US Dollar offered, but intra-day momentum indicators are stretched

Overview: The Dollar Index reached its best level since May 1 before the weekend but has come back softer against all the G10 currencies and most emerging market currencies. There is no apparent driver, and the intraday day momentum indicators caution against expecting much in the way of follow through gains in North America. The dollar edged closed to JPY160 and triggered official intervention warnings. The market has turned cautious and is threatening to end the yen's seven-day slide. Among emerging market currencies, the South African rand, Turkish lira, and a few East Asian currencies are softer including the Chinese yuan.

Equities are mostly higher, but the Asia Pacific region struggled. Among the large markets, only Japan and India managed to rise. The Shanghai and Shenzhen Composites and Taiwan's Taiex fell by over 1%. Europe's Stoxx 600 is recouping most of the pre-weekend loss (~0.75%), while US index futures are trading with a firmer bias. Benchmark 10-year yields are mixed. European premiums over Germany are narrower. European bond yields are mostly 2-3 bp lower while the 10-year Germany Bund yield is a basis point higher. The 10-year US Treasury yield is little changed near 4.25%. It rose about 3.5 basis points last week after falling nearly 28 bp in the previous two weeks. Gold recorded a bearish outside down day ahead of the weekend but there has been no follow through selling and softer dollar may have helped give it a mild bid today. It is stalling near the 20-day moving average (~$2332.50). August WTI rallied nearly 3.5% for the second consecutive week last week to approach $82 a barrel. It pulled back before the weekend but is firmer today above $81. 

Asia Pacific

The regional highlights this week are focused on Japan, though Australia reports it May monthly CPI, which is expected to have risen to 3.8% from 3.6%. It will underscore the central bank's hawkish hold and may underpin the Australia dollar. Japan's real sector data, (retail sales and industrial production) ae likely to have improved sequentially, support ideas that after contracting in Q1, the economy is recovering. Japanese retail sales are expected to show that even before this month's modest income tax cuts, consumers have become more active. Retail sales fell at slightly more than an 8% annualized clip in Q4 23 before rising at a 2.8% pace in Q1. In April retail sales rose by 0.8% (revised from 1.2%) and are expected to have risen by 1.1% in May. After a horrible start to the year, where industrial output fell by nearly 7.5% in the first two months of the year, rebounded by 4.4% in March, before easing by 0.9% in April. The median forecast in Bloomberg's survey is for a 2.0% increase in May. Still, the most consequential report is Tokyo's June CPI. It is important as it carries the signal that the national figure will reflect, and it comes as the market debates about whether the BOJ can initiate QT (reducing gross purchases below the average pace that its holdings are maturing) and hike rates at the end of next month. Tokyo's CPI is expected to have risen to 2.4% from 2.2% on the headline and core (excludes fresh food) rising to 2.4% from 2.2%. If true, both have returned to levels that prevailed at the end of last year. 

It has taken the market two months to return to almost JPY160 after the Japanese intervention in late April. It has become as much of a one-way market as it has been. The dollar's seven-day advance is the longest since March, when it moved rose in eight consecutive sessions. MOF's Kanda stepped up the verbal intervention, warning of officials’ willingness to intervene, if necessary, at any time. The exchange rate often moves with the changes in the US 10-year yield. Yet, that relationship has broken down. The 10-year Treasury yield is bouncing in the Q2 trough, 4.20%-4.30%. The dollar edged slightly above JPY159.90 before consolidating in a narrow range above JPY159.60.  It broke down to about JPY158.80. A hawkish hold by the central bank helped the Australian dollar recover to the around $0.6680, stalling in front of the upper end of its trading range. A disappointing flash June PMI dragged the Aussie back to almost $0.6630. It is trading with a firmer bias today and hovering near the middle its $0.6600-$0.6700 range. A firm May CPI reading on Wednesday and elevated consumer inflation expectations (above 4%) could see a retest on the upper end of the range. The PBOC set the dollar's reference rate at CNY7.1201, a new high (CNY7.1196 on Friday). It was the fourth consecutive higher dollar fix. The average in the Bloomberg survey was CNY7.2627 (CNY7.2683 on Friday). The yuan is bumping along the weak side of the range, and this is becoming disruptive. Overnight swaps, reportedly, have not traded since last Tuesday because the implied settlement price would be outside of the band. The dollar reached almost CNH7.2950 against the offshore yuan before pulling back amid talk of Chinese banks buying dollars. 

Europe

With a light economic agenda, little will distract market participants from the key political events in the coming days. The softer than expected German IFO survey follows on the heels of a disappointing ZEW survey but is not a market driver. Toward the end of the week, the heads of EU countries will meet to agree on the new roles in the EC. As it turns out, Italy's Meloni (ECR in the EU Parliament) has picked up a few unaligned MPs (including Le Pen's niece) to have the third largest bloc in the new parliament with 83 seats to edge ahead of Macron's faction (80 seats). The center-right bloc (EPP) has 190 seats and the center-left bloc (S&D) have 136 seats. That gives them 326 seats of 720. They need to reach 361. However, rather than turn toward Meloni, it will likely invite the Greens, which have slightly more than 50 seats. Meloni will likely feel snubbed, but it very well could end the honeymoon that she has enjoyed with the EU. Von der Leyen had seemed to reach out, but now that the center could hold with the Greens, which after their poor showing in the European Parliament elections, will likely be delighted to be part of the EC for the first time. In France, which goes to the polls on June 30, a hung parliament is looking increasingly likely. The French 10-year premium over Germany widened to almost 80 bp from less than 50 before the election call. It appears to have stabilized in recent days. The UK goes to the polls on July 4. A recent YouGov polls suggested that Labour can secure as many as 425 seats in the 650-seat House of Commons. It could be the largest majority in a century. Some polls warn that Prime Minister Sunak could lose his seat, which would also seem unprecedented in modern history. 

The euro's bounce ran out of steam in the first part of last week near $1.0760 and contrasting flash PMIs saw the euro return to $1.0670, the low since May 1, seen on June 14. A break of $1.0650 could spur a re-test on the year's low set in mid-April near $1.06. The US two-year premium over Germany has widened to around 195 bp from near 175 bp on June 6, the day before the US jobs report. Ahead of the outcome of the French election, the risk is more on the euro's downside than upside. That said, the euro has been bid to session highs in the European morning near $1.0730, slightly above the pre-weekend high. The intraday momentum indicators are stretched and suggests limited follow through is likely in the North American morning. Sterling traded heavily in the second half of last week, falling from around $1.2750 in the middle of the week to $1.2625 at the end. It has not been lower since May 15. It looks technically weak, and we have suggested the risk may extended into the $1.2555-$1.2580. However, sterling settled below its lower Bollinger Band for the first time since mid-April and is trading quietly today in a little more than a third-of-a-cent range below $1.2670. Last Friday's high was about $1.2675. Sterling's intraday momentum indicators are stretched. 

America

The highlight for the week in the US may be take place in a 12 hours window from Thursday night, when the first US presidential debate will be televised (and before either candidate has been formally nominated by their respective parties) and Friday morning, when the May PCE deflator will be reported. Given the role of the electoral college, national polls may not be as important as votes in a handful of swing states. PredictIt.Org show that wagers have favored a Trump victory in November and North Carolina Governor Burgum is seen as his most likely vice president candidate. Meanwhile, the headline PCE deflator is expected to be flat, which would allow the year-over-year rate to slip to 2.6% (from 2.7%). The core rate is seen edging up by 0.1% and the year-over-year rate easing to 2.6% (from 2.8%). Canada reports May CPI and April GDP. The headline and underlying measures are expected to slow slightly. The Canadian economy is likely to have grown slightly after stagnating in March. Mexico's central bank meets on June 27. There is little doubt that the central bank will standpat after reducing the overnight rate in March. The slowing of the moderation in inflation, the risks of passthrough inflation given the peso's slide, and the risk of a larger fiscal deficit by the new government are likely important considerations. 

After rising for five consecutive sessions, the Canadian dollar slipped lower before the weekend and has come back firmer today. The Canadian dollar has risen for eight of the past 10 sessions but is has gone virtually nowhere. The US dollar’s five-, 20- and 50-day moving averages converge within a few hundredths of a Canadian cent of CAD1.3700. Indeed, with three minor exceptions, all intraday never on a settlement basis, the range set on June 7 (employment day) --~CAD1.3660-CAD1.3770) has confined the price action. That range may come under pressure today. Still, with the intrasession momentum indicators stretched, the CAD1.3650 may be sufficient. The peso plunged about 7.85% in the first two weeks after the election and jumped back last week recouping 1.75%. It was the second strongest emerging market currency last week after the South African rand, which put together broad coalition government that spurred optimism that the economic reform agenda will proceed. The greenback peaked on June 12 near MXN19.00 and fell to slightly below MXN18.11. The dollar's retracement has been extended to almost MXN18.07 today. Support may be seen in the MXN17.95-MXN18.05 band.