Waller May Be Alone In Advocating July Rate Cut, But It Weighs On The Greenback

Overview

The US dollar is trading softer against most G10 and emerging market currencies today. The dollar seemed to lose its bid late yesterday after Federal Reserve Governor Waller argued in favor of a rate cut at this month’s meeting, despite the TIC data that showed foreign investors bought more US securities in May than they did in the first five months of 2024 ($311 bln vs $95 bln), driving home the message again that the talk of a capital strike against the US over its large deficit/debt or loss of “American exceptionalism” has been grossly exaggerated. The US announced a 93.5% tariff on graphite from China (given the other tariffs the effective rates is near 160%), which may have the effect of making more it more expensive to develop an EV battery industry in the US.

Equities are mostly firmer today after the S&P 500 (SPX, SP500) and Nasdaq (NDX) reached record highs yesterday. In the Asia Pacific region, among the large bourses, Japan, South Korea, and India failed to join the advance. Europe’s Stoxx 600 (STOXX) is extending yesterday’s gain, which snapped a three-day slide. It is practically flat on the week. US index futures are steady to firmer. Japanese long bond yields softened slightly despite the measure of CPI that excludes fresh food and energy unexpectedly rose. There may have been some light position squaring ahead of Sunday’s upper house election. European benchmark 10-year yields are up 1-3 bp to pare this week’s declines. A notable exception is the 10-year Gilt, which has seen a nearly eight basis point increase this week. The 10-year US Treasury yield (US10Y) is slightly softer, near 4.44%, which is up about three basis points on the week. Gold is firmer near $3353 but still within its recently well-worn range. August WTI is trading at its best level since Monday, near $68.50 following a new batch of EU sanctions on Russia and its oil.

USD: A favorable combination of US data yesterday of stronger than expected retail sales, softer import prices, and the fifth consecutive decline in initial weekly jobless claims extended the Dollar Index’s recovery. It reached 98.95, the highest level since June 23, and rose through the upper Bollinger Band (~98.85 today) for the first time in two months. There has been no follow-through buying, and DXY is trading quietly lower. It has held below 98.60 and held so far above 98.30. We note that the North American session has seemed to be better for dollar buyers this week. The week winds down with June housing starts, and after a dramatic 9.8% drop in May, a modest rebound is expected. Economists will adjust residential investment projections that feed into Q2 GDP, which will be released on July 30. No fewer than a dozen Fed officials spoke this week and the Beige Book was published. There seems to be a broad agreement that the Fed’s stance is appropriate, despite the pressure from the White House. Still, given Governor Waller’s comments yesterday, it is possible he dissents from the most likely decision at the upcoming FOMC meeting to stand pat. The University of Michigan consumer confidence survey is due today. The assessment of current conditions and expectations may have softened. Economists polled by Bloomberg expect the one-year inflation outlook to remain elevated at 5%, which is not confirmed by other surveys or market measures. The 5–10-year inflation outlook may tick down to 3.9% from 4.0%. Recall at the end of last year, around the time of the Fed’s last cut, the one-year inflation outlook was 2.8% and the longer projection was 3.0%.

Euro: After ending a six-day slide on Wednesday, the euro was sold again yesterday. It made a marginal new low for the month, slightly above $1.1555. Still, it has come back better bid today and is knocking on the $1.1645 area late in the European morning. Barring a recovery above $1.1690 today, it will be the first back-to-back weekly loss for the euro since mid-May. The Eurozone reported May’s current account surplus was 32.3 bln euros. That puts this year’s average monthly surplus near 25.1 bln euros. The average in the first five months of last year was about 36.3 bln euros. So, while the current account surplus has narrowed, the trade surplus has widened despite the increased penetration by China-based producers. The average monthly trade surplus this year has been about 18.55 bln euros, up from 17.33 bln euros in the Jan-May 2024 period. Separately, construction in the eurozone fell by 1.7% after rising a revised 4.3% in April (initially 1.7%), which was the strongest since May 2020. It is likely being flattered by government efforts and EU encouragement to modernize infrastructure.

CNY: The dollar recorded the low for the year on July 1 near CNH7.15. It has probed the CNH7.19 area on Wednesday and consolidated slightly below there yesterday. The high from June 23 is around CNH7.1925 and the greenback has not traded above CNH7.20 since June 11. A narrow range prevails today (~CNH7.1800-CNH7.1860). The PBOC set the dollar’s reference rate at CNY7.1498 (CNY7.1461 yesterday and CNY7.1475 a week ago). The dollar’s fix yesterday was the lowest in nearly eight months (CNY7.1461) and the change, 0.09%, was the most in almost two months. Chinese officials continue to moderate the pressures emanating from the foreign exchange market. The yuan’s rise against the dollar this year is modest (~1.6%). Beijing seeks not a strong or weak yuan but a stable one against the US dollar. It is not pegged to the US currency, as is the Hong Kong Dollar and the HKMA intervened earlier this week to defend the peg. Beijing does allow some movement in the yuan, and its chief tool remains setting the daily reference rate, around which the greenback is allowed to move 2%, but rarely does. Still, as we have noted, the daily fix was adjusted at the start of the year by about 0.01%. It has widened on average over the last several months, and while it is still quite small, it shows a little flexibility.

JPY: The dollar is firm against the Japanese yen. It has met sellers a little above JPY149 for the past three sessions. It has held below there today, but the consolidation seems constructive. Nearby resistance may be seen around JPY149.40, the halfway point of this year’s range. Above there is the 200-day moving average (~JPY149.70), which the greenback has not traded above since mid-February. It is not a popular view, but we note that the rolling 30-day correlation of changes in the dollar-yen and the US 10-year yield is slightly above 0.80, the highest it has been since the end of 2021. Japan’s June CPI was largely in line with the signal generated from the Tokyo CPI that was released a few weeks ago. The headline pace slowed to 3.3% from 3.5% and the core measure, which excludes fresh food, eased to 3.3% from 3.7%. The surprise was the measure that excludes fresh food and energy, which edged up to 3.4% from 3.3%, despite the slippage in the Tokyo reading (3.1% vs. 3.3%). Note that the data highlight next week is Tokyo’s July CPI (July 25) and headline and core rates are expected to have ticked down. Still, the elevated price pressures and the relatively weak yen underpin the dissatisfaction with the government. The LDP-Komeito coalition lost their majority in the lower house last year and looks likely to lose the majority in the upper house in Sunday’s election. A key programmatic difference between the coalition and leading opposition parties is over how to support households that are being squeezed by inflation. The coalition supports a cash handout, while the opposition advocates a cut in the sales tax.

GBP: While it is difficult to imagine a better string of economic data than the US reported yesterday, the opposite is true for the UK. Following last week’s news of an unexpected contraction in May, the second consecutive month that the US economy shrank, it reported higher than expected CPI and weaker employment data in recent days. Sterling’s eight-day slide was interrupted on Wednesday, but it resumed yesterday. Yet it held above Wednesday’s low, near $1.3365 yesterday. Sterling’s loss of about 0.10% yesterday put it atop of the G10 performances against the dollar. It appears to have been supported by the rise in the year-end expected rate to about 3.75% yesterday, the fourth gain in five sessions and the highest level since June 9. Yesterday’s 5.5 bp increase was the most in almost two months. Trading is subdued, and sterling is in a narrow $1.3410-$1.3445 range so far today. A move above $1.3465 may help stabilize the technical tone.

CAD: The greenback forged a base this week near CAD1.3670 and reached a new high for the month yesterday around CAD1.3775 yesterday. It is trading with a softer bias today in a tight range between about CAD1.3725 and CAD1.3755. We have often found that when the US dollar is bid, the Canadian dollar tends to perform well on the crosses. This has indeed been the case this month. The Dollar Index bottomed on July 1, and the Canadian dollar is the best performing G10 currency against the US dollar so far this month, losing only a little more than 1%. At the same time, the market has pulled away from another rate cut by the Bank of Canada this year. The swaps market implies a year-end rate of 2.55% (2.75% currently), which is up almost 15 bp this month.

AUD: The disappointing Australian employment data helped send the Aussie to a new low for the month near $0.6455. This met the (61.8%) retracement of the rally from the June 23 low. It took out the potential neckline (~$0.6485), which projects to around $0.6380. The low from June 23 is a little below there. Yet, it would be more compelling if it had closed below the neckline, but it did not yesterday. Moreover, there was no follow-through selling and the Aussie has recovered slightly above $0.6520 today. Nevertheless, without a dramatic rally in the North American session, it will be the first weekly loss in four for the Aussie.

MXN: The US dollar remains confined to Tuesday’s range against the Mexican peso. It was roughly MXN18.65 to MXN18.8850. The upper end is also the high for the month. The month’s low, set July 9 near MXN18.5525, was the lowest the greenback has been since last August. The momentum indicators warn that the consolidation phase may persist a bit longer and it continues today (~MXN18.7175-MXN18.7835). Even though the attractive carry pays to be long the peso even in sideways movement, there may be some trepidation ahead of August 1 that leads to some more long liquidation. Barring a setback in the dollar today below around MXN18.6370, it will be the first back-to-back gain for the greenback since early April.