Fragile ceasefire lifts animal spirits and reverses the Greenback's gains

Overview: It is not clear when the choreography began. US dramatic display, including dropping a dozen bunker-buster bombs on well telegraphed nuclear enrichment sites in Iran, and reports lend credibility to speculation that the enriched uranium had previously been removed. Or was it with Iran's strike on a US base in Qatar that was well signaled. In any event, a tentative cease-fire is at hand. Israel declared its campaign was a success. However, it is unlikely to be seen as a 12-day war, given Israel's decimation of Iran's proxies previously (Hamas and Hezbollah). In any event, the prospect that WWIII, which many feared, has eased and risk appetites have been emboldened. The greenback has suffered broadly. It has been sold against the G10 currencies and most emerging market currencies today. The sell-off has brought it within spitting distance of the lows seen earlier this month. Gold is off over 1% and around $3320 is at its lowest level in two weeks. August WTI, which reached $78.40 yesterday, extended the pullback to about $64.40 today. It is near $66.20 now. 

Equities have rallied. Most of the large bourses in the Asia Pacific region were up at least 1%, while Hong Kong, Taiwan, and South Korea indices rose more than 2%. Europe's Stoxx 600 is up 1.3%, which if sustained would be the largest gain since early last month. US index futures are 0.8%-1.2% better. Benchmark 10-year yields are 3-6 bp higher in Europe, with German Bund yields rising most as defense-spending supply weighs on sentiment. The 10-year US Treasury is little changed near 4.35%. Chair Powell's semiannual congressional testimony is the key event on the North American diary today, while the market will be monitoring the fragile cease-fire in the Middle East. 

USD: After rising slightly above 99.40 in the European morning yesterday, a new high for the month, the Dollar Index was sold from nearly the start of the North American session and traded below the pre-weekend low and slipped under 98.40. Settlement was below last Friday's low, adding to the negativity of the price action, which is a potential key downside reversal. Follow-through selling today frayed 98.00. Earlier this month, the Dollar Index recorded a three-year low near 97.60. In addition to the geopolitical backdrop, the Fed is still in play. Governor Bowman joined Governor Waller (both Trump appointments) in suggesting support for a July rate cut. Federal Reserve Chair Powell's testimony today may sound hawkish in this context, if he were to simply reiterate what he said at his press conference following the recent FOMC meeting. The high-frequency data will likely receive little more than passing interest. The distortions caused by the anticipation of tariffs saw the US trade deficit blow out in Q1 and this will be reflected in today’s estimate of a record quarterly current account deficit of around $455 bln. The Treasury's International Capital report shows foreign investors bought a net of a little more than $400 bln of US financial asset in Q1. It is easy to blame others, like nearly any country that saves more than it spends.  From the earliest of times, it seems debtors blame creditors, but realpolitik has seen the debtors forced to bear the cost of adjustment. Meanwhile, FHFA house price index is expected to have fallen for the second consecutive month in April, which would be the first back-to-back decline since July-August 2022. The other data are surveys (Philadelphia Fed's non-manufacturing survey, Richmond Fed survey, and the Conference Board's consumer confidence), which Fed officials have downplayed as the real sector data has fared better. However, the surprises in the real sector reports are increasingly to the downside. Powell is likely to repeat the thrust of the arguments made in his press conference after the recent FOMC meeting. The economy is in a position to allow the Fed to wait for greater clarity. We expect the next move to be a cut, which we pencil in for September. Powell will likely be asked about the rise in oil prices (more than 40% since early May). Typically, the Fed does not view it as a harbinger of inflation but a headwind on the economy.

Euro: The euro posted an outside up day, trading on both sides of last Friday's range and settling above its high (~$1.1545). The euro recorded news session a little above $1.1580 after Qatar said it shot down missiles Iran fired at the US base there in late dealings, after notification was given (making it look a bit like theater). The euro took out last week's high, near $1.1615, to rise to slightly above $1.1620. The euro traded above $1.16 three times previously this month and failed to close above it once. It is straddling it in the European morning. Many participants may lack near-term conviction, but a dollar-bearish medium-term view is the consensus. German investment sentiment improved according to the June IFO survey, but it is mostly about expectations. The current assessment edged up to 86.2 from 86.1 and is below the April reading of 86.4. The expectations component rose to 90.7 from 89.0, the highest since February 2022 (Russia's invasion of Ukraine). The overall business climate rose for the sixth consecutive month and at 88.4 is the highest since last May.

CNY: The dollar reversed from CNH7.1925 to about CNH7.1760 yesterday. It fell through last week's low, set before the weekend near CNH7.1740, to almost CNH7.1700 today. It is near CNH7.1750 now. The June low is closer to CNH7.1645. The PBOC has mostly set the dollar's fix lower this month, which lowers the dollar's cap. The reference rate was set at CNY7.1656 (CNY7.1710 yesterday and CNY7.1695 before the weekend). It is the lowest fix since the day after the US election last November. The one-month implied volatility is approached 3.5% yesterday, the lowest since last July and is slightly firmer today. 

JPY: The greenback ran up to JPY148 yesterday, its best level of the month. The broad dollar retreat pushed it back to around JPY146.00 in the North American afternoon. Last Friday's high was slightly above JPY 146.20. For the sixth consecutive session, the dollar recorded higher highs, but yesterday’s sell-off sapped the momentum. The greenback was sold to JPY144.85 today. A push below JPY144.80 targets JPY144.40. The 6.5% drop in oil prices and the six-basis point decline in US 10-year yields appeared to have helped fuel the yen's recovery. Oil is off another 3.5% today, while the 10-year Treasury yield is nearly flat. 

GBP: Sterling looked like a dog early yesterday. It set the low for the month, near $1.3370, before rebounding smartly on the back of the falling dollar. It settled above last Friday's high ($1.3510) and closed above the 20-day moving average (~$1.3515). It looked as if some longs that had been forced out scrambled back yesterday. Follow-through buying has lifted it to almost $1.3620 today. The three-year high was recorded earlier this month near $1.3630. Overcoming $1.3650 could signal a push toward $1.3700. 

CAD: The greenback drew as near CAD1.3800 it could without trading it. It set the session low near midday in New York near CAD1.3725. At the end of the day, the Loonie rivaled the yen as the weakest currency within the G10. The five-day moving average crossed above the 20-day moving average for the first time in a month, but the greenback looks heavy. It has tested the upper part of the support band seen in the CAD1.3685-CAD1.3700 area. A break targets the CAD1.3640 area. Canada reports May CPI today, and barring a significant downside surprise, the Bank of Canada is likely to stand pat when it meets at the end of next month. A 0.5% increase in the headline, which the median forecast in Bloomberg's survey projects follows a 0.1% decline in April. It would translate to an almost 4.6% annualized rate through the first five months (~4.8% in the first five months of 2024). However, due to the base effect, the year-over-year rate may be little changed from the 1.7% in April. The underlying core rates, which the Bank of Canada took notice of, may have softened but likely remain elevated around 3%. The swap market has the next cut, fully discounted in October to 2.50%) and sees the terminal rate between 2.25% and 2.50%.

AUD: The Australian dollar gapped lower yesterday and fell slightly through $0.6375 before buyers re-emerged and lifted to almost $0.6460 late in the North American afternoon. The pre-weekend low was a little below $0.6450. The North American close was solid near session highs. It has surged back above $0.6500 today to reach $0.6515. The year's high was set in the middle of the month, near $0.6550. Australia reports May CPI first thing tomorrow. It peaked at 4.0% last year and after falling to 2.1% last October has steadied. In fact, from February through April it held at 2.4%. It is expected to have eased to 2.3% in May. The central bank gives more credence to the quarterly inflation report, but the market is confident (~85%) that the RBA will deliver the third rate cut of the year in early July that will bring the cash rate target to 3.60%. Two more rate cuts are fully discounted for this year. The terminal rate is now seen near 3%.

MXN: The dollar rose through MXN19.34 briefly yesterday in the initial reaction to the US strike on Iran. It spent most of the session trending lower and slipped through MXN19.12 late dealings yesterday. It reached almost MXN19.01 today but is holding above MXN19.00. A break of MXN18.95 could re-target the year's low (~MXN18.8250 in mid-June). Mexico reported a dismal April retail sales report yesterday. The larger-than-expected 1% decline was the largest drop since the end of 2023. The cumulative increase in Q1 was 1.1%. The April IGAE economic activity, though held up somewhat better than expected, rose by 0.54% after a revised 0.18% decline in March. The year-over-year decline of 1.55% is the poorest since early 2021 as the economy recovered from the pandemic. Mexico reports CPI for the first half of June today. The core and headline measures most likely remained above the 4% upper end of the target range. Nevertheless, with economic weakness a bigger threat, the central bank is expected to deliver its fourth half-point cut in a row on Thursday.