Can’t See The Risk-Off By Looking At The Dollar Or Gold

Overview

The combination of President Trump’s renewed threat to send letters to announce the new bilateral tariff letters and the heightened tensions with Iran have spurred risk-off forces, but they have not been expressed, as often is the case, with a stronger dollar and a surge in gold. The greenback is softer against nearly all the G10 currencies and most emerging markets currencies, though not the Mexican peso, which rose to its best level since last August yesterday. Outside of the sterling, whose upside has been limited by the larger than expected economic contraction in April and the dollar-bloc currencies, the other G10 currencies are up at least 0.50% ahead of the North American open. Demand for South Korean stocks, which extended their rally for the seventh consecutive session, has lifted the won by more than 1% to lead most market currencies higher. For its part, gold has edged higher, and while it recorded a new high for the week (almost $3378), it has pulled back toward $3339 by the European open before finding new demand. It is trading near $3360-2.

Equities, outside of the continued rally in South Korea, are mostly lower today. In the Asia Pacific region, Hong Kong and mainland shares that trade there, led the losses with more than a 1% decline. Europe’s Stoxx 600 (STOXX) is weaker for the fourth consecutive session, and US index futures are 0.3%-0.5% lower. Bonds are bid. European yields are off mostly 4-6 bps and the 10-year US Treasury yield (US10Y) is off nearly four basis points to around 4.38%. The US sells $22 bln 30-year bonds today amid some trepidation. It is currently yielding about 4.88%, a four-day low. May WTI spiked to a two-month high near $69.30, but has reversed lower and fell to almost $67.00 in Europe to approach the 200-day moving average.

USD: The softer than expected CPI weighed on the dollar, but at the close yesterday, the Fed funds futures market was still not fully discounting two rate cuts this year. However, shortly after the markets closed yesterday, President Trump indicated he would send letters in the next two weeks telling trading partners their new tariffs around the same time as Treasury Secretary Bessent, who apparently is a candidate to replace Powell at the Fed, was assuring that Trump would likely extend the postponement of the so-called reciprocal tariffs. Also, reports indicate the US is evacuating non-essential personnel from numerous Middle East embassies. Rhetoric has turned more heated recently, and the International Atomic Energy Association as found Iran is no longer in compliance with its “nuclear safeguard obligations.” May producer prices today. They are expected to have bounced back after falling in April. Headline prices are expected to rise by 0.2%, which would put the year-over-year rate at 2.6%, up from 2.4%. The core measure is seen rising by 0.3%, but due to the base effect, the year-over-year rate may be steady at 3.1%. With the PPI in hand, economists will solidify projections for the May PCE deflators. Weekly jobless claims are due, and the four-week moving average is likely to rise further and may reach its highest level since August or October 2024. The labor market is slowing but sufficiently slowly to allow the Fed to remain cautious, given the uncertainty, while the restrictive monetary policy helps squeeze price pressures. There is a small gap between yesterday’s low in the Dollar Index and today’s high. It has been sold through last week’s low (~98.35) and is approaching the three-year low set in late April was near 97.90. We had thought there was more upside potential, but the 99.40 area proved a more formidable cap. On a break of the 97.90 area, nearby support is seen around 97.45.

Euro: The euro to $1.15 yesterday, its best level since late April, and extended that to around $1.1565 today. The year’s high was on April 21, when it reached nearly $1.1575, a level not seen since October 2021. The softer-than-expected US CPI appeared to clear the way for the market to do what it wanted, and that was to sell the dollar and the euro was the biggest beneficiary. On a break of $1.1575, there little chart resistance ahead of $1.1685-$1.1700. While the eurozone economic calendar is light today, it picks up tomorrow with the aggregate industrial production and trade figures. The national reports from Germany, France, and Spain warn of a large decline in April industrial output. Recall that April industrial production fell by 1.4% in Germany and France. Spain’s industrial output fell by 0.8%. Of the Big Four, Italy’s was the best, rising 1%. The median forecast in Blomberg’s survey calls for a 1.7% decline in the aggregate reading. If accurate, it would be the largest decline since July 2023. This is consistent with a dramatic narrowing of the eurozone trade surplus from almost 28 bln euros (seasonally adjusted). The median forecast in Bloomberg’s survey is for an 18.3 bln trade surplus in April, down from 27.9 bln euro surplus in March. This would be a 35% narrowing, but still larger than any month last year, but January 2024.

CNY: Despite the US dollar’s broad weakness yesterday, it managed to rise to a six-day-high against the offshore yuan and briefly poked above CNH7.20. That nearly met the (61.8%) retracement objective of this month’s decline. The dollar has been sold to almost the low for the week set Tuesday, slightly below CNH7.1780. The year’s low was set in late May near CNH7.1615. The PBOC set the dollar’s reference rate at CNY7.1803, the third consecutive lower fix and the lowest since early April. It is still not clear what the US conceded in exchange for China’s rare earths and magnets. Reports indicate the export licenses to US companies are for six months. Still, it seems clear that the US and China both control choke points in key supply chains. Yet, we continue to suspect that for semiconductor chips and fabrication and most feedstocks for petrochemicals, for example, that the US controls may be easier to find alternatives, even if higher price than it is for the US (and others) to find alternatives to China’s processed rare earths and magnets. It may very well be the case that those sectors will require (more) state-assistance from the US, Europe, and Japan.

JPY: The dollar recorded yesterday’s session highs near JPY145.45, a nine-day-high, shortly before the US CPI, which saw it tumble to around JPY144.35 quickly in response and slightly below Tuesday’s low, it bounced to almost JPY145.20 where it was met with new sales. The dollar was sold to almost JPY143.65 and a break of the JPY143.45 could spur a test on the JPY142.00-50 area. In the last week of May, Japanese investors sold JPY1.144 trillion of foreign equities, this was the third most since the end of 2022. In the first week this month, they sold another JPY149 bln. Foreign investors about JPY1.165 trillion of Japanese bonds in the last week of May, snapping a four-week liquidation phase. In the first week of June, they bought JPY220 bln. To round out the story, Japanese investors soldJPY459 bln of foreign bonds last week after selling JPY118 bln the previous week. For their part, offshore accounts bought JPY180 bln of Japanese stocks after buying JPY336 bln in the prior week.

GBP: The soft US CPI trumped the UK’s poor jobs data and helped lift sterling back above Monday’s settlement (~1.3550) to reached nearly $1.3570. The best level since Q1 22 was recorded last week near $1.3615. Above there, nearby resistance may be in the $1.3625-45 area. A break of Tuesday and Wednesday’s lows, in the $1.3455-65, could sour the tone again. After the poor jobs data on Tuesday, the UK followed it up with more weak economic news today. April GDP contracted. Output shrank by 0.3% (-0.1% expected) in a broad contraction, with the industrial sector and services output falling (-0.6% and -0.4%, respectively), and the trade deficit deteriorating. The only bright spot was the increase in construction (0.9%). The Bank of England may not be able to afford the patience that the market previously thought it could. At the end of last week, the swaps market was discounting slightly less than 39 bps of cuts this year, and now it is a little more than 50 bps. The 10-year Gilt yield has fallen by about 12 bps over the same time. Market commentary and news reports have offered a narrative about the lack of demand for long-term bonds, and there is nary a word about shifting expectations for central bank policy. That seems incomplete and misleading.

CAD: The broad decline in the greenback brought it to a four-day low against the Canadian dollar near CAD1.3650, within spitting distance of the eight-month low set last week closer to CAD1.3635. It has drawn closer to it today, with a low near CAD1.3645. The CAD1.3600 area may offer psychological support, and the lower Bollinger Band is near CAD1.3575. However, more important support is found in the CAD1.3400-25 area.

AUD: Whereas the Canadian dollar managed to post minor upticks against the greenback, the antipodeans slipped by 10-15 ticks. It fell back toward $0.6500 in the NY afternoon. The losses were extended to almost $0.6475 today before the Aussie recovered by to the $0.6500 area. The dollar-bloc currencies are continuing to underperform today.

MXN: The peso saw its best level since last August despite the soft April industrial production report. Output rose by 0.1%, in line with expectations, but the contraction in March was revised to -1.2% from -0.9%. It was the strongest emerging market currency yesterday, pushing ahead of the Hungarian forint and Polish zloty, which were arguably helped by the euro’s strength. That said, Poland’s Prime Minister Tusk won a confidence vote called after the opposition’s Law and Justice Party candidate won the presidency. Still, the market was already selling the greenback against the peso before the US CPI. The dollar did not catch a bid until around MXN18.8265 ahead of support in the MXN18.78-80 area. The dollar is consolidating so far today in a range of roughly MXN18.8965-MXN18.98. The short-dollar long-peso seems more than a carry-trade (interest rate arbitrage). After all, the peso itself is up more than 10% against the US dollar here in H1, which is more than twice the yield pick-up.