Capital markets take US tariffs and threats in stride

Overview: The US tariff saga continues. Yesterday, President Trump announced a 50% tariff copper, sending the red metal screaming higher (13%+), and threatening 200% tariffs on pharma. Other sectoral investigations are expected to wrap up toward the end of the month. There is a vigorous effort to check "transshipments," but it is not clear how it will be defined. How much domestic input is required, and how will it be decided? In any event, outside of copper than has pulled back a little today, the capital markets have taken it in stride and are fairly subdued so far today. The greenback is narrowly mixed against the G10 currencies, mostly within yesterday's ranges. Emerging market currencies are lower, except for the Russian ruble and Mexican peso. The peso has reached its best level since last August today. 

Equities were mixed in the Asia Pacific, with gains in Japan, South Korea, Taiwan, among the large bourses, while China, Hong Kong, Australia, and New Zealand moved lower. Europe's Stoxx 600 is higher for the third consecutive session, which if sustained would be the longest advance in a month. US index futures are firm. Asia Pacific yields rose, with the Antipodean 10-year rates jumping 5-8 bp. European yields are around a basis point lower and the US 10-year Treasury yield is flat near 4.40% ahead of today's $39 bln sale. Gold is trading heavier and reached a new seven-day low a little below $3283 today. The near-term risk extends toward $3250. August WTI edged higher to almost $69 to reach its best level since June 23. The $69.50 area is the (38.2%) retracement objective of the sell-off from June 23 high near $78.40. 

USD: After initially retreating on the first batch of tariff notification from the US, the Dollar Index turned better bid in Europe and continued through most of the North American morning. It reached almost 97.85, to kiss the 20-day moving average, and approach the (50%) retracement of the leg down from June 23, found near 97.90. It is consolidating in a narrow range, mostly 97.50-97.70. We suspect there is more downside potential in North America. A break of 97.40 could see 97.20 initially. The US economic calendar today features wholesale trade and inventories, minutes from last month's FOMC meeting, and sale of $39 bln 10-year notes. There had been a sharp rise in wholesale inventories in Q1 partly in anticipation of US tariffs and partly to rebuild after a cumulative decline in wholesale inventories in 2023 and 2024. Some of the decline in wholesale inventories in Q2 may have been shifted to retail. Inventories are often a volatile component to GDP (captured by investment). The FOMC minutes may be interesting in that the median "dot" still anticipated two cuts this year, the dispersion of views increased. Still, the market has once again converged with the Fed and the futures market has two cuts nearly full discounted.

EURO: The euro made a marginally new seven-day low yesterday, slightly below $1.1685. That is where the (38.2%) retracement of the euro's rally since the June 23 low is found. The euro is holding above $1.1700 so far today but has not been able to resurface above $1.1730. The next retracement (50%) and the 20-day moving average are near $1.1640. Even without the goading by Washington, the EU relations with China have deteriorated, and reports last week suggested that Beijing intends to cancel the second day of the two-day summit initially slated for July 24-25. Reciprocal curbs have been announced on medical device procurement. There are other sources of trade friction. China's aid to Russia is also a stumbling block for the EU. Moreover, recently reports suggest that Chinese navy vessel operating out its base in Djibouti fired a laser at a German air force plane flying over the Red Sea. There had seemed to be a brief opportunity for rapprochement. In crude terms, it is an exchange of Taiwan for Ukraine and better/fairer trade. Reports suggest China cannot allow Russia to lose in Ukraine because than the US turns its full attention on it. At the same time, Europe cannot allow Russia to win without the risk of continued intimidation and appeasing a territorially hungry dictator who seems to think nearly wherever Russians live ought to be its sphere of influence. Europe typically does not project its power into the Pacific, but recent reports suggest the UK, France, and Italy are coordinating the deployment of aircraft carriers into the Indo-Pacific.

CNY: The greenback reached almost CNH7.1855 yesterday, its best level since June 23. It settled above the 20-day moving average (~CNH7.1760) for the second consecutive session. The June 23 high near CNH7.1925 is the next target and so far, today it has reached about CNH7.1880. The dollar has not traded above CNH7.20 since June 3. For the first time since then, the PBOC set the dollar's reference rate higher for the second consecutive session (CNY7.1541 vs. CNY7.1534). China's June CPI rose by 0.1% year-over-year after three months of -0.1% readings. There is more to it than the common narrative of weak demand. Some parts of the CPI basket, for example, like food (-0.3% year-over-year), are more about supply than demand. The last time food prices rose on a year-over-year basis was in January. Services prices rose by 0.5% and have not fallen since February. Core prices, excluding food and energy rose by 0.7%. Earlier this week, Switzerland reported its core prices rose by 0.6% year-over-year in June. Producer price inflation deepened. The 3.6% decline year-over-year (-3.3% in May) is the most since July 2023. Gradually, the under-consumption explanation appears to be slowly giving way to the over-investment. In part, the under-consumption narrative conflates consumer goods and capital equipment. It is not so obvious that boosting household consumption, for example, would absorb, say the immense steel or concrete output. We have also underscored that Chinese companies often compete for market-share rather than profits. This may reflect the access to cheap and patient capital (state-owned banks) rather than the impatient capital of the markets, which focuses on quarterly returns. 

JPY: The dollar reached its best level against the Japanese yen since June 23, near JPY147.20 today. However, it has come under pressure and has returned to session lows near JPY146.55 in the European morning. A break could see JPY146.20. The consensus is that the dollar has been decoupled from interest rates. Yet, on July 1, the US dollar bottomed near JPY142.70. The same day, the US 10-year yield slipped below 4.20% for the first time in two months. It reached 4.43% yesterday, the highest level since June 20. The rolling 30-day correlation of change in the exchange rate and the US 10-year yield reached almost 0.60, a three-month high. It bottomed below 0.10 on May 20. Long-term Japanese rates have soared over the past 5-6 sessions (though consolidating today) but offered the yen little meaningful support. Real wages in Japan fell by 2.9% in the year through May. It matches the largest decline since April 2023. After a quiet June, rates at the long end of the Japanese yield curve have surged. The 30-year yield was near 2.85% last Thursday and reached 3.10% yesterday (~3.06% today). The peak in May was near 3.20%. Last Wednesday, the 40-year yield was around 3.05%. It reached nearly 3.40% yesterday (~3.36% today). The May peak was almost 3.70%. Inflation remains elevated at 3.5% in May. The government not only failed to get the US to compromise its 24% "reciprocal tariff” announced in early April but it actually was raised to 25%, which does not include the sector tariffs (autos, steel, and more to come). 

GBP: Sterling briefly frayed the (61.8%) retracement objective of the rally from the June 23 low. That retracement was roughly $1.3530, and sterling fell a few hundredths of a cent below it before recovering back to almost $1.3600. It is trading quietly today, mostly between $1.3565 and $1.3610. Nearby resistance is seen in the $1.3640-50 area. The 10-year UK Gilt yield is near its highest level in a month (~4.65%). As former Prime Minister Truss noted, the yields are above where they were in the September 2022 crisis. This year's down trendline is near 4.75% at the end of the week. Paradoxically, a disappointing May GDP report on Friday may not be sufficient to cap yields as weaker growth translates to a larger deficit as a percentage of GDP, which risks greater supply.

CAD: The US dollar remained firm against the Canadian dollar yesterday. It essentially held CAD1.3940 and reached almost CAD1.3695. The (50%) retracement of the losses from the June 23 high is near CAD1.3680. The (61.8%) retracement is a little above CAD1.3700. The greenback is firm today (~CAD1.3660-CAD1.3695). The stronger IVEY PMI (53.3 vs. 48.9) flies in the face of the S&P PMI where all three reading (manufacturing, services, and composite) weakened further below the 50 boom/bust level. The data focus is on Friday's June labor market report. US President Trump announced a 50% tariff on copper yesterday. Last year, Canada was the second largest source of US imported copper with about a 16.5% market share (second to Chile with a 70% market share). Given the nature of the commodity, a tariff is unlikely to re-shore production but will simply raise revenue.

AUD: The Reserve Bank of Australia's surprise decision to stand pat at yesterday's meeting lifted the Australia dollar to almost $0.6560. It did not trade above $0.6550 in Europe or North America yesterday, and by the time European markets closed, the Aussie had given back all of the gains scored in the wake of RBA's decision, recording a low slightly beneath $0.6510. The $0.6510 level held today, and the Aussie reached $0.6545 in the consolidative activity. The Reserve Bank of New Zealand did not surprise the market, which had around a 13% chance of a hike discounted. It left the cash target rate unchanged at 3.25%. A cut is fully discounted at the October meeting, but the odds of an August cut crept up to about 68% from 60% yesterday. The New Zealand dollar slipped through low yesterday (~$0.5980) but held the (61.8%) retracement of the gains from the June 23 low ($0.5975). It popped back above $0.6000 in European turnover. 

MXN: The early dollar upticks to almost MXN18.74 were greeted with new sales against the peso. The greenback fell through MXN18.60 to about MXN18.5850, the lowest level since last August. It has made a marginal new low today near MXN18.5775. The lower Bollinger Band is near MXN18.5160, but the next interesting chart area is closer to MXN18.40. The Mexico reports June CPI today. The headline pace is expected to tick lower to 4.3% from 4.42%. The core rate may rise to 4.22% from 4.06%. If so, it will be the first decline in the headline rate since January. On the other hand, an increase in the core rate would lift it to its highest since last April. Yesterday, Brazil reported an unexpected 0.2% decline in May retail sales after a 0.3% decline in April. Tomorrow, Brazil reports June IPCA CPI. It is expected to be flat around 5.3% year-over-year. The dollar gapped higher against BRL on Monday. The top of the gap, Monday's low (~BRL5.390) was taken out and the dollar recorded a low near BRL5.4355. The bottom of the gap, last Friday's high (~BRL5.4260) is the next obvious target ahead of BRL5.40 that held last week, the lowest since last September.