No turn around Tuesday as greenback remains firm

Overview: The sharp jump in US long-term interest rates has helped lift the greenback in recent sessions and it remains firm against most of the G10 currencies today. The Canadian dollar is the best performer, and it is nearly flat. The intraday momentum indicators warn that after a mostly consolidative Asia Pacific and European morning, the greenback may probe higher in North America. The US economic calendar features the JOLTS report on job openings, while auto sale will trickle in throughout the day. Headline risk comes from the ECB gathering in Sintra, where Fed Chair Powell will speak later this morning. 

Equity markets are mostly lower today, though Japan's Topix made new highs and the Nikkei reached its best level in three months. Most of the other large markets in the region fell. Europe's Stoxx 600 snapped a four-day slide yesterday but is giving it all back plus some today. It is off nearly 0.5%. US index futures are off 0.3-0.5%. European benchmark 10-year yields are 1-3 bp firmer today and France's premium over Germany is slightly wider today. UK Gilts are bucking the move, and the 10-year yield is a couple of basis points lower, aided by moderating BRC shop inflation. The 10-year US Treasury yield that was testing 4.20% early last week is consolidating around 4.45% now. Gold is subdued in the narrow range established at the end of last week (~$2320-$2340). August WTI has extended its rally to $84. It has not closed above there in almost three months. Escalating tensions in the Middle East and the onset of the hurricane season in the Atlantic are cited as the proximate drivers. 

Asia Pacific

As part of the Bank of Japan's Tankan survey, manufacturers were asked about their exchange rate outlook. The results:  the dollar is seen averaging JPY144.77 in the fiscal year than began April 1. This seems, dare one say, extremely dollar bearish. Through yesterday, the average since the beginning of FY24 has been slightly below 156. Bloomberg’s survey found a median forecast for the dollar to be at JPY154 at the end of September and at the end of the year, and JPY147.50 at the end of Q1 25. The average of the median forecasts for the fiscal year is JPY150.50. At the end of the month, Mimura, the current director of the Ministry of Finance's International Bureau will replace Kanda as the Vice Minister of International Affairs, who is responsible for currency policy. Kanda oversaw record intervention that hardly bought a month of time before the dollar was sent to new highs. Besides size, Kanda also innovated by seeming trying to catch the market by surprise, like intervening shortly after press conference following last FOMC meeting.

A sharp rise in US 10-year Treasury yield for the second consecutive session may have encouraged the market to extend the greenback's gains. The dollar reached nearly JPY161.75. It has been confined to about a third of a yen below there today, but it looks poised to push higher in North America. The US dollar has risen nearly 10 yen or 6.5% since the intervention-induced low in early May. There are options for $1.5 bln that expire today at JPY161 and that could also account for some of the dollar buying yesterday. The Australian dollar drew near last week's high, slightly shy of $0.6690, before being turned back yesterday. The Aussie has not traded above $0.6700 since June 12 and has not closed above it since January. On the other hand, it has closed once below $0.6600 in nearly two months. The rule of alternation suggests that after testing the upper end of the range, it may test the lower end. Meanwhile, the US dollar settled a new high for the year against the offshore yuan yesterday near CNH7.3050 and has reached almost CNH7.31 today. The PBOC set the dollar's reference rate at CNY7.1291. It is a new fixing high after setting it ever so slightly lower yesterday and last Friday. Given that the yuan's modest decline against the dollar this year, most other countries, emerging markets, and high-income countries have experienced a modest yuan appreciation.

Europe

After the four largest eurozone members reported their national CPI figures for June the aggregate can hardly be a surprise. The 0.2% month-over-month increase was in line with expectations and saw the year-over-year rate slip to 2.5% from 2.6%. The core rate was unchanged at 2.9%. At an annualized rate, eurozone's CPI rose by 4% in Q2, the same pace as in Q1. As we have noted, the base effect makes it difficult to see improvement in the second half. In H2 23, the eurozone's CPI rose at an annualized rate of less than 1%. Separately, the eurozone's May unemployment rate was steady at 6.4%. This is a record low under monetary union, but the risk that the labor market conditions will soften in the coming months. Germany has already given the signal. After being at 5.9% for six months through May, German unemployment rose to 6.0% in June, matching its highest since February 2021. The ECB's forecast for 6.5% unemployment at the end of this year and next seems optimistic. The swaps market sees less than a 10% chance of an ECB rate cut when it meets on July 18. The market is discounting about a 70% chance of a cut in September. We suspect the odds of a cut are somewhat higher.

The euro's high yesterday was set in the Asia Pacific session near $1.0775, where options for about 435 mln euros expire today. It made a lower high in Europe and a lower high in North America. Despite the poor US ISM survey, the euro was unable to find much traction until closer to $1.0720, and today, it has slipped to $1.0710 today. A break of $1.07 could signal a retest on last week's low near $1.0665. Germany's 2-year yield jumped nine basis points as some haven buying was unwound, and the US premium narrowed by almost eight basis points, more than any session last month (to about 183 bp). It is slightly firmer today. Sterling peaked at its 20-day moving average, slightly above $1.2705 yesterday, a seven-day high. It also coincided with the (38.2%) retracement of sterling's pullback from the June 12 high near $1.2860. It has not traded above its 20-day moving average for a couple of weeks. Sterling surrendered its gains as the US 10-year yields rose and set a new session low near $1.2630. Further slippage today pushed it to almost $1.2615 today, a couple hundredths of a cent above last week's low. The $1.2600 level offers important technical support.

America

In the holiday-shortened week that features updates on the US labor market, today's highlights are the May JOLTS report and June auto sales. The US labor market is gradually slowing, and the number of job openings has been trending lower. Part of this is normalization post-Covid. In January 2020, the number of job opening were about 6.7 mln. In May, job openings are likely to fall through 8 mln for the first time since February 2021. US auto sales are running a little ahead of last year's pace. The average in the first five months was about 15.6 mln (seasonally adjusted annual rate) compared with slightly less than 15.3 mln in the Jan-May 2023. One cautionary sign is that auto inventories are accumulating (almost 60% higher than a year ago). The fact that US yields rose (bearish steepener), despite the poor ISM manufacturing for the second session had many narratives try to draw connections with last Thursday's embarrassing US presidential debate. But the lack of either candidate addressing what most observers, including the CBO and IMF, has said is unsustainable is not really new news. As of last Tuesday, June 25, the latest CFTC Commitment of Traders showed that had reduced their net short 10-year note futures position to 319k contracts (notional value $100k per contract). It has not been below 300k contracts 2 1/2 years. Market positioning seems to be a help component of the narrative.

The US dollar tested the lower end of its trading range last week, when Canada's firmer than expected CPI dampened the likelihood that the central bank would follow up last month's rate cut with another one this month. It reached almost CAD1.3625. It has not closed below CAD1.3600 in nearly three months. The greenback recovered to nearly CAD1.3735 before the weekend and extended it to almost CAD1.3750 yesterday. It posted its highest settlement since June 12, but CAD1.3800 area offers formidable resistance. The US dollar is consolidating in a narrow range below CAD1.3755 today but looks poised to move higher in North America today. The US dollar traded within its pre-weekend range against the Mexican peso yesterday. It held below MN18.45 after approaching MXN18.60 at the end of last week. It remains in the pre-weekend range today but looks poised to move higher. Meanwhile, the Brazilian real fell to new lows for the year. It was the fourth session in the past five that the dollar rose by more than 1% against the real. Brazil's fiscal policy and President Lula's steady criticism of the central bank's monetary policy are seen as the most significant drag, The Brazilian real is the worst performing emerging market currency this year (-11.7%), which is more than twice the decline of the Mexican peso (-5%). Still, there seems to be a regional rotation. Four of the five worst performing currencies in H1 24 were in Latam.