing single family home sales have been considerably weaker. In the first five months of the year, they fell by almost 20%. In the Jan-May 2025 period, they fell by a little more than 5%.

Prices: The Dollar Index peaked on June 24 near 101.80 and chopped lower to reach 100.35 in the middle of last week. The downtrend line comes in near 101.20 on Monday and finishes next week closer to 101.00. The 20-day moving average is slightly above 101.00. The momentum indicators are still falling.

EMU

Drivers: The euro remains sensitive to changes in US rate expectations. The 30- and 60-day correlations with the two-year US yield remain near multi-year extremes (~-0.70 and -0.75, respectively). These correlations are more robust than the correlation between the exchange rate and the two-year differential (~ 0.55 and -0.27, respectively).

Data: The key event is the ECB meeting on Thursday. After the June hike, there is little chance of a change in policy. The swaps market has about a 22 bp higher rates discounted for the following meeting in September, when the staff will update its economic projections. After contracting by 0.2% quarter-over-quarter in Q1 26, the median forecast in Bloomberg's survey is for a 0.2% expansion in Q2. The day after the ECB meeting, the July preliminary PMI will be reported. Recall that the composite rose in June to 50 after falling to 48.5 in May and 48.8 in April. It finished last year at 51.5.

Prices: The euro continues to struggle, though it reached a four-week high in the middle of last week slightly below $1.1485. It was sufficient to lift the five-day moving average above the 20-day moving average for the first time since mid-May. However, by the end of the week, it had given back the most of its gains and settled around 1/5 cent higher on the week. The momentum indicators look more constructive than the price action. A break of last week's low (slightly below $1.1380) leaves little on the charts ahead of the year's low recorded on June 24 (~$1.1325).

PRC

Drivers: There is no doubt that the Beijing manages the exchange rate. We continue to put the emphasis on the daily setting of the dollar's reference rate. So far, this year, the rolling 30-day correlation of changes in the Dollar Index and the greenback against the onshore yuan peaked in May near 0.70 and eased to around 0.57 last week, the lowest since mid-March. The dollar's movement against the offshore yuan's 30-day correlation with the Dollar Index (~0.57 now from a peak in late April near 0.88) and is also the lowest since March. Beijing can, if it wanted, simply cite US intelligence agencies previous debunking of President Trump's re-hashed claims that China interfered with the outcome of the 2020 election (by stealing 220 mln voter files). However, that the US raised the issue in such a high-profile way of the anticipated Trump-Xi meeting (late September in NY) warns to keep expectations low.

Data: In a quiet week for Chinese data, the main feature the setting of the one- and five-year loan prime rates. They are at 3.0% and 3.5%, respectively. Expectations for a change are low, but if there is a surprise, it could be a small 5-10 bp reduction.

Prices: The dollar recorded a three-year low against the offshore yuan shortly before the Federal Reserve's hawkish hold was announced on June 17 (CNH6.7540). It reached nearly CNH6.82 a week later and has been in that range for ever since. This month's high has been around CNH6.81 and it could be retested. The PBOC has continued to guide the onshore yuan higher/dollar lower. The greenback's fix was set at CNY6.7909 on July 16, a new three-year low, nearly a month after the dollar bottomed against the offshore yuan.

Japan

Drivers: The rolling 30-day correlation between changes in the US 10-year yield and the dollar against the yen peaked in mid-June near 0.66 and fell slightly below 0.20 in early July. It is now near 0.25. The 30-day correlation between changes in the exchange rate and the US two-year yield is a little below 0.40. It peaked in May slightly above 0.65 and was about half as much a week ago. Separately, Finance Minister Katayama suggested the domestic pension funds boost allocation to Japanese asset markets, and that Japanese government bonds should be available to for individual tax-free investment vehicles (Nippon Individual Savings Accounts). The market's reaction to the reports was supportive of both JGBs and the yen.

Data: Outside of the preliminary July PMI, for which the local market tends not to follow closely, there are two highlights in the coming days: the June trade balance and the national CPI. There are powerful seasonal factors the lift the Japanese trade surplus in June. In the past 20 years, there has been one exception, 2008. Helped by the undervalued yen and AI-related foreign demand, Japan's trade balance is gradually improving. In the first five months of the year, Japanese recorded an average monthly deficit of about JPY121.5 bln. The deficit in the Jan-May 2025 period averaged ~JPY496.3 bln. Turning to the CPI, we already know that the Tokyo CPI rose from 1.4% to 1.7% and the core measure rose from 1.3% to 1.6%. A similar rise in the national reading would lift the headline to around 1.8% from 1.5% and the core rate may rise to 1.7% from 1.4%. It has not been above the 2% target this year.

Prices: Japan's markets are closed on Monday for Marine Day but some may see intervention as a risk after the threats on Friday. The dollar is firm against the yen but spent last week confined to the previous week's range. The five-day moving average (closing basis) crept slightly higher last week (~JPY162.30 vs.~JPY162.15). The yen was the only G10 currency that fell against the dollar last week. Finance Minister Katayama renewed the intervention threat, but the market barely took notice. In the days that followed her call for Japanese pension funds to boost domestic allocation, Japanese investors increased their purchases of foreign bonds. The JPY1.09 trillion bought in the week ending July 10 was the most in two months and more than the amount purchased last month. The Bloomberg surveys show many analysts see the dollar at its peak but the price action suggests there still is upside risk for the dollar.

Drivers: Sterling remains highly correlated with the euro, but it has been benefiting from the dollar's pullback more. It has risen to its best in a year against the euro, and it may have helped sterling perform better against the dollar. Sterling is inversely correlated with changes in the UK's two-year yield. The 30-day inversion is minor (~-0.10). Over the past 30 sessions, changes in sterling are slightly inversely correlated with the UK's 10-year yield. The 30-day inverse correlation with changes in the US two-year yield is near -0.60. It reached almost -0.80 in the middle of last month, the most in more than two decades.

Data: Politics will rival economics in the UK in the coming days. The Labour Party's leadership challenge ends on July 17, and Burnham will formally replace Starmer on July 20. His first and most important appointment, from the market's perspective, will be the Chancellor of the Exchequer (similar to a powerful finance minister). Speculation over the appointment injected a little volatility into sterling and Gilts last week. In terms of economic data, the UK reports the four market-sensitive data points: the government finances, labor market, CPI, and retail sales. The data pose headline risks but the impact on policy expectations will likely be minimal. The BOE meets on July 30 and there is little meaningful chance of a change in policy. The swaps market leans toward a rate hike at the September meeting. Yet, the May wage data and the June time-series are unlikely to have much impact on BOE decision-makers in September.

Prices: Sterling reached a two-month high in the middle of last week (almost $1.3560) amid speculation that Home Secretary Mahmood will be named Chancellor of the Exchequer. It pulled back to around $1.3425 before the weekend on the broadly stronger US dollar and risk-off mood. This effectively retraced (61.8%) of last week's gains. The next area of support is seen in the $1.3380-$1.3400 band, which houses the 200-day moving average and the July 15 low. Sterling rallied from a low of about $1.3140 on June 24 and this has stretched the momentum indicators, which appear poised to turn lower. At the same time, sterling looks set to unwind some of its recent gains against the euro (~2.75% since June 22). The cross-rate activity, which was a tailwind for cable, could now be a tailwind.

Canada

Drivers: We have suggested that one of the key drags on the Canadian dollar has been the widening of the US two-year premium over Canada. It rose from about 90 bp at the end of April to almost 145 bp at the start of the July. During that time, the greenback rose from about CAD1.3550 to nearly CAD1.4250. Weaker US job creation in June and softer inflation gauges last week saw the US two-year premium narrow to almost 130 bp. The 30-day correlation between the exchange rate and the interest rate differential is near 0.67, the highest in more than three years. The correlation between the exchange rate and the two-year US yield is slightly below 0.45.

Data: Canada reports June CPI and May retail sales data in the week ahead. Headline CPI has risen at an annualized pace of a little more than 7% through the first five months of the year. It was slightly above 5% in the Jan-May 2025 period. The underlying median and trimmed core measures are considerably more tame (average 2.05% in May), and the central bank puts more emphasis on them. Canada's retail sales have been flattered by rising prices. Retail sales rose by an average of 0.8% a month for the first four months of the year. In Jan-Apr 2025, they fell by an average of 0.2%. The economy bounced back in Q2 after contracting by 0.1% (annualized rate in Q1 26 and 1.0% in Q4 25. However, household consumption has pulled back, from 2.9% in Q4 25 to 1.5% in Q1 26 to around 1.0% (median forecast in Bloomberg's survey) in the quarter that just ended.

Prices: The Canadian dollar posted its first back-to-back weekly gain since the end of April/early May. The US dollar approached psychological support near CAD1.4000, while the CAD1.3980 area corresponds to the (38.2%) retracement of the rally off the May 1 low, and the next retracement (50%) is near CAD1.3900. The five- and 20-day moving averages crossed for the first time in a little more than two months. The momentum indicators are trending lower.

Australia

Drivers: The Australian dollar is sensitive to the change in US two-year yields. The 60-day inverse correlation is around -.0.69, near the most in more than a decade. The 30-day correlation is about -0.56. It reached a little more than -80 last month, also the most in more than a decade. Meanwhile, the 60-day correlation between changes in the exchange rate and changes in the US-Australian two-year interest rate differential reached nearly 0.63 at the end of last week, the most since early 2018. The Aussie is also sensitive to the US dollar’s broad direction. The 60-day inverse correlation is near -0.75 and the 30-day correlation is near -0.60. Although there is much talk about Australia’s exposure to commodities and critical minerals, the equity market has underperformed. It is up about 1.25% this year.

Data: Australia reports June jobs data on Thursday followed by the preliminary PMI on Friday. Australia created about 76.5k jobs in the first five months of the year, little changed from the year ago period. However, the creation of full-time positions slowed to about 56k from 90k. The participation rate averaged 66.7% in Jan-May of this year compared with 66.9% in the first five months of last year. The unemployment rate stood at 4.4% in May. A year ago, it was at 4.1%. The central bank, which meets on August 11, may be more sensitive to inflation and inflation expectations than the labor market now. The futures market sees the Reserve Bank of Australia on the sidelines until at least Q4. The composite PMI has been in sawtooth pattern in recent monthly, chopping back and forth over the 50-threshold. It finished last year at 51.0 and were at 50.4 in June.

Prices: The Australian dollar reached a one-month high in the middle of last week near $0.7020. The upward momentum stalled, and the Aussie pulled back to almost $0.6965 before the weekend. The momentum indicators are still constructive. The $0.6960 area corresponds to the (38.2%) retracement of this month's gains and the (50%) retracement is a slightly below $0.6940 and the 20-day moving average is slightly lower.

Mexico

Drivers: The Mexican peso is sensitive the dollar's broad direction. The 30-day correlation of changes in the Dollar Index and the peso is near 0.70, which is higher than many currencies. As we have noted, the peso is one of the few emerging market currencies that trade practically 24 hours a day. It is sometimes used as a proxy for other emerging market currencies. Over the past 30-sessions, the US dollar-peso exchange rate is roughly as inversely correlated with the JP Morgan Emerging Market Currency as it is positively correlated with the Dollar Index Also, the 30-day correlation of the US dollar against the peso and the US two-year yield is slightly below 0.60.

Data: Mexico's price pressures are subsiding, and the economy appears to have recovered after it contracted by 0.6% (quarter-over-quarter). Headline inflation slowed to 3.37% in June, the slowest since 2020. The mid-July reading will be reported Thursday. Economic growth has returned. The IGAE economic activity report, which serves the function of a monthly GDP reading, will be closely watched. It rose by 1.2% in April, the largest increase since March 2020. May retail sales are due Tuesday. They jumped by 0.8% in April. The risk is that retail sales cannot maintain the surge and pullback. Still, they were practically flat in the first quarter and likely improved last quarter. Nevertheless, in GDP terms, consumption likely slowed in Q2 after growing 2.2% year-over-year in the first quarter.

Prices: The dollar tested the lower end of its recent range against the Mexican peso in the middle of last week, near MXN17.3575. It recovered and pushed a little above MXN17.55 before the weekend. The upper end of the recent range is in the MXN17.6450-MXN17.6765 area. A more serious test for the greenback may be the 200-day moving average (~MXN17.71), which the dollar has settled above since April 2025.

Disclaimer

War and Tech Slump Weigh on Sentiment

noreply@blogger.com (Marc Chandler) — Fri, 17 Jul 2026 06:47:33 -0400

There are two major concerns that are spurring risk off ahead of the weekend. First, the Middle East war is escalating, and there does not seem to be a near-term off-ramp. Second, the rout in technology stocks is rippling through the equity markets, and sharp losses in many Asia Pacific equity markets have been recorded today and the Nasdaq is poised to gap dramatically lower.

The US dollar is mixed but mostly firmer and it looks poised to finish the week on a firm note. Japan’s finance minister threatened to take “decisive action” if necessary, but the yen failed to respond. The yen is weaker for the fourth week in the past five, though volatility is low. The UK will have a new prime minister on Monday, and the prospect of a market-friendly Chancellor of the Exchequer has spurred a Gilt rally, the same was thought of the current Chancellor a couple of years ago.

Prices

G10

• The euro trended lower in North America as the greenback seemed top benefit from a safe haven appeal after reports that Iran has urged to Houthis to close the Strait of Bab El-Mandeb, if the US strikes Iran’s power grid. If so, the dollar reacted more than crude oil prices. In any event, after it reached almost $1.1485 on Wednesday, the euro returned to almost $1.1430 in the North American session. It has held above it so far today but has been unable to push much above $1.1450. The euro settled near$1.1415 last week.

• The Japanese yen slipped to a one-week low yesterday. On an intraday basis the dollar has frayed the 20-day moving average but has not settled below it since mid-May. It is found a little above JPY162.00 today. The dollar reached JPY162.55 yesterday, shouting distance of the 40-year high recorded on July 1 (~JPY162.85). It is trading mostly between JPY162.15 and JPY162.50 today. Options for about $540 mln at JPY162.00 expire today. New threats by the finance minister to “take decisive action” failed to move the market. The yen’s historical (actual) volatility over the past two weeks is near 4.4%, which is low in relative terms compared with the G10 currencies, and in absolute terms for the yen itself.

• The broadly firmer dollar and the lack of confirmation of the next prime minister’s Chancellor saw sterling give back about half of Wednesday’s surge. Sterling pulled back from almost $1.3560, the high since May 12 to $1.3460. Last week’s high was ~$1.3450. It has fallen to almost $1.3435 today. The $1.34 area may offer solid technical support. It corresponds to a (38.2%) retracement of sterling’s rally since the late June (when it reached ~$1.3140) and the 200-day moving average.

• Initially, the Canadian dollar rose to its best level since mid-June yesterday but it could not sustain the momentum in the face of risk-off, the broadly firmer greenback, and the slight widening of the US two-year premium (to a new three-day high). The US dollar held psychological support and recovered from CAD1.4010 to almost CAD1.4060 but remained below Wednesday’s high was (slightly above CAD1.4075). The greenback is consolidating between about CAD1.4025 and nearly CAD1.4050. Options for ~$475 mln at CAD1.4015 expire today.

• The Australian dollar traded in less than a 15-tick range yesterday on both sides of $0.7000. It reached about $0.7020 on Thursday, the high since June 22. It has slipped to a three-day low today near $0.6965. Last week, it settled near $0.6955.

• The dollar recovered from MXN17.3575, Wednesday’s low to MXN17.46 yesterday. The Mexican peso’s roughly 0.3% decline yesterday was among the smallest in the region. Only the Argentine peso rose in Latam and the Chilean peso slipped by 0.1%. The Brazilian real come under the most pressure in the region (-0.6%) following news that Lula was edging ahead in the polls, and the US was lifting the tariff om most Brazilian imports to 25% (effective next week). The dollar gapped higher against the Brazilian real and regained a foothold above BRL5.10. The dollar is probing the MXN17.48 area in Europe today. The week’s high (~MXN17.54) may draw prices.

• The dollar consolidated yesterday within Wednesday’s range against the offshore yuan. The greenback settled firmer but below the five-day moving average, for which it has settled below since last Thursday. However, the US dollar is firmer today, above the five-day moving average (~CNH6.7760) and pushed above CNH6.78. The next chart area may be CNH6.79. After setting the dollar’s fix yesterday at ever so slightly new three-year low (CNY6.7909), it was lifted to CNY6.7934 today. Last Friday’s fix was CNY6.7989.

• The dollar rose to a new high for the week against the Indian rupee today (~INR96.4065). The central bank governor underscored inflation risks stemming from the Middle East war and the prospect of a weak monsoon season. Indian equities are among the strongest in the world today, with its key indices rising more than 1%. The dollar settled slightly above INR96.28 compared with INR95.3250 last week.

Other Markets

• Yesterday’s losses in US equities, reports of China’s new AI, and the rotation out of chips have sparked sharp losses today. The Nikkei 225 was off 4%, while Taiwan and South Korea’s main indices were off more than 6.25%. China’s CSI 300 shed 3.6%. Europe’s Stoxx 600 is snapping a three-day advance with around a 0.8% pullback in the morning. It is now about 0.4% lower on the week after a1.75% loss last week. US index futures are lower, with the Nasdaq off around 1.75% and the S&P 50 off nearly 1%.

• Benchmark 10-year yields are edging lower today. The 10-year JGB yield slipped almost two basis points to ~2.68%, while European rates are mostly lower, led by a nearly three basis point decline in the UK Gilt yield. Perhaps, the speculation that Mahmood may be named the next Chancellor continues to support the Gilt market. The 10-year US Treasury yield is off three basis points to almost 4.52%. It is off about 10 bp this week.

• Gold was sold to a new low for the week in early North American turnover yesterday, slightly below $3970. It has come back firmer today but is straddling the $4000 area. This week’s ~3% loss is the largest since early June. It has fallen in six of the past seven weeks. Silver slumped to a new low for the year yesterday near $55.40 and settled near its lows. Follow-through selling pushed it to almost $54.75 today. Last week, it settled around $59.85. Gold settled last week near $4200.

• August WTI continues to trade within Tuesday’s range yesterday (~$77.85-$81.25). Ahead of the unpredictable weekend, it is trading firmly near $80.70 late in the European morning. The contract settled near $71.40 last week.

Data

• The US economic diary is jammed today. June import and export prices softened given what happened top energy prices, excluding oil, import prices likely rose. They will be overshadowed by June housing starts that will be released at the same time. May housing starts tumbled by 15.4% and likely snapped back to recoup the lion’s share of the decline. June industrial production and manufacturing output will be reported shortly after the housing starts. Both the broader measure and manufacturing likely increased. Lastly, the University of Michigan’s preliminary July reading is due. Sentiment is expected to have improved for the second consecutive month but that was before the re-escalation of the war in the Middle East. Inflation expectations may not have changed significantly.

• Canada reports May portfolio flows today. Foreign demand for Canadian stocks and bonds has increased markedly in the first four months of the year. Foreign investors have accumulated about C$104 bln of Canada’s financial assets compared with net sellers of about C$17.3 bln in Jan-April 2025.

• Following yesterday’s aggregate eurozone May trade deficit, today the eurozone’s May current account surplus was reported today. It improved to 25.1 bln euros from a revised 17.5 bln euros in April. The current account surplus in the Jan-May period was about 120.55 bln euros compared with about 111.5 bln euros in the year ago period. The ECB projects the current account surplus will narrow to 1.3% of GDP this year from 1.7% in 2025.

Disclaimer

US Dollar Losses Yesterday Have Been Mostly Sustained Today

noreply@blogger.com (Marc Chandler) — Thu, 16 Jul 2026 06:49:15 -0400

There seems to be a nervous calm in the foreign exchange market. The US dollar is mostly in narrow ranges around little changed levels. The euro, for example, is in about a 15-tick range and the greenback is confined to less than a quarter of a yen range. Despite the slightly stronger than expected May UK GDP (0.1%) sterling is among the heaviest of the G10 currencies and is testing $1.35 late in the European morning.

The news stream is light. The eurozone reported its first monthly trade deficit in a little more than three years. Weekly portfolio flow day showed Japanese investors bought the most foreign bonds last week since May, while they continued to buy foreign stocks. The US reports June retail sales are expected to have risen by about 0.4% excluding autos and gasoline. Two Fed Presidents (Logan and Schmid) speak during the session. Governor Jefferson speaks tonight. The blackout period ahead of the FOMC meeting begins this weekend.

Prices

G10

• The US two-year yield has fallen by about 15 bp in the past two sessions, the biggest two-day decline since last August. The euro recovered from slightly below $1.1380 on Tuesday to almost $1.1485. It finally rose above the high recorded in response to the soft US jobs data on July 2 ($1.1475). It is in a narrow range today of about $1.1460-75. Options for nearly 2 bln euros at $11.475 expire today. The next target is in the $1.1500-10 area. If the euro has forged a base, initial potential may extend into the $1.1600-50 band.

• The yen seems largely sidelined, confined largely to a range set five days ago. The dollar traded in a little more than a half a yen range yesterday and is in less than a quarter yen range today mostly above JPY162. We are struck by the divergence between Japanese retail accounts that have established a large net short dollar position and the most recent Commitment of Traders, which showed a substantial net short yen position. A nearly two-week up trendline comes in near JPY161.90 today.

• Some linked sterling’s strength to speculation that Monday when the UK gets its 7th PM in the decade since the Brexit referendum Home Secretary Shabana Mahmood will be named Chancellor of the Exchequer. Her centrist and fiscal discipline appeals to investors. However, the market may be getting a little ahead of itself, after all, Reeves, the current chancellor, was also regarded as moderate and fiscally conservative. Sterling rose about 1.1% yesterday to almost $1.3560, its best level in two months. Even with the slightly better than expected May GDP, sterling has not been able to advance further today. It is trading between about $1.3505 and $1.3545. As we previously noted, the $1.3500 area marks the halfway point of this year’s range. Options for about GBP940 mln expire there today.

• Helped by the continuing narrowing of the US two-year premium over Canada, the Canadian dollar extended its recent gains yesterday and reached its best level in a month. The US dollar was sold to CAD1.4025. The US two-year premium narrowed slightly yesterday and approached 130 bp, the smallest since June 11. The greenback has held on to most of yesterday’s gains and has been confined to about CAD1.4035-CAD1.4055 range so far today. Options for $645 mln at CAD1.4050 expire today. If the US dollar is “correcting” the two-month advance, the (38.2%) retracement is near CAD1.3980 and the 50% is about CAD1.39. For the second consecutive session, the greenback settled below the lower Bollinger Band (which comes in near CAD1.4055 today).

• The Australian dollar reached $0.7020 yesterday, its best level since June 22. The five-day moving average crossed above the 20-day moving average on Tuesday for the first time in two months. It is in a little more than a 10-tick range around $0.7000. The next target is around $0.7535 and then $0.7575. It approached the upper Bollinger Band yesterday (now ~ $0.7015) but held below it.

Emerging Markets

• Lower US rates, a broadly softer dollar, and firm equities helped lift the Mexican peso yesterday to its best level since June 22. The dollar was sold to about MXN17.3575 and the five-day moving average crossed below the 20-day moving average for the first time in a month. The next target is in the MXXN17.20-MXN17.25 area, though a consolidative tone is evident today and the greenback has risen to almost MXN17.42. While the Mexican peso gained about 0.30% yesterday, the Colombian peso rose by about 1% to a new high since early 2020. The US dollar traced out a large outside down day, trading on both sides of Tuesday’s range and settling below its low. The peso has risen almost 16% since the mid-May (presidential election was at the end of May).

• The broadly weaker dollar was also reflected in the offshore yuan, which rose to its best level since June 18. Recall, that the previous day, at the conclusion of the FOMC meeting, that the greenback recorded a three-year low near CNH6.7540. The dollar is holding above about CNH6.7650 today. The PBOC shaved the dollar’s fixing today by the slightest among possible. (CNY6.7909 vs. CNY6.7910 yesterday). Year-to-date only the onshore yuan has risen by about 3.25% against the US dollar, the most among the emerging market currencies. Only two G10 currencies, the Australian dollar and Norwegian krone have done better.

• The Indian rupee continued to grind lower today. It reached a new low since May 22. The dollar reached nearly INR96.3740. The dollar’s record high (May 20) was about INR96.9650. It may not have been helped by the swing of the current account into deficit in May (-$2.0 bln vs. +$700 mln a year ago). In April, India recorded a current account surplus of $4.7 bln.

Other Markets

• US equity indices closed firmer yesterday. The S&P 500 is within striking distance of the record high from June 2 (~7621). The Nasdaq settled at its best level so far this week. It settled near 26265 yesterday and its record high from June 1 was 27190. US index futures are trading heavier today. The large Asia Pacific bourses fell today, with the notable exception of Hong Kong and the mainland shares that trade there. South Korea’s Kospi slid nearly 6.4%. Europe’s Stoxx 600 is off nearly 0.5%, which more than offsets the net gain over the past three sessions.

• The 10-year US Treasury yield fell for the second consecutive session yesterday, the first back-to-back decline this month. The yield was turned back from above 4.60% at the start of the week. Gilts caught a late bid yesterday amid speculation about the next Chancellor of the Exchequer. However, yields are 1-3 bp higher in Japan, Europe, and the US today.

• Gold traded quietly yesterday. If recovered from the lows, a little below $4018 and reached session highs after punching through $4080. It is lower today and reached almost $4023 before stabilizing. Silver traded a bit heavier than gold and could not quite get into positive territory in the North American afternoon. It languishes in its recent trough and slipped to a new low for the month slightly below $56.60.

• August WTI traded sideways yesterday within Tuesday’s range. The consolidation looks constructive. An off-ramp to the conflict seems increasingly elusive. It is within yesterday’s range today and little changed in late European morning turnover near $79.50. For a currency strategist with a sense of history, bombing Iran into submission seems fraught with risk and not a high probability success strategy. And, even if the US and Israel can prevent Iran from acquiring nuclear weapons, the lessons from Ukraine and now Iran may boost the desire of other countries to get the capability. The longer-term goal of non-proliferation is being put at risk, more so than China, a nuclear power, testing a submarine launch missile, as it did recently.

Data

• US June retail sales likely slowed after a strong May but were likely skewed by the drop in gasoline prices. The median forecast in Bloomberg’s survey anticipates a 0.2% increase after a 0.9% jump in May. Excluding autos and gasoline, a 0.4% rise is expected after a 0.5% gain in May. May business inventories are due. The rebuilding of inventories in Q1 was important. It was the largest quarterly increase since Q2 24. The projected 0.3% increase would maintain the Q1 pace. Lastly, June pending home sales were unlikely to have sustained May’s heady 3.8% jump. A small decline would not be surprising.

• Canada reports June housing starts. They are expected to have declined, which would be the first back-to-back decline since February-March last year. Through May, Canadian housing starts are running about 2.8% the year ago pace.

• The eurozone reported that the May trade balance fell into deficit (~5 bln euros) on a seasonally adjusted basis, the first monthly shortfall since April 2023. In the first five months of the year, the average monthly surplus was about 2.6 bln euros. In the Jan-May 2025 period, the average monthly trade surplus was about 16.7 bln euros.

• The UK eked out 0.1% growth in May after it contracted by 0.1% in April. The three-month pace slowed to 0.7% from 0.8%. Industrial production contracted by 0.5% after April’s 0.2% decline was revised to flat. However, manufacturing output rose by 0.1% after a revised 0.5% increase in April. Construction output remained weak (-0.8% vs. a revised 0.1 decline in April. It initially rose by 0.1%). The 0.3% increase in services was the key to May’s growth. activity stabilized (0.1% vs. -0.2%) and the trade deficit narrowed. The Bank of England meets on July 30, but it still seems too early for a hike. The swaps market has a little more than 14 bp discounted for the following meeting (Sept 17), which is down from almost 19.5 bp on Monday.

• Japan’s weekly portfolio flow report (through July 10) showed Japanese investors bought slightly more than JPY1 trillion of foreign bonds last week, the largest haul since early May. They bought a small amount of foreign equities (~JPY200 bln) for the fourth consecutive week.

Disclaimer

US Dollar is Mostly Firmer, August WTI Recovers above $80, and China's GDP Disappoints but New 3-year Low Dollar Fix

noreply@blogger.com (Marc Chandler) — Wed, 15 Jul 2026 06:47:05 -0400

The US dollar is mostly firmer today, but largely within the well-worn ranges seen recently against most of the G10 currencies. The news stream is light, but the US has stepped up the strikes against Iran, and August WTI is back around $80 a barrel. The eurozone’s May industrial output unexpectedly fell, while Japan May industrial output was revised lower but activity in the service sector improved. China’s Q2 GDP disappointed, though June retail sales and industrial output were firmer than expected.

Earlier this month, the US reported disappointing jobs growth in June and yesterday reported a softer than expected June CPI. After Federal Reserve Governor Waller’s seemingly hawkish comments on Monday, there was increased speculation of a rate hike as early as this month’s FOMC meeting. After the CPI, the odds were more than halved. Fed Chair Warsh maintained his hawkish line and commitment to bring inflation down in his testimony before Congress yesterday. He returns to testify before the Banking Committee today. The questions will differ, but the answers will remain the same.

Prices

G10

• On July 2, the euro recovered from $1.1375 to $1.1475 after the disappointing US June employment data and has remained in that range ever since. With the help of a softer than expected US CPI, the euro moved from the lower end of the range to the upper end. Yesterday’s favorable price action was marred by the euro’s inability to settle above Monday’s high (~$1.1445) and the 20-day moving average (~$1.1415 today). So far today, it is trading in a narrow range. The euro has held below yesterday’s high and was sold to almost $1.1410 late in the European morning. Options for about 845 mln euros at $1.1420 expire today.

• Yesterday, the dollar was mostly confined to Monday’s range against the Japanese yen. The dollar was confined to about a 40-tick range on both sides of JPY162.00. It is inside that range today but looks poised to push above yesterday’s high. The 40-year high was recorded on July 1 near JPY162.85. Finance Minister Katayama seems to be determined to boost domestic demand for Japanese bonds, as higher yields do not seem sufficient (yet)

• Sterling traded in about a cent-range yesterday between about $1.3340 and $1.3445. It stalled in front of last Friday’s high ($1.3450). It settled firmer on the day but below $1.3400. It is in about a 20-tick range on both sides of $1.3400 today, where options for about GBP640 mln expire today, but looks set to extend the range to the downside. The euro fell for nine of the past ten sessions coming into this week against the euro but recorded its first back-to-back gain in nearly a month. It is little changed today.

• The Canadian dollar rose by almost 0.70% yesterday, its best day since the end of April. The US two-year premium that trended higher in May and June, which the exchange rate tracked, has fallen by almost 10 bp since the start of the month and about half of it was recorded in response to the softer US CPI. The US dollar was sold slightly through CAD1.4050, its lowest level since June 17 (Fed Day). It slipped to CAD1.4040 today but has come back bid in the European morning and reached almost CAD1.4070. Initial resistance is seen in the CAD1.4080-CAD1.4100 area.

• The Australian dollar rebounded from the dip below $0.6920 and reached slightly above $0.6990 after the US soft inflation report. That is a three-week high and posted its highest settlement since June 22. It continues to press against the high today. Nearby resistance is seen in the $0.7000-$0.7020 area.

• The Mexican peso had its best day here in July, rising by about 0.55% against the dollar and reached a five-day high yesterday. The greenback was sold and briefly traded below MXN17.39. The US dollar held above last week’s low (~MXN17.3750). It is consolidating today in a roughly MXN17.4040-MXN17.4340 range. The Brazilian real’s 1.2% gain led the emerging market currencies yesterday. The dollar settled below BRL5.10 for the first time in almost a month. Last month’s low was slightly above BRL5.0.

• The offshore yuan reached its best level since the day after last month’s FOMC meeting concluded. The greenback frayed support near CNH6.77 twice yesterday and dollar buyers emerged. It slipped to CNH6.7655 earlier today and reached CNH6.7775 in Europe. There may be near-term potential to CNH6.7800-20. Given the broad dollar decline yesterday, the PBOC seemed to have little choice and set the fix at a new three-year low (CNY6.7910 vs. CNY6.7990 yesterday).

• The dollar’s broad pullback yesterday and the stabilization of oil failed to deter Indian rupee selling. The dollar gapped higher on Monday and Tuesday, and extended the gains today to INR96.2825, its highest level since May 22. The record high was recorded on May 20 near INR96.9650.

Other Markets

• Equities are mostly firmer today. The Nasdaq led yesterday’s equity advance with a 0.90% gain. The S&P 500 gained about 0.4% to recoup almost half of Monday’s loss. Dow Industrials eked out a negligible gain. Outside of Chinese markets, which traded a little softer, the large Asia Pacific markets rallied today with South Korea’s Kospi raising 6.25% and Taiwan’s Taiex up 2%. Hong Kong and mainland companies that trade there rose 1.4% and 1.0%, respectively. Europe’s Stoxx 600 is straddling unchanged levels, while US index futures are firm.

• The rally in US bonds following the softer than expected CPI helped European bonds pare earlier losses yesterday. However, they have bounced back by mostly 2-3 bp today. The three basis point decline in the US 10-year yield was the most in about three weeks. It is 1-2 bp firmer today and back above the 4.60% mark. The US two-year yield dropped nine basis points and unwound in full Monday’s jump. Today, it is a couple of basis points firmer near 4.22%.

• It may seem counter-intuitive, but gold rallied by about 1.25% yesterday after the softer than expected US CPI. It was the biggest rise since the July 2 disappointing US jobs data. The rally stalled within less than 50 cents of the 20-day moving average (~$4100 today). It is consolidating between about $4017 and $4062 today. Silver traded on both sides of Monday’s range but the close was well in the range, seemingly neutralizing the potential technical signal. It is softer today, mostly in a $58-$59 range but looks vulnerable to new losses.

• August WTI reached the session high yesterday slightly above $81.25 shortly before the North American session began. It was sold to about $77.85 before midday in New York. It settled firmly albeit slightly below $80. It is trading between $79.30 and almost $81 today and is hovering near $80 in late European morning activity.

Data

• Following yesterday’s June CPI, the US reports PPI today. A flat headline reading will allow the year-over-year rate to slip to 6.2% from 6.5%. The core measure may increase by 0.3%, which would lift the year-over-year rate to 5.2% from 4.9%. The July Empire State manufacturing survey is due at the same time and is seen rising to 9.7 from 5.7. Recall that May’s reading of 19.6 was a four-year high. Late in the session, the Fed’s Beige Book will be released.

• Ahead of the Bank of Canada’s decision (9:45 AM ET), StatCan reports June existing home sales and May manufacturing sales. The Canadian economy contracted 1.0% in Q4 25 and by 0.1% (annualized rates) in Q1 26. However, the economy appears to have returned to growth in Q2 and the median forecast in Bloomberg’s survey is for 1.9% (Atlanta Fed’s GDPNow tracker puts US growth at 1.3% in Q2). The swaps market expects the Bank of Canada to stand pat through Q3 and has a clear bias toward a hike late this year.

• The eurozone’s May industrial output was surprisingly soft. Instead of rising by 0.2% it fell by 0.2%. The sting was only slightly blunted by the upward revision in April to 0.3% from 0.1%. Recall that national figures showed better than anticipated activity in Germany and Spain (0.9% and 1.2%, respectively), while French industrial output slipped by 0.1% and Italy’s fell by 0.3%.

• Japan revised down its initial 0.5% estimate for industrial output in May to 0.1%. In the first five months of the year, Japan’s industrial production increased by a monthly average of 0.5% compared with a 0.2% average in the Jan-May 2025 period. May core machine orders tumbled 12.4% after an 8.7% increase in April. The median forecast in Bloomberg’s survey was for a 4.2% decline. On the other hand, May’s tertiary industry index (services) jumped by 1.1% (0.4% expected), though the April series was revised to a 0.8% gain from 1.3% initially. The BOJ meets at the end of the month. After last month’s hike, the swaps market sees virtually no chance of a hike, though another hike appears to be nearly fully discounted at the end of the year.

• China’s data disappointed. It reported the economy grew by 0.9% quarter-over-quarter in Q2, down from 1.3% in Q1. The year-over-year pace slowed to 4.3% from 5.0%. Still June industrial product and retail sales were stronger than expected. Retail sales from 1.0% year-over-year. It had been expected to continue to contract after the 0.6% year-over-year decline in May. Industrial output rose 5.3% year-over-year, up from 4.5% in May. On a year-to-date, year-over-year measure, retail sales slowed to 1.3% from 1.4% and industrial output was unchanged at a 5.4% pace. Fixed asset investment and property investment contracted at a faster pace. New and used house prices continued to decline. Property investment’s contraction deepened. The GDP deflator rose 1.6% in Q2 after three years are deflation readings. It appears spurred by higher energy costs and sectors linked to AI. Separately, China reported that new yuan loans and aggregate financing improved in June but not as much as economists expected. The poor economic readings will spur speculation of new stimulus measures from Beijing.

Disclaimer

Oil Extends Recovery, US Dollar Consolidates, JGBs Rally on New Fin Min Suggestion, China's June Trade Surplus Swells

noreply@blogger.com (Marc Chandler) — Tue, 14 Jul 2026 06:45:18 -0400

The US dollar is consolidating yesterday’s gains today. An off-ramp to the Middle East conflict seems increasingly elusive. After surging more than 9% yesterday, the front month WTI and Brent oil futures contracts are up 3.6%-4.6% today. There are three developments in the US that will be closely monitored today. First, the June CPI is due. It looks to have moderated a little, but given Governor Waller’s comment yesterday, a sticky core rate could boost the perceived chances of a hike later this month. Second, Chair Warsh testifies before the House Financial Services Committee (10:00 AM ET). Third, the US earnings season gets underway with several large bank reporting today.

Japanese government bonds have rallied today despite continued rally in oil prices and a soft yen. Last week, Finance Minister Katayama suggested that Japanese pension funds boost their domestic allocation. Today, she advocated adding government bonds to the individual tax-free investment vehicles. Meanwhile, the dollar is holding above JPY162.00. Lastly, China reported a larger than expected, $125.6 bln June trade surplus, which will likely increase the tension with the US and Europe.

Prices

G10

• The escalation of the hostilities in the Middle East helped strengthen the dollar broadly and the euro fell to its lowest level (slightly below $1.1380) since the disappointing US jobs data were reported on July 3. Yesterday’s low held but the euro is struggling to re-establish a foothold above $1.1400, where options for nearly 3 bln euros expire today. A break of $1.1360 could signal a return to the euro’s low (~$1.1325) recorded on June 24.

• The absence of formal efforts to make Japanese pension funds boost domestic allocation and the rise in US rates weighs on the yen. The dollar reached almost JPY162.50 in the North American afternoon. It is holding today, but the greenback has not traded below JPY162 today. Last week’s high was near JPY162.70, and the 40-year high from July 1 was near JPY162.85.

• Sterling reversed lower after it reached $1.3450 before the weekend and appears to have posted a bearish shooting star candlestick. Follow-through selling yesterday brought it to a three-day low slightly below $1.3350. It slipped to almost $1.3340 today before catching a bid. But the intraday momentum indicators are stretched as sterling approaches $1.34, where options for almost GBP400 mln expire today. A break of last week’s low slightly above $1.3320 would signal a correction is at hand after rallying from about $1.3140 on June 24.

• The Canadian dollar was resilient yesterday, in the face of the risk-off and jump in short-term US rates but was confined to a narrow range. Canada’s two-year yield jumped as well, and the differential moved a little in Canada’s favor. For the first time since around mid-May, the five-day moving-average crossed below the 20-day, but the price action was more consolidation that Canadian dollar strength. The US dollar traded in a 25-tick range on both sides of CAD1.4150. Still, for the second consecutive session, the greenback settled below the 20-day moving average (~CAD1.4175 today). Follow-through US dollar selling today has approached support near CAD1.4080. The intraday momentum indicators are stretched, but the next important chart area is around CAD1.3980-CAD1.4000.

• The Australian dollar traded poorly after it reached a two-and-a-half week high before the weekend. It was sold to a three-day low a little below $0.6915 yesterday in North America. This area held and the Aussie recovered to a little above $0.6950 and reclaimed the 20-day moving average (~$0.6940). Options for about A$475 mln at $0.6960 expire today. Monday’s high was near $0.6970 and overcoming that would strengthen the technical tone.

• Most emerging market currencies weakened yesterday amid the risk-off and jump in US rates. The Mexican peso was no exception. It lost about 0.30%. The dollar traded inside the pre-weekend range (~MXN17.4655-MXN17.5460) and it is trading within yesterday’s range today. The dollar is holding above the 20-day moving average (~MXN17.4765 today).

• The dollar was little changed against the offshore yuan yesterday as it consolidated in last Friday’s range (~CNH6.7765-CNH6.7960). It remains inside that range today. After setting the dollar’s reference rate at new three-year lows for the past two sessions, the PBOC fixed the greenback a little higher today (CNY6.7990 vs. CNY6.7927 yesterday).

• The Indian rupee remained under pressure today. The dollar gapped higher for the second consecutive session. Before the weekend, it settled near INR95.3250. It reached almost INR95.8590 yesterday and INR96.24835 today. It is the highest in almost two months. The dollar’s record high was recorded on May 20 near INR96.9650.

Other Markets

• Higher interest rates and oil, coupled with the ongoing rotation in the tech sector, dragged equity markets mostly lower yesterday. While the S&P 500 was confined to last Friday’s range, the Nasdaq, which settled on session highs before the weekend, and at its best level in nearly three weeks, posted its lowest close in three sessions yesterday and below the five- and 20-day moving averages. Both settled below opening levels. US banks formally kick off the earnings season today. Most of the large markets in the Asia Pacific region bounced back today, with a 2.15% rise in China’s CSI 300 leading the way. Taiwan and India were notable exceptions. Europe’s Stoxx 600 is lower for the second consecutive session after falling three days last week. It is off about 0.5% in late morning turnover. Meanwhile, the Nasdaq futures are trading higher (~0.4%), the S&P and Dow futures are slightly heavier.

• Benchmark 10-year yields jumped yesterday, helped by the rally in oil prices and fear that the war in the Middle East may underpin price pressures for longer. Yields are higher 2-4 bp higher in Europe. What may have been the anticipation of a “peace dividend” has been reversed. The 10-year Treasury yield pushed above 4.60% yesterday for the first time since May 21. The two-year yield rose to new highs for the year, encouraged by hawkish comments by Federal Reserve Governor Waller who warned that the Fed may need to hike rates in the near-term if underlying inflation continues to signal general price pressures. Andrew Burnham is most likely to become the next UK prime minister in a week, and reports suggest there is talk in his camp about merging the annual budget (October-November) with the department-level spending reviews (which are usually separate events). The 10-year Gilts surged 10 bp yesterday, followed by Italy seven basis point increase. The 10-year Gilt yield is up almost five basis points today. Japan’s finance minister floated a new idea to reduce JGB yields. Katayama suggested that government bonds could be added to the tax-free Nippon Individual Savings Accounts. Demand at the 20-year bond auction was strong.

• The prospect of a prolonged disruption from the Middle East war may extend the pressure of some central bank to sell Treasuries and/or gold. Gold was tagged for nearly 3% yesterday, its largest decline in a little more than a month. The yellow metal slipped through $3984 today before it recovered to about $4034. Silver shed around 3.7% yesterday after falling nearly 4.10% last week. It reached almost $57.25, less than ten cents above this month’s low. It was sold slightly through $56.90 today before stabilizing. The low for the year was recorded on June 24, near $55.60. It is near $58 in late European morning turnover.

• August WTI jumped yesterday in reaction to the weekend developments. The 9.4% surge was the largest of the war. It approached $78.60 a barrel, its highest level since June 17 and settled above the 20-day moving average (~$72.80 today) for the first time since June 3. The five-day moving average is crossing above the 20-day moving average today for the first time since late May. Follow-through buying today lifted the contract to $81.25. The $79.65 area corresponds to the (38.2%) retracement of the decline from the contract high on May 18 ($100.10). The (50%) retracement is around $83.55.

Data

• The median forecast in Bloomberg’s survey anticipates the first decline in the monthly headline US CPI since May 2020. Given the base effect, the year-over-year rate would fall to 3.8% from 4.2%. The core is stickier and is expected to rise by 0.2%, leaving the year-over-year rate steady at 2.9%. The other notable event is Fed Chair Warsh testifies before the House Financial Services Committee (followed by the Senate Banking Committee tomorrow). On the working hypothesis, the Warsh is channeling Greenspan, he is unlikely to break new ground today. Still, investors are still trying to get the measure of the new chair. The Fed’s Beige Book also will be released tomorrow ahead of the FOMC meeting later this month. The Fed funds futures have about 10 bp of tightening discounted, which is one assumes the choice is between standing pat and a 25 bp hike, a 40% chance of a hike is discounted. Nearly 42 bp of tightening is discounted by year-end, compared with about 38 bp on June 17, when the last FOMC meeting concluded with a hawkish hold.

• China’s June trade surplus rose to $125.6 bln from $105.4 bln in May. That brings the surplus in H1 26 to a little more than $570 bln, down from $583 bln in H1 25. In dollar terms, exports have risen 27% year-over-year, while imports are up 36%. Emerging markets appear to be absorbing a greater share of Chinese exports. Machinery, electric products, transportation equipment, and chemical product exports are rising, while textiles, apparel, footwear, furniture, and toy exports have declined. China’s goods exports reached a record $412 bln. China reported a record trade surplus with the EU (+27% year-over-year) to almost $33 bln in June. China’s exports to the US rose by nearly 14% to $43.5 bln in June, while imports from the US rose by 25.8% to $14.6 bln. China’s trade surplus with the US rose to $28.9 bln from $26 bln in May.

Disclaimer

Middle East Conflict and Pressure on Chips Challenge Investors

noreply@blogger.com (Marc Chandler) — Mon, 13 Jul 2026 06:43:31 -0400

The re-intensification of the Middle East war initially roiled the markets but as the session progressed, oil has pulled back and equities have stabilized. August WTI briefly traded above $75 and is now around $73.50, which is still nearly 3% higher. Most of the large Asia Pacific equity markets were under pressure but Europe is little changed and US index futures are mixed.

The US dollar is mixed. The Japanese government reportedly will not formally overhaul the allocation of the government’s pension funds, despite what it may have appeared like before the weekend, and the yen and JGBs are softer today. Since last week’s hawkish hold by the Reserve Bank of New Zealand, the Kiwi has been the strongest in the G10 and remains so today. Undaunted by the heightened volatility and the risk of further disruption of commerce through the Strait of Hormuz, the PBOC set the dollar’s reference rate at a new three-year low.

Prices

G10

• It is difficult to get excited about the euro if it remains in the range set July 2 with the US jobs data: ~$1.1375-$1.1475. Ahead of the weekend, it did trade on both sides of the previous day’s range, but settlement was neutral and below the 20-day moving average (~ $1.1430 today). The escalation of the Middle East war saw the euro sold to about $1.1385 today before it recovered in early European activity to new session highs around $1.1445. The intraday momentum indicators are stretched. Options for almost 785 mln euros at $1.1400 expire today and, tomorrow, 2.3 bln euro of options expire there. Given the euro’s sensitivity to US two-year rate changes and the fact that tomorrow could see the first decline in US CPI since the Middle East war began, the constructive momentum indicators, there may be scope for additional near-term euro gains.

• Japanese investors have been selling foreign assets this year, according to the weekly MOF data. Yet, the finance ministers call for Japanese pension funds to boost domestic allocation lifted the yen by around 0.5% ahead of the weekend, its biggest gain since early May and the first back-to-back gain since early April. The dollar finished last week below the 20-day moving average (~JPY161.75 today) for the first time since mid-May. Reports indicate that the Takaichi government has no plans to overhaul the asset allocation of the Government Pension Investment Fund (GPIF). The greenback is consolidating with the pre-weekend range so far today (~JPY161.65-JPY162.35).

• Sterling reached almost a four-week high before the weekend, slightly above $1.3450. It stopped in front of the June 15 high (~$1.3460), which also corresponds to the (61.8%) retracement of the decline from the May Day high (~$1.3660). The next technical hurdle is seen in the $1.3480-$1.3500 area. The latter is the halfway mark of this year’s range. Sterling rose for the 11 of the past 12 sessions. Sterling was sold to almost $1.3365 today but recovered to record the session high slightly above $1.3410 in early European turnover, where options for about GBP315 mln expire today. Initial support now is seen around $1.3380.

• Culminating a week of favorable data, including the June employment report before the weekend, the Canadian dollar snapped a five-week slide. It begins this week with a four-day advance in tow. It is the longest rally since April. The greenback settled below its 20-day moving average (~CAD1.4170 today) for the first time since May 7. The US dollar rose to CAD1.4175 today before coming back off. It was pushed slightly below CAD1.4135 in early European turnover. Nearby support is seen around CAD1.4115-20. A break of CAD1.4080 could spur a move toward CAD1.3980.

• The Australian dollar reached new highs for the week before the weekend near $0.6970. It was the sixth daily advance in the past seven sessions. The Aussie has not been this high since June 23. It settled above the 20-day moving average (~0.6945 today) for the first time since the end of May. The five-day moving average looks poised to cross above the 20-day moving average in the coming days. The Australian dollar was initially sold to about $0.6925 before it stabilized. It recovered to almost $0.6950 before stalling Options for almost A$400 mln at $0.6930 expire today.

• The dollar was sold to three-day lows against the Mexican peso before the weekend. It still settled slightly higher on the week, despite slipping lower for past two sessions, for the first time since mid-June. The greenback is consolidating within its pre-weekend range. The 20-day moving average is slightly below MXN17.46 and a close below would weaken the dollar’s technical tone.

• Against the offshore yuan, the dollar peaked in the middle of last week around CNH6.81 and finished the week slightly above CNH6.78, its lowest close since June 22. Last month it forged a base slightly above CNH6.75. The dollar has spent today’s session so far, below the 20-day moving average (~CNH6.79), but it has held above the pre-weekend low (~CNH6.7765). The PBOC set the dollar’s fix at a new three-year low and further below CNY6.80 (CNY6.7972 vs CNY6.7989 before the weekend).

• The jump in oil prices weighed on the Indian rupee. The greenback gapped higher and reached almost INR95.86, its highest level since May 22. The central bank apparently intervened around INR95.75, according to some reports.

Other Markets

• Equities finished firmly at the end of last week and are mostly weaker today. While the MSCI Asia Pacific Index and Europe’s Stoxx 600 still fell on the week, the US S&P 500 and Nasdaq rose by more than 1%. Most of the large Asia Pacific bourses fell today, led by the nearly 9% drop in South Korea’s Kospi and a 4% drop in Shenzhen. Taiwan, Australia, and India eked out minor gains. Europe’s Stoxx 600 is slightly weaker near midday. US S&P and Nasdaq futures are trading lower (~0.30% and 1.0%, respectively).

• Benchmark 10-year yields in Europe and the US rose by 8-11 bp last week. The best performer in the G10 was the beleaguered Japanese government bond. Following the finance minister call on Japanese pension funds to boost their domestic allocation, the yield snapped a nine-day advance and fell by 13 bp for a net nine basis point decline on the week. Yields are higher today: ~4 bp in Japan, 2-4 bp in Europe, and the 10-year Treasury yield is a little more than a basis point firmer ~4.57%. The two-year US yield edged up to a new high for the year today, a little above 4.23%.

• Gold fell to around $4022 in the middle of last week. It recovered to almost $4140 but stalled there. The market seems to lack near-term conviction. It fell to a three-day low today near $4044. Silver traced out a similar pattern. The mid-week low was slightly below $57.25, and although it stabilized it was unable to settle above $60. It was sold to almost $57.70 today before stabilizing.

• The escalation of hostilities in the Middle East saw August WTI jump to a little above $76 in the middle of last week. It reached almost $67 on July 2, the low since the war began. The continuation of talks between the US and Iran were seen as more important than the kinetic engagement. Before the weekend, Aug WTI slipped to almost $70.75, finding support ahead of the 200-day moving average (~$70.50). The weekend developments saw the contract gap higher and briefly traded above $75 but has come off and filled the opening gap. Still, as the North American traders return to their posts its above $73.

Data

• The June US budget deficit will be reported late today. The markets tend not to react even though nearly everyone expresses concern about the deficit and accumulating debt. In the first five months of the calendar year, the US recorded a budget deficit of about $644 bln. In the Jan-May 2025 period, the US shortfall was around $653 bln. The bipartisan Congressional Budget Office expects this fiscal year’s deficit to reach $1.9 trillion, the same as in the last fiscal year.

• India reported a larger than expected June trade deficit and firmer CPI. The $30.4 bln trade deficit was the largest since January and compares with an $18.8 bln deficit in June 2025. India’s trade deficit in H1 26 is about a third largest than in H1 25. Exports have risen 15.5% year-over-year, while imports surged by 31%. India’s June CPI rise to 4.38% from 3.93% in May. It is the highest since the end of 2024. It is above the 4% target for the first time in almost 1 ½ years. Food prices jumped 5.05% year-over-year.

Disclaimer

Week Ahead: US CPI, China's Q2 GDP, and Bank of Canada Meeting Featured

noreply@blogger.com (Marc Chandler) — Sat, 11 Jul 2026 07:00:00 -0400

The US dollar was mixed last week. The combination of strong data and the central bank's hawkish hike lifted the New Zealand dollar to the top of the G10 currencies. The roughly 4.5% rally in Brent oil, the first weekly gain in five weeks, seemed to help the Norwegian krone came in a close second. The low yielding Swiss franc and Japanese yen fell last week. The dollar rose against the Swiss franc for the fifth week in the past six. The yen's loss was pared ahead of the weekend after Japan's finance minister urged the nation's pension funds to boost domestic allocation. The impact was short-lived and the dollar settled near the middle of session's range. The Ministry of Finance weekly report show Japanese investors have been net sellers of foreign stocks and bonds this year through early July.

President Trump has declared the ceasefire with Iran is over, but that talks continue. The situation is precarious to say the least. After the midweek spike, oil prices stabilized in the last two sessions. Given that neither the US nor Iran seem to want to return to the situation earlier in the conflict, investors recognize the heightened risks will not getting carried away. The conflict remains in the background. The week ahead could feature the first decline in US headline inflation in the war began. China is expected to report that growth slowed in Q2, and the June details look poor. The Bank of Canada meets but the market is confident it will not change the 2.25% rate target.

Drivers: Fed Chair Warsh may not be a big fan of forward guidance, yet the market understood last month's FOMC meeting to have delivered a hawkish hold. It also understood Warsh's comments in Sintra, where he noted that inflation expectations had eased and that he was optimistic that AI could help deliver non-inflationary growth. The new Fed chair testifies before Congress Tuesday and Wednesday.

Data: There is little chance of a Fed hike later this month, October seems a likely time frame. It is a way Chair Warsh can dilute the significance of the Summary of Economic Projections, which will be updated in September. There is also a sense that he may not want to raise rates in his first few meetings. That will show the White House that he made a considered decision and can be trusted to "tap on the brakes" as Treasury Secretary Bessent suggested was possible. The problem with the October meeting is that it is week before the midterm elections. Still, it means that this week's data, June CPI, PPI, retail sales, and industrial production will not be decisive. The Atlanta Fed GDP Now tracker for Q2 has fallen from a little above 3% at the end of May to 1.3% now. The data highlight in the week ahead is the June CPI, which is expected to have pulled back to 3.8% from 4.2% (and 2.8% from 2.9% core rate). Retail sales may be flattered by the rise in auto sales. Still the measure that excludes autos, gasoline, food services and building materials may have slowed to a still firm pace of 0.4% (from 0.7%). June Industrial output and manufacturing likely edged higher. A word about the TIC data (due July 14). Despite the buzz, there was never really a "sell America" moment last year. The TIC data showed that in H1 25 foreigner investors snapped up $102.5 bln of US financial assets a month. It was on the second six-month period of over $100 bln a month since H1 23. The US runs a large current account deficit, and foreign investors have little choice but to accumulate US assets. The only issue is which asset and at what price. Meanwhile, the US earnings season kicks off with reports by the six largest banks on Tuesday and Wednesday.

Prices: The Dollar Index tested a six-day low ahead of the weekend near 100.60 but recovered toward 101.00. A trendline off the late June and July 1 highs begins the new week near 101.25 and finishes the week near 101.10. A convincing move above it targets the high for the year recorded on June 24 (~101.80). Support has been forged near 100.50.

EMU

Drivers: Changes in the euro remain highly correlated with changes in the US two-year yield (~-0.70 for the past 30 and 60 days). Counter-intuitively, the euro is also inversely correlated with changes in Germany’s two-year yield, but less so (~-0.20 for the past 30 days and ~-0.40 for the past 60 days). The correlation of the changes in the euro and changes in the US-German two-year yield differential is about -0.50 and -0.23 for the 30- and 60-day correlations, respectively.

Data: The eurozone report May industrial output and external account in the coming days. Industrial output fell by a cumulative 0.3% in Q1 26, which offset the gain of a similar magnitude in Q4 25. The manufacturing PMI gives one little reason to be hopeful. It slowed in May to 51.6 from 52.2 in April. Industrial output rose by 0.1% in April. The aggregate economy contracted by 0.2% in Q2 and is expected to have grown by 0.2% in Q2 mostly on the back of increased investment and stronger exports. The eurozone recorded an average monthly trade surplus of 4.6 bln euros in Q1 26. It was the lowest quarterly average since Q2 23. In order to do better in Q2, after April's one-billion-euro deficit is to average about 7 bln euro surplus a month in May and June. Still, the ECB's staff projects that the aggregate current account surplus this year will fall to 1.3% of GDP from 1.7% in 2025.

Prices: The euro recorded last week's high before the weekend, near $1.1460. It was unable to sustain the push above the 20-day moving average (~$1.1440) and settled around $1.1415. Last week's low was around $1.1390. All last week, the euro traded within the range set on July 2, the US jobs day ($1.1375-$1.1475).

PRC

Drivers: While managing the exchange rate, Chinese officials seem to keep an eye on the dollar's broader movement. The correlation of the dollar's changes against the Chinese yuan (CNY) is correlated with changes in the Dollar Index (~0.60) in the past 30 and 60 days. The RMB does not appear sensitive to changes in China's short-term interest rates. The 30-day correlation of changes in the dollar against the yuan and China's two-year yield has not been above 0.10 since the end of January and has spent more time since with inverse correlations. The 30-day correlation of the changes in the dollar against the yuan and the US two-year yield peaked slightly above 0.50 in early June, which was the highest since Q3 24. It is now near 0.20.

Data: It is a big week for Chinese data, which will all come together for the first large country's estimate of Q2 GDP. The data that have been reported in recent months suggests the economy has slowed from the 5% year-over-year pace reported for Q1. The quarter seemed to have ended on a soft note, even though year-over-year retail sales are expected to have recovered after contracting by 0.6% in May. Beijing is fighting on two fronts. House prices are expected to have continued to decline and the campaign against "involution" appears to have spurred a contraction in investment. Lastly, China's CXMT, an important memory chip company is expected to launch its IPO in the coming days (estimated valuation at ~$4.3 bln). Reports indicate revenues surged seven-fold in the first half.

Prices: The dollar settled on a weekly basis below its 20-day moving average (~CNH6.79) for the first time in a month. Initial support is seen around CNH6.7730. The three-year low was record in mid-June near CNH6.7540. Ahead of the weekend, the PBOC set the dollar's reference rate below CNY6.80 for the first time in three-years, which seemingly signals official willingness to accept a continued gradual appreciation of the yuan.

Japan

Drivers: The US 10-year premium over Japan fell to about 165 basis points earlier this month, the lowest since Q1 22. The year's high was above 210 basis points in late March. Following the finance minister’s comment that Japanese pension funds should boost domestic allocation saw the 10-year JGB yield snap a nine-day advance and the 10-year differential jumped by 17 bp to 185 bp. The 30-day correlation of changes in the dollar-yen exchange rate and the 10-year differential peaked this year near 0.65 in May and fell below 0.20 by the end of June. It is now below 0.10. The 60-day correlation is around 0.35. The 30-day correlation between the exchange rate and US 10-year yields has weakened to around 0.22 from the year high on June 17 (FOMC meeting) near 0.65. The 60-day correlation peaked in mid-May near 0.60 and is now a little below 0.45.

Data: The Japanese economy may be doing better than economists suspect. The median forecast for Q2 GDP is 0.2% (annualized) after 1.8% in Q1 26. May's industrial output was initially estimated at 0.5%, the same as April. It is subject to revision this week. In Q1 it rose by a cumulative 1.6%. Services (tertiary industry activity) may be stronger. After rising by a cumulative 0.7% in Q1 26, it jumped 1.3% in April. The May reading is early Thursday.

Prices: In the middle of last week, the US dollar approached the 40-year high recorded on July 1 near JPY162.85. Last week's high was about JPY162.70. The comments by Finance Minister Katayama urging Japanese pension funds to purchase for domestic assets gave the yen a bigger boost that the threats of intervention. The dollar fell to about JPY161.30 before the weekend and recovered to around JPY161.85. The greenback settled slightly above the 20-day moving average (JPY161.65) but strung together the first back-to-back losing sessions since early April.

Drivers: Although the changes in sterling are still highly correlated with changes in the euro (~0.85 for the past 30 and 60 sessions), sterling is faring better than the euro. Indeed, the euro has been sold to new one-year lows against sterling in recent days. The euro appears to have forged a large head and shoulders top pattern against the sterling. It has gone through the neckline and against the euro, and there is scope for another 1.25%, which suggests sterling can continue to outperform the euro. It is a source of sterling demand. Andrew Burnham received a formal nomination from 322 (of 403) Labour MPs, technically one vote shy of the number needed to avoid a formal contest. This will likely be confirmed at the start of the new week, and Burnham will most likely become prime minister on July 20.

Data: On Thursday, the UK reports the May monthly GDP and the details. Recall that the economy contracted by 0.1% in April, the first monthly contraction since last August. The strength of May retail sales (1.2% vs. 0.5% median forecast in Bloomberg's survey) may have tilted the balance toward expecting a return to growth in May. Still after outsized growth of 0.6% quarter-over-quarter in Q1 26, GDP is seen returning to the H2 25 quarterly pace of 0.1%.

Prices: Sterling rose to $1.3450 before the weekend, its best level since June 15. However, it slipped back to settle slightly above $1.34, where the 200-day moving average is also found. Sterling has rallied in 11 of the past 12 sessions and may be getting stretched. A move above $1.3460, the (61.8%) retracement of sterling's losses from the May 1 high ($1.3660), improves the technical tone. The next target is the $1.3485-$1.3500 area. A break of $1.3360-80 area would boost the odds that a high is in place.

Canada

Drivers: While US two-year yields are firm, the US premium over Canada has narrowed and the sustained rise in May and June has begun stabilizing. This appears to have helped lift the Canadian dollar. Canada's May trade surplus, the largest in four years, bolstered by energy, metals, and minerals, suggests a positive terms of trade shock. Exports rose to a record in May and the surplus with the US reached its highest since January 2025. The June employment data before the weekend was a little better than expected with the unemployment rate slipping to 6.5% (from 6.6%), while the participation rate remained constant (65.0%). Still when everything was said and done, the swap market was little changed over the course of the week, with about 15 bp of tightening discounted this year.

Data: StatCan will report June existing home sales and May manufacturing and wholesale sales on Wednesday ahead of the week's highlight, the outcome of the Bank of Canada meeting. The policy dilemma sketched by Governor Macklem at the last meeting has not significantly changed, and this will keep the central bank on the sidelines.

Prices: The Canadian dollar snapped five-week slide with its first higher weekly close since the end of May. The greenback was sold to almost CAD1.4135 on Friday but recovered back toward the session high (~CAD1.4175) despite the better-than-expected jobs data. However, reflecting what we suspect may be a change in psychology, the US dollar fell to a new session low, slightly above CAD1.4115 in the NY afternoon. The greenback recovered in late turnover and settled above CAD1.4150 but below the 20-day moving average (~CAD1.4165) for the first time in nearly two months. The next support area is near CAD1.41 and a convincing break of CAD1.4080 could target CAD1.3980.

Australia

Drivers: The Australian dollar is sensitive to the US dollar's overall direction. The inverse correlation with the Dollar Index is near -0.65 (30 days) and -0.73 (60 days). The Aussie remains the closest thing to a proxy for gold among the G10 currencies (30-day correlation ~0.70 and the 60-day correlation ~0.73). It is sensitive to changes in the US two-year yield (-0.50 and -0.66 for 30- and 60-day correlation, respectively).

Data: Australia's economic calendar features a couple of bank surveys and the Melbourne Institute's July consumer inflation expectations (symmetrical trimmed mean). It peaked at 5.9% in April. The central bank hiked the cash target rate in each of the first three meetings of the year (now 4.35%). The Melbourne Institute's measure fell in May and June, but at 5.5% the central bank is looking for more progress. The central bank meets on August 11, and barring a significant surprise, it is likely to monitor developments until Q4.

Prices: The Australian dollar reached two-and-a-half week highs before the weekend (~$0.6970). It traded above the 20-day moving average (~$0.6955) for the first time in a little more than a month. Yet, the momentum was not sustained and the Aussie pulled back to around $0.6940 and spent most of the North American session chopping within less than 10 ticks of $0.6950. The momentum indicators are more encouraging than the price action.

Mexico

Drivers: The dollar's movement against the Mexican peso is correlated with the changes in the Dollar Index (~0.74 and 0.67 for 30 and 60 days, respectively). However, the peso is an even stronger proxy for the JP Morgan Emerging Market Currency Index (-0.78 and -0.82 correlation for 30 and 60 days, respectively).

Data: Mexico's economic diary does not have market moving data in the coming days.

Prices: The dollar bottomed early last week near MXN17.3750 and jumped about 1.5% Tuesday-Wednesday before consolidating Thursday and Friday. The greenback posted its third weekly gain in the past four weeks, albeit only by a couple of ticks. It appears to have moved to the upper end of a three-month trading range. Recall that the dollar reached MXN17.6765 on June 24, its highest level since early April. The five- and 20-day moving averages are rising, though the momentum indicators are not generating robust signals. One-month implied volatility peaked in late March, near 14.8%. It is now in the lower end of its two-month range, a little below 8%.

Disclaimer

JGB Yields Fall for the First Time in Two Weeks and Yen Bounces as Fin Min Calls on Nation's Pension Funds to Boost Domestic Allocation

noreply@blogger.com (Marc Chandler) — Fri, 10 Jul 2026 06:46:07 -0400

The US dollar is softer against most currencies today. The main feature is the recovery of the yen, not in response to material intervention but on the call from the finance minister for Japanese pension funds to invest more in domestic assets. The Nikkei rallied 1.2% and the 10-year JGB yield fell for the first time in two weeks. The 13 basis point decline was the largest single day decline this year. The dollar, which had been near JPY162.40, fell to JPY161.30 before finding new bids. Separately, the PBOC set the dollar’s reference rate below CNY6.80 for the first time in three years.

Federal Reserve Chair Warsh named key personnel for the new task forces. They appear highly respected and credible, with some diversity of experiences and political perspectives. It seems like a healthy exercise to examine first principles from time-to-time. Meanwhile, technical talks between the US and Iran reportedly are continuing and August WTI, which peaked on Wednesday slightly above $76, approached $71 today and is near $72 ahead of the start of the North American session.

Prices

G10

• The euro traded in a $1.1375-$1.1475 range on July 2 and remained within it this week. The euro managed to push above the 20-day moving average (~$1.1440 today) and rose to $1.1460 before it reversed lower in Europe and fell to new session lows near $1.1425. It has not settled above it since the eve of the June 17 hawkish hold announced by the FOMC. Yesterday’s low was around $1.1415 and a close below it weakens the technical tone. That said, there are 2.6 bln euro in options that expire today in between $1.1400 and $1.1405.

• Despite reporting a record current account surplus earlier in the week and yesterday’s Ministry of Finance weekly data that showed Japanese investors continued to sell foreign stocks and bonds last week, the yen found little traction. However, the yen has come back bid today on the back of a firm PPI and the call by Finance Minister Katayama to encourage the national pension funds to increase their investment in domestic assets. The dollar was sold to JPY161.30, slightly ahead of the week’s low set Monday, closer to JPY161.20. The greenback has recovered to about JPY161.85 in the European morning. The intraday momentum indicators suggest there may be scope for additional USD gains, with the JPY162 posting the initial hurdle.

• Sterling continues to trade impressively and rose yesterday for the tenth session in the past 11. The daily momentum indicators are not overextended. The next target is around the June 15 high, $1.3460, which also corresponds to the (61.8%) retracement of sterling’s losses since the May Day high (~$1.3660). It reached slightly above $1.3450 in the Asia Pacific session before stalling. It eased back to almost $1.3410 in Europe. Support is seen in the $1.3380-$1.3400 area. There are options for GBP1.37 bln in that band that expire today.

• The Canadian dollar edged slightly higher yesterday, but it was not convincing. Perhaps some were deterred by anticipation of today’s labor market report, which will be hard pressed to be better than last month’s (154k jump in full-time employment and a drop in the unemployment rate to 6.6% from 6.9% on a steady participation rate). The greenback frayed the 20-day moving average (~CAD1.4165 today) for the first time in nearly two months but it settled above it and held above the CAD1.4150 support. Follow through US dollar selling today saw it fall to almost CAD1.4135 today, its lowest level since June 19. However, the greenback recovered from Asia Pacific low and returned to the CAD1.4170 area in the European morning. The intraday momentum indicators suggest this may be the extent of the US dollar’s recovery.

• The Australian dollar was stuck in a quarter-cent range yesterday above $0.6925. The week’s high had been near $0.6960 but it reached $0.6970 today. It stalled and slipped back to almost $0.6940 where it was bought in Europe. The intraday momentum indicators are constructive.

• Mexico reported that headline price pressures subsided to their mildest in five years last month. Given the better risk environment yesterday and pullback in the US dollar more broadly, one might be forgiven for expecting the peso to have recovered more of Wednesday’s losses. The US dollar traded to about MXN17.5275, which is a little below Tuesday’s high (~MXN17.5450). Today, the Mexican peso enjoys a slightly firmer today. The US dollar found support near MXN17.50. The Colombian peso extended its post-election surge. Its nearly 1.5% surge yesterday, half of the week’s rally coming into today, led the emerging market complex higher. It has appreciated by about 12% since the end of May presidential election.

• In line with its broadly heavier tone yesterday, the greenback slipped against the yuan. It had reached CNH6.81 on Wednesday and found bids near CNH6.7935 yesterday. However, encouraged by a new three-year low dollar fix, the offshore yuan reached its best level in about two-and-a-half weeks (~CNH6.7785). The dollar can finish below the 20-day moving average (~CNH6.7895) for the first time since the FOMC’s hawkish hold last month. The PBOC set the dollar’s reference rate at a fractionally new three year low today (CNY6.7989 vs. CNY6.8036 yesterday and CNY6.8047 a week ago).

• The Indian rupee edged up today. After falling in the middle of the week, the rupee spent yesterday and today consolidating with a slightly positive bias. The dollar reached INR95.6085 on Wednesday and saw INR95.2250 today.

Other Markets

• With a few exceptions, the large equity markets recovered yesterday from the midweek air pocket. Investors seem to have concluded that given the nature of the two regimes, a wider berth must be given the Middle East “ceasefire”, while recognizing the unknown breaking point. The large equity market Asia Pacific rallied today, with the notable exception of China and Taiwan. South Korea’s Kospi’s 2.5% gain led the region, Europe’s Stoxx 600 fell in the first three sessions of the week. It recovered yesterday and is slightly firmer near midday in Europe today. US index futures are narrowly mixed.

• Benchmark 10-year yields fell 4-7 bp in Europe yesterday and 4-5 bp in the US and Canada. It helped peripheral premiums, and in this case including France, narrowed. Yields are lower today, led by a 13 bp drop in Japan’s 10-year yield. European rates are mostly 2-3 bp lower and again peripheral premiums are narrowing. The 10-year US Treasury yield is off a couple of basis points to 4.53%, a three-day low.

• Gold settled firmly yesterday and snapped a three-session slide that followed a three-session rally at the end of last week. It stalled today and slipped back below $4100. A close above the $4135 area would end the week on a firm note even if below last week’s close (~$4177). Silver also snapped three-day slide, which followed a four-day rally last week. It has struggled to find much buying interest above $60 in recent sessions after it settled last week a few pennies below $62.50. It rose to about $60.75 earlier today but met sellers that pushed it back to $59.50.

• August WTI recorded yesterday’s session lows late in the NY afternoon near $71.40. Wednesday’s low was $71.75. It reached a three-day low today near $71.15. It is not a return to the status quo ante, but it does seem to be consistent with the idea that perhaps because neither side wants escalation that the ceasefire can be more resilient than one would have suspected.

Data

• Canada’s June employment report is the main feature of today’s North American session. It is difficult to envisage a better report than May’s, which saw a 154k increase in full-time employment and fall in the unemployment rate to 6.6% from 6.9% and a steady participation rate (65%). Still, after contracting in Q4 25 and Q1 26, the Canadian economy appears to have returned to growth in Q2.

• Yesterday, Mexico confirmed consumer price pressures are moderating. At 3.37% in June, the headline pace is the lowest in five years. The core rate fell for the fifth consecutive month and at 4.03%, it is the lowest since April 2025. Today, data may show the economic recovery is uneven. May’s industrial output is expected to have contracted by 0.7% after the 2.1% surge in April. That would be sufficient to push the year-over-year rate back below zero, which, with a few (4) exceptions, has generally been shrinking since mid-2024.

• Japan reported a 0.4% rise in June’s PPI, which lifted the year-over-year rate to 7.1% from a revised 6.6% in May (initially 6.3%). It is the fourth consecutive increase in the year-over-year rate and the highest since early 2023. Meanwhile, the chip and AI frenzy has seen Japanese machine tool orders soar. They rose 52.8% year-over-year in June after a 37.5% jump in May and a 45.1% increase in April. Japanese machine tool orders ae the strongest since late 2021 and early 2022.

Disclaimer

The US Dollar Consolidates with a Softer Bias as Oil Steadies

noreply@blogger.com (Marc Chandler) — Thu, 9 Jul 2026 06:45:27 -0400

With the fog of war still shrouding the near-term outlook, the US dollar is mostly consolidating with a softer bias against the G10 currencies. Outside of the New Zealand dollar that is still basking in yesterday's rate hike, and the Canadian dollar, which is slightly softer, the other G10 currencies are up less than 0.15% ahead of the North American open. August WTI and September Brent are trading within yesterday’s ranges.

The FOMC minutes released yesterday failed to tell the market anything it did not already know. Fed officials are divided, which had already been revealed in the “dot plot” that saw nine of the 18 members indicate that they thought at least one hike this year would be appropriate. The UK’s Labour leadership contest formally begins today, though there seems to be little doubt of the outcome. French politics are also in flux after Le Pen says she will run for president next year. Lastly, undeterred by slightly slower consumer inflation, the PBOC set the dollar’s reference rate at a new three-year low.

Prices

G10

• The euro fell to a four-day low in North America yesterday (~$1.1390) but recovered in the North American afternoon to new session highs, slightly above $1.1430. It has risen to almost $1.1450 today but continues to consolidate in the range set last Thursday, when the US employment report was released. That range was about: $1.1375-$1.1475. The 20-day moving average is about $1.1445, and the single currency has not settled above it since the day before the June 17 FOMC outcome.

• The yen is consolidating near the 40-year low set last week. The US dollar reached almost JPY162.85 on July 1 and backed off after the employment data. And with a running start, the greenback reached almost JPY162.70 yesterday. It is trading mostly below JPY162.60 today. Options for almost $2 bln at JPY163 expire today. The US 10-year premium over JGBs narrowed to new low since March 2022 around 162 bp on Monday and has stabilized in recent days. It was nearly 200 bp as recently as late March.

• Sterling seemed unusually well bid yesterday and reached new session highs in the early NY afternoon (~$1.3410) but settled slightly below $1.3390. Quietly, sterling has advanced in nine of the past 10 sessions. It reached $1.3430 today, its best level June 17 (Fed’s hawkish hold). It has pushed above the 200-day moving average ($1.3400). It has not closed above it since June 16. Nearby resistance is seen in the $1.3440-60 area. Sterling is also outperforming the euro there may be scope toward GBP0.84 initially (~1.5%). Sterling has shown little interest in Labour’s leadership contest that formally starts today.

• For the first time in a couple of months, the Canadian dollar is showing some life. From early May through late June, it fell by about 5.2% against the US dollar. The greenback reached almost CAD1.4250, which it tried twice to overcome and has been rebuffed. It posted its lowest close in nearly two-and-a-half weeks yesterday. The CAD1.4150 area, which was approached yesterday and is holding. It is fraying the 20-day moving average (~CAD1.4155 today). The US dollar has not settled below it since May 7. Below there, the CAD1.4100-10 area may be the next area of chart support.

• The Australian dollar broke down to a four-day low yesterday, a little above $0.6905. It recovered and reached almost $0.6940 in the North American afternoon. It has edged a little higher today. Initial resistance is seen near this week’s high (~$0.6960) and the 20-day moving average is a couple of hundredths of a cent lower. It has not settled above it since the end of May. The $0.7000 may offer the next important target.

• The Mexican peso has fallen by about 1.15% against the dollar in the past two sessions. That is almost half of the year’s carry (one-year rate differential is around 280 bp). The dollar settled near MXN17.39 on Monday and reached almost MXN17.6450 yesterday amid the risk-off mood. It pulled back but posted its highest settlement since June 24, which was also above last week’s intraday high. The greenback is consolidating between MXN17.5280-MXN17.5835 today. Support is pegged in the MXN17.4750-MXN17.50 area.

• The dollar briefly pushed above CNH6.81 against the offshore yuan yesterday, a new high in nearly two weeks. Last month’s high was almost CNH6.82. The dollar has pulled back to about CNH6.7970 today. The PBOC set the dollar’s reference rate a little lower today but at CNY6.0836, (from CNY6.0877 yesterday), it was sufficient to mark a new three-year low.

• After falling by around 0.6% yesterday, the Indian rupee steadied today and recovered above a third of yesterday’s decline. The new facility launched last month to attract foreign deposits reportedly has raised $1.5 bln. The program offers high interest rates (~7.5% in some cases) as the central bank is subsidizing the program. After peaking near INR95.6085 yesterday, the dollar eased to about INR95.2815 today.

Other Markets

• The recovery of the Nasdaq yesterday from early losses of more than 1% may have been seen as a signal by bargain hunters in some of the beaten-up Asia equity names. Most of the large Asian bourses advanced today. Hong Kong, Taiwan, and Australia were notable exceptions. China’s CSI 300 led with a 2.5% gain. Europe’s Stoxx 600 is trying to snap a three-day slide. It is up about 0.2% in late European morning turnover. The S&P and Nasdaq futures are firmer.

• The US 10-year yield spent most of the last few sessions of June below 4.40% and yesterday approached 4.60%. It is back to late May levels, when it peaked so far for the year a little below 4.70%. The yield is near 4.57% now. Yesterday’s surge in European bond yields seemed overdone. Yields are 2-4 bp lower today. However, there is a drama playing out in France on two fronts, the current budget projections, and the next year’s presidential contest. The French premium, reached around 85 bp, is the highest in nearly nine months, but it slightly below 80 bp now.

• Gold recovered from a brief drip below $4022 near midday in NY yesterday but stalled a little below $4090. It is trading with a firmer bias today and reached almost $4118. The five- and 20-day moving averages are converging in the $4125-35 area. Silver was sold to almost $57.20 yesterday and its rebound held below $59. It also enjoys a firmer tone but has held below $60.

• August WTI has rallied more than 10% in the past two sessions. It reached almost $76.10 yesterday, roughly a two-week high. It traded above the 20-day moving average (~$75) for the first time since June 11. It is consolidating today, awaiting fresh developments, between about $72.35 and $75.15. Speculators in the futures market had amassed their large gross short crude oil futures contracts since 2017 in mid-June (~236.5k contracts, 1k barrels per) and had already shaved in in the past two reporting weeks through June 30, but it was still large before the recent escalation.

Data

• US existing home sales may have risen for the third consecutive month in June and may have risen by a cumulative 5% in Q2 after falling by about 6% in Q1. If the median forecast in Bloomberg’s survey is fair, that 4.20 mln seasonally adjusted annual pace would still be lower than the 4.27mln pace in December 2025. Still, the monthly average in H1 looks to be about 4.10 mln unit pace, which is slightly better than the H1 25 pace (4.05 mln). Weekly jobless claims are also due and may be skewed by last week’s holiday. The four-week average is about 222k after falling from the H1 26 high of 224.5k the previous week.

• Mexico is expected to report slight declines in the year-over-year CPI measures today. The headline rate is projected to fall toward 3.50% from 3.94% in May. Last year’s low print was 3.51% in July. Mexico’s inflation has not been below 3.50% since the end of 2020. The core rate is stickier. The median forecast in Bloomberg’s survey is for a slight softening to 4.10% from 4.19% in May. Banxico will also release the minutes from its recent meeting when the key rate was left unchanged at 6.5%.

• Germany reported a larger than expected May trade surplus of 19.1 bln on adjusted basis. The median forecast in Bloomberg’s survey was for a 14.8 bln euro surplus. Exports were stronger than anticipated. They increased by 0.9%. But it was the 2.5% drop in imports that was responsible for the bulk of widening of the surplus. The monthly surplus averaged about 17.7 bln euros this year, down slightly from 17.9 bln average in the first five months of 2025. The Bundesbank forecasts that the current account surplus will ease to 4.1% of GDP this year from 4.5% in 2025.

• China’s June inflation gauges were little changed. Producer prices, which emerged from a 3.5-year deflationary period in March, have now risen 4.1% year-over-year, the highest since July 2022. The consumer price index ticked down to 1.0% from 1.2% year-over-year, while the core rate was steady at 1.1%. China’s consumer prices fell for the second consecutive month (-0.3% after -0.1% in May). While no doubt demand can be stronger, the biggest drag comes from food prices. They are off 1.6% year-over-year. Non-food prices have risen by 1.5%. The core measure is up 1%.

Disclaimer

Renewed War Roils Markets

noreply@blogger.com (Marc Chandler) — Wed, 8 Jul 2026 06:43:46 -0400

There is one overreaching development that is driving the capital markets today. War. Hostilities between the US and Iran have intensified. At the NATO summit in Türkiye, President Trump has said the ceasefire is over. Oil prices have jumped. Benchmark bond yields have risen and stocks sold. The dollar itself is mixed in the G10 but is mostly stronger against emerging market currencies.

As widely anticipated, the Reserve Bank of New Zealand hiked its overnight cash rate target 25 bp to 2.50%. The New Zealand dollar is the strongest among the major currencies (~0.35%) followed closely by the oil-sensitive Norwegian krone. The Japanese yen is the weakest, off about 0.2% to approach last week’s 40-year high. President Trump told expressed frustration with NATO members over not supporting his desire for Greenland and renewed his call to end trade with Spain for its lack of sufficient military spending and its lack of support for the war on Iran. The US runs a trade surplus with Spain.

Prices

G10

• The euro ground lower in yesterday’s North American session and slipped below to Monday’s low near $1.1410. It slipped slightly below $1.14 in the European turnover after recovering to a little more than $1.1430. The single currency remains within the range recorded on July 3 when the US June employment data were released (~$1.1375-$1.1475) but still looks vulnerable. There are ~2.2 bln euros in options struck at $1.14 that expire today.

• After jumping almost 0.5% against the yen on Monday, the most since the end of April, the dollar recorded an inside day yesterday, confined to about a JPY161.65-JPY162.20 range. The greenback only briefly traded above JPY162 in North America. The upside has been extended to about JPY162.55 today. The 40-year high set earlier this month was near JPY162.85.

• Sterling poked above $1.34 yesterday in the Asia-Pacific session for the first time since June 17, when the FOMC meeting concluded. However, it trended lower and reached $1.3350, where options for GBP1.37 bln expire today. It has been sold to a four-day low today, just ahead of $1.3320 in early European turnover and bounced to around $1.3350. A break of the $1.3270-$1.3300 area weakens the technical tone.

• Despite the risk-off moment, which tends to weigh on the Canadian dollar, it has come back bid today. It is the third session that the greenback is recording lower highs and lower lows. Monday’s high was about CAD1.4240, and today, the US dollar returned to CAD1.4155, last week’s low. Many will cite the jump in oil prices, but the rolling 60-day correlation is practically flat. Market positioning may help explain the Canadian dollar’s outperformance today.

• The Australian dollar reached a two-week high yesterday near $0.6960 but could not sustain the momentum. It was sold back to about $0.6920 yesterday, where it bottomed on Monday. It slipped below $0.6910 today but reached almost $0.6925 as the European morning progressed. A break of the $0.6900 area, where A$480 mln options expire today and another stack of almost A$575 mln expire Friday, weakens the technical tone.

• The Mexican peso sold off yesterday and its nearly 0.85% loss was the largest in almost two weeks. The peso was the weakest of the emerging market currencies yesterday. The Colombian peso’s nearly 0.80% gain made it the best performing currency in the region. The dollar settled slightly above MXN17.50 and the gains have been extended to MXN17.6250 today. Options for $605 mln, struck at MXN17.60 expire today. The high from late June was near MXN17.6765, its best level since early April.

• The offshore yuan softened a little yesterday. The dollar settled above CNH6.80 for the first time since June 26. It crept up to almost CNH6.8075 today. Initial resistance is around CNH6.81, while last month’s high was almost CNH6.82. The PBOC set the dollar’s reference rate CNY6.8077 today (CNY6.8054 yesterday).

• The Indian rupee saw yesterday’s gains, the most in two weeks, reversed today. Foreign investors are taking a more positive perspective on Indian stocks and bond in recent weeks but the impact om the currency seems marginal. And foreign investors turned sellers today. The rupee rose by about 0.35% last month, the first monthly gain since February. With today’s losses, it is off around 0.95% this month, making it the weakest in the region. The greenback reached almost INR95.6090 today, its highest level in nearly a month.

Other Markets

• Equities are off sharply today. The MSCI Asia Pacific Index fell 1.6% yesterday and all the large equity markets in the region but Hong Kong, Taiwan, and Singapore fell today. South Korea’s Kospi led the sell-off with a 5.35% slide, the Nikkei 225 was off 2.1% and India’s indices fell about 2%. Europe’s Stoxx 600 was off about 1% over the past two sessions and is tumbling around 1.8% through the morning. If sustained, it will be the largest loss since mid-March. US index futures are 1.0%-1.5% lower.

• Benchmark 10-year yields jumped mostly 4-5 bp in Europe yesterday and are 8-11 bp higher today. The US 10-year yield rose in each of last week’s four sessions for a 12 bp gain. It slipped by a little more than one basis point on Monday and jumped by about 8 bp yesterday and settled slightly above 4.55%, its highest close since June 10. It is approached 4.58% today. Some pressure may have come from investors hedging the corporate bond issuance, which featured Amazon’s at least $25 bln offering ($62 bln in bids, according to reports), but today’s story is oil and the renewed hostilities in the Middle East.

• Despite news yesterday that the PBOC bought the most gold last month since October 2023 (~15 tons), it failed to inspire buying. The price of gold fell by around 1.4% yesterday and is off 1.7% this week coming into today. Support around $4100 yielded to the pressure, but gold recovered and settled a little below $4115. Follow-through selling today has tarnished the yellow metal further, driving it to about $4040, a four-day low. The low for the year was recorded in late June, near $3944. Silver was turned back Monday from almost $63.30 and was pushed slightly through $59.50 yesterday. It settled slightly below $60 and traded below $58.20 today. Its low for the year was recorded on June 24 around $55.60.

• The attack on the four ships yesterday in the Strait of Hormuz risked retaliation from the US and this helped lift oil prices. Late in the North American session, the US Treasury revoked the June 21 waiver on Iranian oil products and indicated it was engaged in strikes 4-5x greater in scope and power than the last strike ten days ago. August WTI, which bottomed last Friday, nearly $67 a barrel and reached about $72.50 yesterday and $75.30 today. The 20-day moving average is slightly above $75. It traded above it for the first time since June 11.

Data

• The FOMC minutes from Chair Warsh’s first meeting will draw attention later this afternoon. Just as the statement was terse, the risk is the new chair put its mark on the minutes as well. The market impact may be negligible as participants continue to get the measure of the Warsh as chair. Despite seemingly trying to avoid forward guidance, the Warsh is not opaque. The market took a hawkish tilt away from last month’s FOMC meeting and took a less hawkish signal from Warsh last week when he told the Sintra audience inflation expectations had eased and AI may indeed boost productivity and non-inflationary growth. With US consumption rising faster than income, how are American households doing it? In addition to drawing down savings, American are borrowing more. May consumer credit will be reported later today. It rose by $53.7 bln in the first four months of the year compared with about $32.3 in Jan-April 2025.

• As widely expected, the Reserve Bank of New Zealand raised official cash rate target by 25 bp to 2.50% earlier today. It is the first increase since May 2023. In 2024 and 2025, the RBNZ halved its target rate to 2.25%. The swaps market is pricing in another hike fully for the late October meeting and leans toward a third hike before the end of the year.

• Japan’s current account surplus widened a little in May (JPY3.97 trillion vs JPY3.91 trillion in April), even though the trade balance surplus narrowed (JPY6.9 bln vs JPY396 bln). Japan’s current account surplus reached a record 4.9% of GDP last year, while on balance-of-payments terms, it recorded a trade deficit of almost JPY570 bln.

Disclaimer

Struck Qatari Ship Underpins Oil and Gas Prices, While Strong Samsung Earnings Fail to Stem Chip and AI Profit-Taking

noreply@blogger.com (Marc Chandler) — Tue, 7 Jul 2026 06:49:02 -0400

The fragility of the ceasefire in the Middle East was driven home today by the strike on a Qatari LNG ship in the Strait of Hormuz today. Oil and gas prices are higher. Samsung earnings failed to deter profit-taking, which weighed on chip and AI equity names. Still, the South Korean wan jumped 1% to a two-week high as SK Hynix prepares to sell American depository receipts (~$28 bln). The company has said it intends to repatriate some of the funds raised. Japan’s 30-year bond auction drew the highest demand in seven years, though yields recovered from the initial decline. Hong Kong launched a gold clearing and settlement facility today.

The US dollar is firmer against the G10 currencies but the Japanese yen. It is straddling the JPY162 level in the European morning, where options for $2.2 bln expire later today. Germany reported a 0.9% rise in May industrial output, which was well above expectations and matches the largest increase since March 2025. Still the euro is trading quietly lower. The NATO conference in Türkiye will attract attention. Meanwhile, the market awaits word from the French court whether Le Pen can run in next year's presidential contest. And the $119 bln coupon auctions this week by the US Treasury kick-off with the $58 bln sale of three-year notes today.

Prices

G10

• The euro made marginal new session low in North America yesterday, slightly below $1.1410. Important chart support is seen in the $1.1400-05 area. It retested the session high in the North American afternoon, near $1.1450. Last week’s high was near $1.1475, which also corresponds to the 20-day moving average, which is now found slightly above $1.1460. So far today, the euro is in about a quarter-cent range below $1.1450.

• The yen traded in a narrow range in North America yesterday. The US dollar drifted lower most of the North American session and approached JPY162.00 in late dealings. It peaked today slightly below JPY162.20 and found support a little below JPY161.70. The record intervention in April/May sent the greenback down almost six yen. The 2024 intervention, which was around half of the size of this year’s operation, drove the dollar down about 22 yen. There are $2.2 bln of JPY162 options that expire today and about $820 mln at JPY162.50.

• Sterling posted an ostensibly bullish outside day by trading on both sides of yesterday’s range and settled above it high. It poked above $1.3400 briefly today where sellers lurked and pushed it to $1.3375. Options for about GBP435 mln at $1.3360 expire today. Sterling needs to convincingly overcome resistance in the $1.3400-20 area to signal a move toward $1.3500 next.

• The Canadian dollar approached last week’s low, but it held, but it still looks vulnerable. In late June, the US dollar tested the CAD1.4250 area. Yesterday’s high was almost CAD1.4240. and the US dollar pulled back to around CAD1.4200 in late dealings. It has been confined to a roughly CAD1.4200-CAD1.4220 range. It will take a break of CAD1.4150 to provide some technical evidence that a top may be in place.

• For the fourth consecutive session, the Australian dollar is recording higher lows and higher highs. It pushed above resistance near $0.6950 in the North American afternoon and reached $0.6960 today before pulling back to around $0.6935. Sustaining the break targets the $0.7000 area next. The 20-day moving average is nearly $0.6970. The Aussie has not closed above the 20-day moving average since mid-May.

• The Brazilian real and Mexican peso were the strongest emerging market currencies yesterday. The Brazilian real was the strongest. It rose by about 0.75% and reached a two-week high. The dollar slipped through BRL5.1300 and settled below the 20-day moving average (~BRL5.15 today) for the first time since June 15. The greenback was turned away from MXN17.50 and was sold through last week’s low seen before the weekend, near MXN17.4180, to approach MXN17.3750. It traded on both sides of last Friday’s range and settled below it low. It closed below the 20-day moving average (~MXN17.4065 today) for the first time since June 17 (FOMC meeting). However, there has been no follow-through, and the US dollar is back above the 20-day moving average. Nearby resistance is in the MXN17.46-MXN17.50 area.

• The dollar’s advance against the offshore yuan recouped the losses recorded in the previous two sessions. It approached CNH6.80 yesterday and reached CNH6.8030 today. It stalled in front of CNH6.8050 resistance. The PBOC set the dollar’s reference rate slightly above last week’s three-year low today (CNY6.8054 vs. CNY6.8066 yesterday and CNY6.8047 at the end of last week).

• The Indian rupee is firmer today despite the rise in oil prices and weaker equities. today. It has fallen in five of the past six sessions. Today’s 0.45% gain is the largest since June 12. The dollar was sold to a three-day low near INR94.9660, slightly the 20-day moving average (~INR94.8950). At the end of week, the central bank will report the latest weekly reserve figures. In June reserves fell for the second consecutive month a total of about $31.5 bln.

Other Markets

• The large equity markets in the Asia Pacific region were sold today. Singapore was the main exception (+1.5%). Strong Samsung earnings failed to inspire and South Korea’s Kospi was tagged for nearly 5%. Taiwan’s Taiex and Japan’s Nikkei 225 fell by more than 2%. Europe’s Stoxx is nursing a small loss in late morning trade after falling 0.35% yesterday. The US S&P and Nasdaq composite approached last and week’s high yesterday, but they held. The Nasdaq futures are off almost 0.90% and the S&P 500 futures a little softer.

• Benchmark 10-year yields mostly edged up yesterday and are higher today. The 10-year US Treasury yield was an exception yesterday and was fractionally lower. Today, it is up a couple of basis points to almost 4.49%. The 10-year JGB yield is up 2.5 bp today after jumping about 4.5 bp yesterday. The yield is up about 78 bp this year, more than twice the increase in the US 10-year yield. European yields are mostly around two basis points higher today.

• Gold initially rose a little above the pre-weekend high yesterday to reach almost $4203 in the Asia Pacific session before retreating a little below $4130 in North America. It fell slightly below $4117 today before stabilizing. Separately, note that Hong Kong launched its gold clearing and settlement system today. The Monetary Authority of Singapore is expected to offer gold vaulting services later this year (October). Silver traded pennies through the 20-day moving average (~$63.20) for the first time in over a month yesterday. But it was greeted by sellers who pushed to back to almost $61.35. It fell about $1 today before bids emerged.

• August WTI traded between about $67.80 and $69.25 yesterday. The 200-day moving average is slightly below $70.30 and the contract has not settled above it for the past four sessions coming into today. Last week’s low was record before the weekend (~$67) and before the Middle East war began, it settled at $65.70. The attack on a ship today as it was exiting the Strait of Hormuz helped lift the August WTI contract to almost $69.75 today. Meanwhile, Saudi Arabia cut its main crude price for Asia next month and will sell at a discount for the first time since 2020. The $11 a barrel cut will bring the price to $1.50 below the regional benchmark. The move is thought to reflect the speed at which oil producers in the Gulf have boosted flows.

Data

• The US May trade deficit is set to widen sharply. The preliminary goods deficit rose to $105.8 bln from $83 bln in April. The overall trade deficit is seen widening to $78.5 bln from almost $56 bln. Although one would not know it from much of the political discourse, the US runs a large and persistent trade surplus in services. In any event, the imports likely rose around 2%, like they did in April. Exports are expected to have fallen by the most in seven months. The NY Fed’s inflation survey may draw more attention than usual after Fed Chair Warsh, who eschews forward guidance, told the Sintra audience that inflation expectations have fallen recently. In May, the one-year expectation slipped 0.1% to 3.5% and the three-year and five-year projections were unchanged at 3.0% and at 3.1%, respectively. The one-year breakeven, the difference between the inflation-linked security and the conventional security is near 1.32%. It peaked in late March near 5.43% and was above 2.5% a month ago. The five-year breakeven is about 2.25%. It peaked in mid-March, near 2.78%. It was slipping through 2.50% a month ago.

• Canada reports May goods trade balance today. April’s C$2.7 bln surplus was the largest since January 2025. The average monthly deficit in the first four months of the year is about C$920 mln compared with an average shortfall of C$1.8 bln in Jan-Apr 2025. The IVEY PMI will also be reported. It typically runs hotter than the S&P iteration. The highlight of the week is the June employment data on Friday, which is unlikely to match May’s nearly 88k increase in employment, the increase of 154k full-time positions and drop in the unemployment rate to 6.6% from 6.9% (steady participation rate, unlike in the US).

• Mexico reports June auto output and exports today. The market does not appear sensitive to the data. Still, it is interesting to note that Mexico exported almost 90% of its auto output in May.

• Germany reported a 0.9% jump industrial output figures today after a larger than expected jump in orders yesterday. The median forecast in Bloomberg’s survey anticipated a 0.1% increase. April’s 0.4% increase was halved to 0.2% increase. On a workday adjusted basis, it was flat year-over-year. After posting 0.3% growth in Q1 26, Europe’s largest economy may have stagnated in the quarter that just ended.

• France’s “twin deficits” are in the news. Today it reported a 6.9 bln euro May trade deficit. The deficit in the first five months of the year averaged 5.27 bln euros down from a 6.5 bln average in Jan-May 2025. Weak growth in France is adding to its fiscal challenges and may see it overshoot its 5% deficit target (5.1% 2025) this year. Meanwhile, a Frenc appeals court is expected to rule today whether Marine Le Pen’s embezzlement case prevents here from running in next year’s presidential contest, which ECB President Lagarde may also be interested in entering.

• We continue to be struck by the contrast between rising labor earnings in Japan and the continued weak household spending. Reported earlier today, Japan’s labor cash earnings rose 3.2% year-over-year in May and 1.4% when adjusted for inflation. Yet, household spending contracted by 0.4% year-over-year in May (-0.5% in April). It has not risen on a year-over-year basis since last November. Japan reports May current account balance tomorrow. The surplus is expected to have edged up even though the trade balance (BOP basis) is likely to have swung back into deficit after being in surplus Feb-April.

Disclaimer

Yen Remains Under Pressure

noreply@blogger.com (Marc Chandler) — Mon, 6 Jul 2026 06:42:58 -0400

The dollar begins the new week on a firm note despite the disappointing employment report last week, but except against the yen, it remains within recent ranges. Japanese official rhetoric has not increased and the sell-off in JGBs seemed to add to the weight on the yen. The dollar rose to JPY162.40, a yen higher than it settled before the weekend. The yen is off about 0.6% late in the European morning. Of the G10 currencies, the New Zealand dollar is off almost as much even though its central bank is likely to hike its key rate in the middle of the week.

OPEC+ agreed to boost output and oil prices are a little softer. Yet, the Norwegian krone is only G10 currency that is not falling against the US dollar today. French budget problems saw its 10-year premium over Germany widen to nine-month highs last week (~80 bp) but is flat today. ECB President Lagarde apparently is mulling re-entering French politics, where the National Front candidates are running ahead on the pols for next year’s contest. After the US jobs data last week, the Fed funds futures are now pricing in a Fed hike at end of the year rather than in October.

Prices

G10

• With US markets closed before the weekend, the euro consolidated the gains scored in the wake of the disappointing US jobs data on July 2. On Friday, it held above $1.1420 but could not rechallenge the $1.1475 area that had capped it the day before. The 20-day moving average is near $1.1465 today and the single currency has not settled above it since June 16, the day before the Fed delivered its hawkish hold. The euro is trading with a heavier bias, and it has held below $1.1450 where options for 1.25 bln euros expire today. Support is seen near $1.1400 were options for almost 1.8 bln euros expire today.

• The dollar slipped through Thursday’s low briefly before the weekend and traded a tick below JPY160.50, its lowest level since the day after the FOMC meeting. Still, it rebounded and settled near JPY161.30. The greenback has bounced back to around JPY162.30 today. Recall that last week’s high was near JPY162.85. Options for $1.8 bln at JPY162 expire tomorrow. Despite the BOJ’s regular bond buying operation today, the 10-year JGB reached a new 30-year high near 2.82%.

• Sterling did not see follow-through buying ahead of the weekend, after reaching $1.3385 after the US employment report last Thursday. The $1.3400 area holds the 200-day moving average and the (50%) retracement objective of the decline since the May 1 high (~$1.3660). The 5-day moving average has crossed above the 20-day moving average today for the first time since mid-May. But sterling is trading with a slightly heavier bias as it holds in the upper end of last Thursday’s range. Initial support is now seen around $1.3320.

• The Canadian dollar spent Friday trading within the range set the previous session. However, the consolidation still looks constructive for the greenback, which settled above CAD1.4200. The US dollar is pushing near CAD1.4230 in the European morning. There have been two highs recently, just shy of CAD1.4250. A move above there could spur the next leg up toward CAD1.4300.

• The Australian dollar snapped a four-week slide with a gain of almost 0.60% last week. It reached $0.6950 before the weekend, its best level in eight sessions, and the (38.2%) retracement of the losses since mid-June. It is consolidating quietly today between about $0.6920 and $0.6950. The next retracement and the 20-day moving average are around $0.6975.

• After falling to nearly MXN17.4180 before the weekend, the greenback recovered to around MXN17.49 in subdued turnover. The Mexican peso reached its best level since June 24. It is not clear if the consolidative phase is complete. For that, the dollar must fall below the MXN17.35-MXN17.40 area. The greenback is consolidating between MXN17.46 and MXN17.4930 so far today.

• The dollar fell to a new low for the week against the offshore yuan, near CNH6.7810 ahead of the weekend. But the dollar is better bid today and it is approaching CNH6.80 in Europe. Initial resistance is seen in the CNH6.8050 area. Before the weekend, the PBOC set the dollar’s fix at CNY6.8047, a new three-year low. Today’s fix was set at CNY6.8066.

• The Indian rupee snapped a four-day slide ahead of the weekend. The dollar reached nearly a three-week high before the US jobs data (~INR95.3960) and eased to about INR95.1640 before the weekend. The rupee came under new pressure today and the dollar reached almost INR95.4840, the highest since June 11.

Other Markets

• Equities finished last week on a strong note. All of the large Asia Pacific markets rallied on Friday, with South Korea’s Kospi leading with a 5.75% gain. Japan, Hong Kong, and Australia’s main indices gained more than 1%. Europe’s Stoxx 600 edged up by about 0.65% to bring the fourth consecutive weekly rise to about 2.65%. US S&P and Nasdaq futures traded higher before the weekend. Today is a different story. Japan, Hong Kong, and Indian stocks advanced but most of the large bourses in the region did not and South Korea’s Kospi could not hold its early gains. The Stoxx 600 is nursing a small loss. US index futures are trading firmly.

• Benchmark 10-year yields rose on Friday and extended last week’s rise. The 10-year JGB rose by 14 bp (to 2.77%), while most European yield increased by 7-12 bp, with Italian rates rising the most. The 10-year US Treasury yield rose 11 bp to 4.48%. Outside of the jump in JGB yields, benchmark rates are mostly softer today. We note that China’s two-year yield slipped a couple of basis points to 1.22%, the lowest since February 2025. The US 10-year yield is off a little more than two basis points to almost 4.45%. The US Treasury will sell $119 bln of coupons this week.

• Before the weekend, gold settled above its 20-day moving average (~$4156) for the first time since mid-May. The yellow metal reached a new two-week high today, near $4203 before reversing lower. It fell slightly through $4137. Nearby support is seen around $4120. Silver has a four-day rally into tow as it entered today’s activity. It rose by more than 2.5% in each of the last two sessions. The pre-weekend high was slightly shy of $62.90, its best level since June 23. It tested the 20-day moving average today, around $63.25, but was turned back. Silver has not settled above the 20-day moving average since May 25. Support now may be seen around $60.60.

• August WTI was little changed before the weekend. It fell to almost $67 on July 2. It settled on its highs and follow-through buying on July 3 and lifted it to about $69.25, the five-day moving average. The 200-day moving average is near $70.35, and since breaking below it last Tuesday, the August WTI contract has settled above it. It is trading between about $67.80 and $69.25 today.

Data

• The final US June services and composite PMI hold little new news. The June ISM services survey will draw more attention. Activity is expected to edge lower and prices paid are expected to have eased. New orders likely remained strong.

• Canada sees its services and composite June PMI. In May, the composite rose for the fourth consecutive month and crossed above 50 for the first time since last October. The Bank of Canada’s Q2 business outlook will also be released today.

• Brazil reports June trade figures. Through May, the trade balance has averaged $6.53 bln a month compared with $4.87 bln average in the first five months of 2025.

• The eurozone reported that May producer prices rose 0.2% (0.7% in April) for a year-over-year rate of 5.9% (5.0% in April). Also, it reported that May retail sales rose 0.2% (-0.3% in April) for a 1.6% year-over-year advance (0.9% in April).

• Germany reported a 1.9% rise in May factory goods ordered after the outsized 3.2% (initially -3.8%) drop in April. Transportation equipment, including for the military, helped flatter today’s report. Industrial output is due tomorrow. It is expected to have eked out a 0.1% gain after it rose 0.4% in April. Separately, the June construction PMI edged up for the first back-to-back increase this year but continued to languish in its trough. It was above 50 last year only in December. It was at 42.4 in May and edged up to 44.8 in June.

• The UK’s construction PMI held below 40 for the second consecutive month. It is at 38.4 (from 38.2 in May, the lowest since the pandemic. It has not been above 50 since the end of 2024.

• Australia’s Melbourne Institute’s Inflation gauge fell by 0.4% in June (-0.3% in May) for a year-over-year pace of 3.9% (4.4% in May). The central bank recently expressed concerns about the elevated inflation expectations, but the broadening of house price declines may become more salient. Note that Reserve Bank of New Zealand meets on Wednesday, and the swaps market favors a hike with around three-quarters of it discounted.

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The Week Ahead: Disappointing US Data, Soft Two-Yield Yield Warns Dollar Leg Up on Fed's Hawkish Hold is Over

noreply@blogger.com (Marc Chandler) — Sat, 4 Jul 2026 07:10:00 -0400

The combination of soft disappointing US data, which culminated in a jobs report on July 2 that showed half the jobs growth that was expected and the continued decline in oil prices, recognized by Fed Chair Warsh in Sintra that inflation expectations have eased recently, took the steam from US short-term rates and the greenback. The two-year US yield finished the holiday-shortened week slightly below 4.14%. It was at 4.18% after the Fed's hawkish hold last month and peaked above 4.20%. It sounds simplistic, but in the current environment as goes the US two-year yield, so goes the dollar.

The other story is the weakness of the Asian currencies despite the strong AI-related exports. The yen's 2.85% decline is not an outlier, but the decline has been sufficient for the yen to trade at 40-year lows. The market knows it risks intervention, and we continue to see signs in the options market that some large pools of capital have bought short-dated dollar puts to protect long dollar positions in the case of intervention. The Chinese yuan continues to stand out. The yuan's gain of a little more than 3% puts it atop the Asian currencies this year. It has also appreciated against the G10 currencies, but the Australian dollar. In the last two sessions, the PBOC set the dollar's reference rate at new three-year lows. The euro has fallen by nearly 9% against the yuan since peaking a year ago. The appreciation of the yuan is not as fast as its critics want but it is moving in the desired direction.

Drivers: The dollar rose in June against all world's currencies but a handful from emerging markets. To explain the decline of a few dozen currencies, one can look for idiosyncratic developments: This country is managing its currency. That country should have raised rates more aggressively. The tune may be different, but the song is the same: Strong US dollar. Last month, the US two-year yield rose by nine basis points. The comparable yield in all the other G10 countries fell (by 3-17 bp). Foreign investors have favored US equities over bonds, and they seemed to be among the bargain hunters who returned to US equities after the S&P 500 and Nasdaq fell for five consecutive sessions.

Data: The US economy appears to have accelerated further in Q2. After slowing to 0.5% annualized pace in Q4 25 and the upward revision in Q1 25 to 2.1%, the economy appears to have grown around 2.5%-3% in the quarter that just ended. ISM's June services and the final services and composite PMI pose little more than headline risk. Net exports likely deteriorated in Q2. The goods trade deficit jumped in May and that points to the widening of the overall trade deficit, which will be reported in the week ahead. If the overall trade shortfall is in line with forecasts, ~$78 bln, the two-month average would be about $67.5 bln after an average of about $55 bln a month in Q1 26. Meanwhile, existing home sales are holding up better than new home sales. Through May, new homes sales are off about 20% this year, while existing home sales are off around 3%. The June series poses some headline risk, but Fed Chair Warsh recognized at the post-FOMC press conference that policy appears restrictive for housing even if not for the financial sector. The minutes from that Fed meeting, Warsh's first, will likely be scrutinized for insight into the new chair's style and to see how close Fed officials may be to delivering a rate hike. The Fed funds futures market has almost 21 bp tightening discounted for the October meeting. While previous Federal Reserve's might be more inclined to hike in September, when there is a new Summary of Economic Projections, Warsh wants to downgrade the SEP, and one way to do that before the taskforce report, is to raise rates without new SEP. Some members of the new taskforces are expected to be named in the coming days.

Prices: The Dollar Index recorded the year's high on June 24 (101.80). It had been consolidating above 101.00 before the disappointing June jobs data on July 2. It fell to almost 100.55, a scratched the 20-day moving average for the first time in a little more than two weeks. The momentum indicators are turning lower. A trendline drawn off the May and June lows begins the new week near 100.30 and finishes the week closer to 100.55. DXY has already met the (50%) retracement of the rally since mid-June and the next retracement objective is near 100.30.

EMU

Drivers: The euro continues to be highly sensitive to changes in the two-year US yield. The 30-day inverse correlation is hovering near -0.70. The most extreme reading was around the June FOMC meeting (~-0.87), which was the most extreme in more than a decade. The 60-day correlation is near -0.69. The euro's correlation with Germany's two-year yield or the two-year rate differential is considerably less (~-0.32 and -0.38, for the 30- and 60-day correlation, respectively).

Data: The ECB hiked rates in June, and there seems to be little chance of another hike this month. This likely limits the impact of this week's high frequency data, namely, May producer prices and retail sales. Coming into May, eurozone retail sales are nearly flat in the first four months of the year. The slight softening in the preliminary June CPI takes the sting from the like rise in May's PPI. Germany's May factory orders are due on July 6 and may have stabilized after falling 3.8% in April.

Prices: The euro bottomed on June 24 dear $1.1325. It reached almost $1.1475 in response to the disappointing US jobs report. It held below the 20-day moving average, and it has not settled above it since the day before the Fed's hawkish hold on June 17. It also stalled near the halfway mark of the euro's decline since mid-June. The next retracement objective is about $1.1510. The momentum indicators are turning higher.

PRC

Drivers: The PBOC manages the exchange rate, but it is not random and it does not ignore market forces. The 100-day correlation between the greenback's changes against the offshore yuan and the Dollar Index is near 0.75, making it more correlated some G10 currencies. Still, we watch the daily fix for signals of potential policy changes. In the last two weeks of June, the fix was raised on a weekly basis. It is the first back-to-back increase since the end of last September and before that it was the first half of April. However, this does not seem to signal a change in policy. Indeed, the PBOC set the dollar's fix at new three-year lows last week. The PBOC has introduced a new policy tool, overnight reverse repos, and appears to have set the rate lower than expected, signaling a potential easing of other rates.

Data: In the management of the yuan's exchange rate, the high-frequency Chinese data seems to have little bearing. The data highlight in the coming days is China June CPI and PPI. These inflation gauges show China as exited deflations grip even as the economy appear to have weakened. In May, CPI stood at 1.2% year-over-year, and the core rate was 1.1%. They look little changed in June. Producer prices increased by 3.9% in the year through May and maybe edged a little higher in June. Yet, the disappointing real sector data has renewed some speculation that the PBOC will ease monetary policy (rate cut and possible reduction in reserve requirements).

Prices: Last month's dollar peak against the offshore yuan was near CNH6.82, about a week after the Fed's hawkish hold. It has since pulled back. It fell in four of last week's five sessions and finished the week below CNH6.7850 and probed the 20-day moving average, which it has not settled below since the FOMC meeting. Last week, for the sixth consecutive week, the onshore yuan settled stronger than the offshore yuan.

Japan

Drivers: Judging from the returns, one set of preferences among investors has been to favor higher interest rate currencies. Australia and Norway's policy rates are the highest in the G10 and their respectively currencies are on top through H1 26. Latam currencies have tended to do better than East Asia currencies so far this year and, while exchange rate determination is rarely mono-causal, their high rates have been an important factor. We are not convinced that another 25 or 50 bp higher rate would have changed the yen's behavior much. It would still be higher than Switzerland and below Sweden at the lower end of the G10 policy rates.

Data: Japan begins the new week with May labor earnings and household spending. Recall that in April real cash earnings rose 2.0% year-over-year, while household spending fell by 0.5%. Many US observers, arguably projecting their own country's experience, are bemused. Higher real income does not lead to more consumption? What gives? They underestimate the cultural roots of consumption. It has to be learned and is part of range of cultural values. For several months this year, US personal consumption expenditures increases have outstripped increase in income, the opposite of Japan's experience. The following day, Japan reports May current account. Japan runs a chronic current account surplus but has been experiencing a trade deficit despite the undervalued yen on most models of valuation. Still, Japan's rolling trade deficit has been shrinking, and on a balance of payment basis, the 12-month average has returned to surplus starting in January this year for the first time in four years. At the end of the week, Japan's June PPI will be reported. It rose 6.3% year-over-year in May, though in the first five months of the year, Japan's producer price index rose at an annualized pace of around 11.75%.

Prices: The combination of fear of material intervention and the softer than expected US jobs report weighed om the greenback for the past two sessions. The dollar peaked on July 1 near JPY162.85, a 40-year high. Before the weekend, it reached JPY160.50 but settled back above JPY161, and the 20-day moving average (~JPY161.15). The momentum indicators are rolling over, but dollar buyers emerging on the pullback and there does not appear to have been intervention. One-month vol finished near 7.15%, up from 6.85% the previous week. The one-month risk reversal (call/put pricing skew) showed the premium for dollar puts rose to about 1.5% last week, up from about 1.1% the previous week. The high vol is consistent with option buying and the large put premium suggests dollar puts are being bought.

Drivers: The UK quit the EU a decade ago last month, and yet over the past 100 sessions, the changes in sterling and the euro have a 0.87 correlation, which is higher than the correlation when the referendum was held (0.45). What is also remarkable is that sterling is more correlated to the euro than the Swiss franc (~0.80). The Swedish krona enjoys around the same correlation with the euro as sterling over the past 100 sessions.

Data: The main data point from the UK in the coming days, June construction PMI is due Monday. It has not been above the 50 boom/bust level since the end of 2024. It was 40.1 at the end of last year and 38.2 in May. It is the lowest since the pandemic. The Labour Party's leadership contest begins formally in the coming days, but there seems to be little doubt that Andrew Burnham will replace Keir Starmer and become the seventh prime minister in the decade since the Brexit Referendum, which is a useful mile marker, but the Brexit decision does not satisfactorily explain the turnover, e.g., Johnson, Truss, and Starmer.

Prices: Sterling bottomed on June 24 near $1.3140. Last week it reached about $1.3385, its best level since the FOMC meeting. It took out the line connecting the mid-May and mid-June highs in the last two sessions but was unable to settle above it. The trendline is found slightly below $1.3350 on Monday and it is closer to $1.3315 at the end of next week. The 200-day moving average is near $1.34, and sterling has not settled above it since the day before the FOMC decision. The $1.34 area also holds the (50%) retracement of sterling's decline since the May 1 high (~$1.3660). The five-day moving average is poised to move above the 20-day moving average for the first time since mid-May.

Canada

Drivers: In the current environment the Canadian dollar tends to do better when short-term Canadian rates are falling. This may seem counter-intuitive, but the 30-day correlation between changes in the US dollar's exchange rate against the Canadian dollar was positive in Q2 26 and mostly inversely correlated in the first quarter. Still, the best thing for the Canadian dollar is a weaker dollar more broadly. The 30-day correlation between DXY and US vs. CAD is a little below 0.70.

Data: It is a big week for Canada's high frequency data. The June services and composite PMI and the Ivey iteration are due. These surveys appear to be faring better than the hard data suggests. The central bank's Q2 business survey is due at the start of the week as well. The highlight of the week is at the end of the week with the June jobs report. It is difficult to envisage a better report than May's when the unemployment rate fell to 6.6% from 6.9% and Canada created 154k full-time posts (lost 66.2k part-time jobs). The Bank of Canada meets on July 15, and the policy dilemma Governor Macklem acknowledged suggests an extend pause remains the most likely scenario. Lastly, Canada announced the beginning of a new oil pipeline that will have the capacity to send 1 mln barrels a day to Asia, as it seeks to diversify away from the US.

Prices: The greenback approached CAD1.4250 last week, matching the high from the previous week. It pulled back to about CAD1.4150, an eight-day low after the US employment report. However, the US dollar bulls have not given up. The greenback finished the week slightly above CAD1.42. The momentum indicators look stretched, but support in the CAD1.4100-CAD1.4135 must be taken out to boost the chance a top is in place. If not, the near-term risk extends toward CAD1.4300.

Australia

Drivers: Unlike the Canadian dollar, changes in the Australian dollar's exchange rate are positively correlated with changes in Australia's two-year yield. Yet, at less than 0.15 and 0.25, respectively, the 30- and 60-day correlations are not inspiring. The inverse correlation between changes in the US two-year yield and the Aussie's exchange rate is ~-0.55 and ~-0.65 for the past 30- and 60-sessions, respectively.

Data: Australia's data calendar is practically empty this week outside of the Melbourne Institute's (experimental) inflation gauge. It fell by 0.3% in May though rose at an annualized rate in the first five months of the year of almost 3.5% compared with a 4.4% year-over-year pace. The Reserve Bank of Australia does not meet until August 11. The odds of a rate hike this year have diminished, but we suspect it is near a bottom. At the end of May, the futures market has almost 18 bp of tightening discounted in the remainder of the year. At the end of June, about 10 bp of tightening was priced in, and now almost 15 bp.

Prices: The Australian dollar posted a key upside reversal last Tuesday by making a new low since early April, slightly above the 200-day moving average (~$0.6865) and recovering to settled above the previous day's high. There was no immediate follow-through buying, but at the end of the week, it tested $0.6950, an eight-day high, its best level since the softer than expected May CPI. The $0.6950 area corresponds to the (38.2%) retracement since the June 15 high (~$0.7080). The next retracement and the 20-day moving average around found slightly above $0.6975. More formidable resistance is seen around $0.7000. The momentum indicators are turning up but are still in oversold territory.

Mexico

Drivers: The dollar's movement against the Mexican peso is more correlated with JP Morgan's Emerging Market Currency Index (~0.80) than the Dollar Index (0.74) over the past 30 sessions. The 60-day correlations are about 0.81 and 0.66, respectively. MSCI has an emerging market currency index but the correlations with the dollar-peso are considerably weaker.

Data: Mexico's June CPI will released on Thursday. Headline inflation is running slightly inside the broad 2%-4% target, while the core rate is slightly above. The central bank has been somewhat more concerned about economic weakness, but it looks as if the economy has gained some traction. On Friday, Mexico reports May industrial output. It surged 2.1% in April, the strongest since March 2021. Manufacturing's gain (1.2%) and construction (7.6%) more than offset the decline in mining (-0.7%) and utilities (-0.3%). The minutes from the recent central bank meeting (it stood pat) will be released on Thursday. The swaps market is discounting the next move, a hike, by late this year.

Prices: The US dollar peaked against the peso on June 24 near MXN17.6765. It was its best level since early April. It has subsequently pulled back and briefly slipped below MXN17.42 ahead of the weekend; its lowest level since June 23. That area also corresponds to the halfway mark of the greenback's gains since the June 15 low (~MXN17.1575) and the 20-day moving average. The next retracement is near MXN17.3550. The US dollar looks toppish against the Brazilian real near BRL5.20-BRL5.22. The Colombian peso continues to bask in the political shift to the right. It was the best performing currency in the world last week, with a 3.7% gain and it reached its best level in six years.

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