Euro trades quietly ahead of ECB meeting

Overview: The US dollar enjoys a firmer bias today, in mostly quiet turnover in narrow ranges. The Australian dollar is a noted exception, and the better than expected jobs growth may have lent it some resilience today. The greenback initially was sold to almost JPY155.35, a new low (since June 7) before recovering to nearly JPY156.60 in Europe. The UK's employment report saw the first payroll growth in three months and softer wage pressures. Sterling is hovering in a narrow range around $1.30. The big event today is the ECB meeting. No change in policy is expected and the market seems fairly confident of a September cut ~80%), but ECB President Lagarde is unlikely to pre-commit while keeping options open. The euro is about a 15-tick range above $1.0925. 

The steepest loss for the NASDAQ 100 since December 2022 yesterday may have weighed on Japanese, South Korean, and Taiwanese shares today, while China, Hong Kong, and Indian equities advanced. Europe's Stoxx 600 is snapping a three-day slide and is up about 0.4%. US S&P 500 and NASDAQ futures are modestly higher while the Dow futures are off slightly. European benchmark 10-year yields are mostly around two basis points higher, while the Gilt yield is little changed. The 10-year US Treasury yield is up nearly three basis points to poke above 4.18%, which is about seven basis points off the week's high. Gold is consolidating in a narrow range after setting a record high yesterday near $2484. September WTI made a new high for the week around $82.25 earlier today but has come off and is slightly lower on the day near $81.35. 

United States: Following on the heels of Tuesday's stronger than expected retail sales report came a rise in industrial output that was twice what the median forecast was in Bloomberg's survey (0.6% vs. 0.3%). Capacity utilization rose to a six-month high. While the Atlanta Fed's GDP tracker ticked up to 2.7% from 2.5%, it did little to change the market's mind, underscored by the Beige Book that reported a number of regions noting flat or declining activity. The Fed funds futures continue to price in slightly more than a 25 bp cut in September and a bit more than a 55% chance for three cuts rather than two, and in any event, more than the median projection among Fed officials of one cut. Economists note that before seasonal adjustments retail sales fell, and industrial output was flattered by non-durable goods and utilities (heat wave). Today's data includes the Philadelphia Fed survey, weekly jobless claims, the index of Leading Economic Indicators, and, late in the session, the May TIC data. 

Euro:  There is little chance of a change in ECB's key interest rates today. The risk always seemed minor after the June cut. We suspect the ECB will be more comfortable easing policy when the macroeconomic forecasts are updated (September and December) barring a new shock. On June 6, when the ECB last met, the euro traded between roughly $1.0860-$1.0900. It is fractionally higher now. Brent oil was trading mostly below $80 and is now near $85. The swaps market then had a nearly 95% chance of a September hike discounted. Now it is seen as about an 80% probability. With yesterday's gains, the euro met the (61.8%) retracement of the decline from $1.1140 at the end of last year. The next target is $1.0980-$1.1015 area. It is in a narrow range (~15 ticks) above $1.0925 so far today. Lastly, note that the European Parliament votes for the EC President today, a day after the European court decision finding the EC was not sufficiently transparent over the vaccine purchases and possible conflict of interests. A defeat for von der Leyen could roil the euro. 

Yen: One might not realize it, given the recent rhetoric, but despite what appears to be a historically undervalued yen (67% according to the OECD's model of purchasing power parity), Japan continues to run a trade deficit. With today's June figures in hand, Japan's trade deficit averaged about JPY540 bln a month (~-$3.55 bln). It is a little less than half the size of the shortfall in H1 23 and about 3.5-times larger than in H1 19. The dollar held below JPY156.80 in North America yesterday and bounced along the intraday trough. It broke below JPY156.00 in the local session and fell slightly below JPY155.40 before recovering to about JPY156.60. The dollar settled below its lower Bollinger Band yesterday (~JPY157.00). It is found near JPY156.50 today.

Sterling: The UK's labor market slowly deteriorating. The number of payrolled employees rose for the first time in three months in June. Average weekly earnings (three-months through May year-over-year) slowed for the first time since January (5.7% vs. 5.9%). Still, the market remains spooked by the slightly firmer than expected June CPI reported yesterday. The swaps market shows less than a 50% chance of a cut on August 1 and the odds of a September cut have been reduced to about 85%, the least since July 1. Sterling's high yesterday was near $1.3045, after the CPI. It pulled back and found support near $1.30. Sterling was pushed through there around the employment report. New bids emerged ahead of $1.2980. The low for the week is slightly below $1.2940.

Australian Dollar: The 50.2k increase in Australian jobs in June were insufficient to prevent the unemployment rate from ticking up to 4.1% (from 4.0%), matching the cycling high seen in January and again in April. Australia has created about 206k full time posts in H1 24. This compares with almost 200k in H1 23. The participation rate has risen by 0.3% in the past year and immigration has increased. The swaps market does not expect an RBA rate cut until 2025. It is not fully discounted in the futures market until next July. The Australian dollar held below $0.6800 at the end of last week, its best level since early January. It pulled back by a little more than 1.0% before finding support near $0.6715 on Tuesday. An inside day was recorded on yesterday, but the Aussie settled poorly. After closing slightly below $0.6730 was the lowest in two weeks, it retested the week's low before recovery to about $0.6745. A close above $0.6750 could signal a retest on the $0.6800 area. 

Canadian Dollar: The Bank of Canada is seen as one of the most aggressive central banks in this easing cycle. It was the first G7 central bank to cut rates and the market is very confident (90%) that second cut will be delivered next week. The swaps market favors two more cuts after that this year. The Canadian dollar cannot find much traction. The greenback is hovering a little below the middle of the CAD1.36-CAD1.38 trading range that has dominated for past three months. Today's range so far is about CAD1.3670-CAD1.3690. 

Mexican Peso: Post-election, the dollar peaked near MXN19.00 on June 12 and reached a low at the end of last week near MXN17.6060. It has forged a shelf in the MXN17.64-MXN17.65 area this week. This nesting looks like a base. The momentum indicators are stretched but have not turned up yet. Still, the risk looks to be on the dollar's upside, and there may be potential back toward MXN18.00-MXN18.10 in the coming days. 

Chinese Yuan: The recovery of the yen, arguably aided by comments from Trump, appears to have done some of the heavy lifting for the PBOC in steadying the yuan. It is no surprise that Trump and his running mate are taking an aggressive stance toward China on tariffs but at the same time he has questioned the US commitment to defend Taiwan. While Vance calling China, America's biggest threat seems to reflect a bipartisan consensus, questions of defending Taiwan might be an attempt to get Taipei to pay more for US defense. The dollar snapped a three-day advance yesterday against the offshore yuan, falling by about 0.25%. A break of the CNH7.25 area is needed to bolster ideas a top may be in place. The dollar continues to trade firmer against the offshore yuan than the onshore yuan, illustrating the still negative market sentiment. The PBOC set the dollar's reference rate at CNY7.1285 (CNY7.1318 yesterday). The Third Plenum ended, and the official statement saw the familiar bromides ("supply-side reforms," "high-quality development,"). A more detailed document is expected shortly.