forex.pm forex forum binary options trade - Recent posts

Overview: The dollar's losses scored after
yesterday's disappointing ISM manufacturing report were extended initially in
Asia Pacific turnover earlier today before it recovered. The recovery has
stretched the intraday momentum indicators, warning against expected strong
follow-through dollar buying in North America, without fresh impetus. Amid
position adjusting and crosses unwinding, the yen is resisting the dollar's
recovery and is the strongest of the G10 currencies. A slightly firmer than
expected Swiss CPI has seen the market shave the odds of a SNB rate cut later this month. This is allowing the franc to recover a little too. The other G10
currencies are lower. Most emerging market currencies are weaker, as well. The
South African rand and Mexican peso are off slightly more than 1%. Modi's
victory in India seems smaller than it did yesterday, and the rupee is also
among the weakest emerging market currencies today. 

Indian stocks are giving back yesterday's
gains plus today, sliding more than 5%. Except for China and Hong Kong, most
bourses in the Asia Pacific region fell today. Europe's Stoxx 600 is off 0.8%
giving back the past two days of gains in full. US index futures are also
softer. Asia Pacific bonds played catch-up after the strong rally in the US
yesterday. European benchmark yields are mostly 1-2 bp lower. The 10-year
Treasury yield is flat near 4.39% after falling 11 bp yesterday. Gold recovered
yesterday and settled above $2350 but has come back heavier today and looks
poised to test yesterday's low (~$2315). July WTI that was testing $80 last
week has been sold below $73 to its lowest level since early February. Lastly,
natgas surged yesterday on Norway's plant outage, but it is recovering today. The
Dutch benchmark was up over 5% yesterday and is off almost 3.8% today. US
prices jumped 6.5% yesterday and are flattish today.

Asia Pacific

The 35th anniversary of Tiananmen Square
protests is reminder of the desire for political liberalization
and human rights in China. Xi's father reportedly warned China's leadership that funeral of
CCP General Secretary Hu needed to be properly managed or there would be chaos.
Hu had been a powerful reformer. Xi himself saw the student protests as
dangerous and drew parallels with the Cultural Revolution. Political reforms in
China since Xi's rule have been in the other direction. The Communist Party has
an increased role in society, government, and businesses. The balance of power
between the princelings, like Xi whose parent fought alongside Mao, and the
Communist Youth League of unconnected but ambitious people has been destroyed
in favor of the former. Mao's "iron rice bowl" of government support
has been dismantled and Xi shares with some in the US and Europe who disdain social
welfare programs. More immediately, the light economic schedule at the start of
this week ends tomorrow with the final PMI for Japan and Australia, China's
Caixin services and composite, and Australia's Q1 GDP (expected 0.2%, same as
Q4 23).

The drop in US interest rates after the
disappointing ISM manufacturing survey took the dollar broadly lower, and it
was pushed below JPY156 for the first time since May 21. Follow-through selling today took the
greenback below the trendline connecting the two spike lows in May that
came in today near JPY155.90. The dollar recorded a bearish outside day
yesterday, trading on both sides of the pre-weekend range and closing below its
low. It has been sold to JPY155.00 today. Nearby support is seen around
JPY154.80. The intraday momentum indicators are stretched. The
JPY155.90-JPY156.00 may now offer resistance. The Australian dollar has
not settled off the $0.6600-handle since May 8. It has nearly covered
the range in the past three sessions. It had traded below $0.6600 on an
intraday basis on May 30 and reached $0.6695 yesterday, amid the greenback's
broad losses. It made a marginal new high today but held below $0.6700 and has
reversed lower to approach yesterday's low below $0.6640. The sell-off has also
stretched the intraday momentum indicator, suggesting that support in the
$0.6625-30 may be sufficient to hold back steeper losses today. Many
observers get caught up in precisely how the Beijing manages its
currency. Since we suspect it changes and evolves over time, and is
purposely opaque, we think that for most market participants, it is not the
point. What the yuan does is more important than how. Most importantly, we
think that Beijing has resisted the magnitude of depreciation that market
forces alone were driving, and it is not using the exchange rate to promote
exports. Indeed, China appears to be shifting toward a foreign direct investment
strategy and a stronger yuan is more desirable than the speculation of a major
one-off devaluation suggests. The PBOC set the dollar's reference rate at
CNY7.1083 (CNY7.1086 yesterday). The average in Bloomberg's survey was
CNY7.2295 (CNY7.2399 yesterday). The dollar has not closed below CNH7.25 since
for nearly two weeks. A similar trendline as the one we identified with the yen
is found today near CNH7.2535. Today's low so far has been CNH7.2490, and the
dollar has made a lower high for fourth session. 

Europe

The news stream from Europe is subdued
today. The final
services and composite PMI are due tomorrow, as is the April PPI. A few hours
before the ECB meeting outcome on Thursday, the aggregate April retail sales report is
due. A pullback after the 0.8% gain in March. Switzerland's May PMI yesterday
was mixed. The manufacturing PMI rose to 46.4 from 41.4 in April, and the
services PMI slumped to 48.8 from 55.6. Today, Switzerland reported May CPI.
The EU harmonized measure ticked up to 1.5% from 1.4%. The Swiss National Bank
meets quarterly, and they became the first G10 central bank to cut rate in
March. The swaps market a little more than a 50% chance of a follow-up cut on
June 20. It was near 60% yesterday, i.e., before today's CPI. Last week, the
euro rose to CHF0.9930, its best level since April 2023, but reversed lower and
snapped a three-week advance. It approached CHF0.9750 yesterday, the (50%)
retracement of the rally from April 19, when the cross was initially driven low
(~CHF0.9565) when Israel retaliated against Iran. Follow-through selling today
has seen nearly CHF0.9720. The next retracement (61.8%) is near CHF0.9700.

The euro rallied on the back of the softer
US manufacturing ISM. After
bumping against it repeated in the North American afternoon yesterday, it
finally pushed above $1.09. for the first time since March 21. Its gains
were initially extended to about $1.0915 but sellers emerged and took it to
about $1.0870 by early in the European session. Given the intraday momentum
indicators, we suspect that support near $1.0850-60 may be sufficient. The
euro's gains amid the high probability of an ECB rate cut on Thursday and solid
US job growth Friday (the median in Bloomberg's survey has crept up in recent
days to 190k), surprised us. We did not expect a breakout. Still, we recall
that market has done this before, i.e., rally the euro ahead of the US jobs
report only to sell off afterward. On Thursday, shortly after ECB's press
conference, there are options for about 2.8 bln euros almost evenly divided
between $1.09 and $1.0915 that expire. Sterling recovered from a dip
slightly below $1.27 to a little above $1.28 on the back of the US dollar's
retreat. Sterling peaked slightly above $1.28 last week, a two-month
high. It took it out yesterday by a few hundredths of a penny. It closed above
$1.28 for the first time since March 11. It approached resistance ahead of $1.2820
and slumped back to $1.2760 in the European morning. With oversold intraday
momentum indicators, sterling found was stabilizing in late European morning
turnover. There are options for about GBP370 mln at $1.2860 that expire
Thursday.

America

The ISM again trumped the PMI. The US May manufacturing PMI was revised
to 51.3 from the initial estimate of 50.9. Recall that the median forecast in
Bloomberg's survey for it was initially 49.9. This is the say that the market
had looked for the third consecutive decline and it came in stronger and was
revised higher. The ISM manufacturing survey was reported shortly after the
PMI. It was weaker than expected at 48.7 (from 49.2). It has been below the 50
boom/bust level since November 2022 with the sole exception this past March (50.3).
In the first four months of the year, it average 49.1. Prices paid rose at a
slow pace (57.0 vs. 60.9) and new order continued to fall (45.4 vs. 49.1). New
orders are the weakest since last May. Employment rose to 51.1 from 48.6. It is
the first reading above 50 in eight months. Still, US yields fell on the ISM
report and took dragged the dollar lower. The Atlanta Fed's GDP tracker fell
sharply in yesterday's update to 1.8% from 2.7%. Today's April JOLTS report is
expected show job openings falling (~130k) and gradually normalizing. They fell
by about 400k in Q1 24 and almost 420k in Q4 23. April factory orders are also
on tap. April durable goods orders have already been reported, though subject
to revision today, rose by 0.7%. Factory orders are expected to rise by 0.6%.
The focus in Canada is the central bank meeting on Wednesday. The market
perceives a greater chance of a rate cut than a week ago (~80% vs. 65%).
Mexico's President-elect Sheinbaum will be inaugurated on October 1. Among
investors there are two fears. The first is over what AMLO may do in the
intervening months and the second is the constitutional changes which will be
possible during the Sheinbaum administration. She might not be able to address
the former, but a clear statement from her committing to support the
independence of the judiciary and central bank could help ease investor
anxiety. 

The dollar held CAD1.3600 in
yesterday's setback. It
has not settled below CAD1.36 since April 9 and the recent price action
underscore the significance of that area. On the top side, the greenback has
not closed above CAD1.3750 since the end of May. The Canadian dollar was the
only G10 currency not to gain on the US dollar yesterday. The US dollar is
approached CAD1.37 today. Last week's high was near CAD1.3735/ The
Mexican peso's fell by nearly 3.8% yesterday, its largest decline in nearly
four years. The US dollar highs were recorded in North America near
MXN17.75, not in thin Asia Pacific markets as was the case with the "flash
crash" in April. The dollar's gains were extended to almost MXN18.00
today, before stabilizing. It is trading around MXN17.88 (up ~1%) in late
European morning trade, finding only little consolation in Sheinbaum's sticking
with AMLO's finance minister. Initial support is seen in the MXN17.60-70 area.

Disclaimer 

There
are two forces that shape the investment climate: politics and economics, and
they are both at the fore in the coming weeks.

Among the highlights will be the European
Central Bank meeting that will mostly likely begin its easing cycle. The Bank of
Canada is a close call. If it does not cut rates in June, it will probably do
so in July. The Swiss National Bank may deliver its second hike in the cycle,
while the Bank of England will likely continue to prepare the ground for a cut
in the second half.

Four months ago, the market was still
pricing in two rate cuts by the Federal Reserve by the end of the first half.
While giving up on the notion, the derivatives market has one cut fully
discounted late this year and almost a 50% chance of a second
cut. In the March Summary of Economic Projections, a closely divided central
bank generated a median projection of three rate cuts this year. We suspect
that the median dot may be a closer to one cut in the next
iteration (June 12).

The European Parliament election will
result in a new European Commission, and possibly a new EC President. The low
level of support for most European governments warns of the risk of polarized
voting and a general shift to the right. However, the political right in Europe
seems divided between a pro-NATO/pro-EU-wing and a populist-wing. The former is the path of
Italy's Meloni has taken. Current EC President von der Leyen is backed by the
center right EEP, the largest party in the current parliament. There has been
some speculation that former ECB President Draghi may be an acceptable compromise
candidate. Still, given the challenge that a second Trump term may present to
Europe, the weakness of current national leadership, 's aggressiveness,
and the economic challenge posed by China, the period ahead argues for a strong
European Commission.

Modi has led India since 2014. The results national election are expected to be announced June 4, and he is widely seen securing a
third term. Modi initially targeted 400-seats (350 in 2019) in the 543-member
lower legislative chamber. The shift to more divisive rhetoric in late May
could be response to less favorable developments. A narrow victory for Modi's
BJP could endanger his extensive reform agenda. This could see foreign
investors extend the sales of Indian assets (~$5.8 bln in Q2) and weigh on the
rupee. Perhaps blunting it would be the inclusion of Indian bonds in JP Morgan
emerging market indices starting in June. This represents a gradual start of
the India's integration into the world's capital markets. While trying to
balance between  and the US, the nationalist Modi is well within the
non-aligned tradition.

South Africa went to the polls on May 29.
There are around 70 political parties and some independents competing for seats
in the national parliament and nine provincial legislatures. The results will
be announced in early June. The ANC has dominated South African politics for
the 30 years and it appears to have lost its majority. President Ramaphosa
recently introduced measures for national health care and basic income grants
that would not be implement even if the ANC secures a majority until 2026. It
was seen an election appeal. A coalition government with a small party or two
on the left would do little to assuage investors. Exit polls show the ANC drawing a little more than 40% of the vote, which has scared investors and set the rand down more than 2% since the election. The benchmark 10-year yield
has risen by about 85 bp this year to a little above 12.2%, more than a fifth came in the two days after the election. In April, South Africa's is
CPI is nearly flat this year at 5.2% year-over-year. The FTSE-All Shares Index
is nearly flat this year through May, surrendering almost 2.5% since the election.  

Mexico holds national elections on June 2.
There is little doubt that former mayor of Mexico City, and AMLO's handpicked
successor Sheinbaum will become the new president of Mexico. While she is
candidate of continuity, the outcome of the congressional elections will likely
frame her efforts for the next three years. Three large issues must be
addressed, the north and south borders, Pemex and the need to develop green
energy, and navigating between foreign countries, especially China, operating
in Mexico and US sensitivities. Mexico is still a poor country with GDP per
capita of about $11.5k and around a third of the population is below the
national poverty line.

For the first time since Q2 23, no G10
economy is contracting. Helped by a large budget deficit and a resilient
consumer, the US economy continues to expand near or above trend growth. The UK
and eurozone economies contracted in Q3 23 and Q4 23, but both expanded in Q1
24, and that recovery has continued in Q2. Japan's economy contracted in Q3 23
and was flat in Q4 23. The contraction in Q1 24 seems largely a function of
the earthquake on January 1 and a scandal in the auto sector. Recent data lends
credence to ideas that the economy is expanding again.

Australian economic activity slowed
sequentially every quarter in 2023 but it remained in positive territory.
Growth is expected to stabilize around 0.3%-0.4% a quarter and the market has priced out a rate cut this year.  The New Zealand economy shrank
in three of the four quarters last year (expanding by 0.5% in Q2 23). It is
expected to have returned to the growth path in Q1 24 (June 20). The swaps market
anticipates a cut toward the end of the year.

Sweden may be have been the weak link. Its economy
shrank last year in the middle two quarters and stagnated in the fourth.  Growth at the start of the year has been stronger than expect and Q1 GDP surprised on the upside at 0.7%. The central bank delivered its first rate cut in May. High-frequency data
suggests the recovery has continued into the second quarter. The swaps market is pricing in another interest rate reduction in Q3.
Norway's mainland economy contracted in the middle two quarters of 2023 but its
growth in Q4 made up for it plus some with a 1.6% quarterly expansion. The economy
appears to be a on stronger path now. The swaps market is not pricing in a cut
this year. 

Bannockburn's World Currency Index, a
basket of the currencies of the dozen largest economies (split evenly between
G10 and developing economies), snapped a four-month slide. After falling to its
lowest level in more than 20 years in early May, BWCI spent most of the month
in a narrow trading range. We suspect a base is forming, which implies a weaker
US dollar. However, it will take some time and is unlikely to be smooth. The
key now seems to be evidence the US economy is slowing. The apparent resilience of the US economy
and prices have seen expectations for Fed cuts this year gradually diminish.
Given that several other major central banks are likely to cut at least once
before the Fed moves, one is still paid to be long US dollars through the
interest rate differential.

All the G10 currencies in index
rose against the US dollar. The Australian dollar was the strongest, gaining about 2.6%, followed by sterling, which rose almost 2%.  The yen was the weakest with its 0.4% gain. The two emerging market currencies with the highest weightings, the Chinese yuan and Indian rupee, were virtually flat in May.  Together, they account for a little more than a quarter of BWCI.  The net change of the South Korean won, Brazilian real, and Mexican peso were less than 1% and together they account for almost 6.5% of the index.  The n rouble, which is not so much a market-traded currency anymore, appreciated by 3.4%, the top performer in BWCI in May.   

U.S. Dollar:  May was a month of
two halves for the dollar. In the first half, the downside correction against
most of the G10 currencies, but the Japanese yen, and, to some extent, the
Swiss franc, which began in mid-April extended through mid-May. Real sector
data surprised mostly on the downside and the two-year Treasury yield that
finished April above  5% fell to around 4.70% by the
middle of May. In the second half of May, hawkish Fed comments, including the May FOMC minutes, and some better-than-expected
data saw the two-year yield climb back toward 5% and the dollar recovered
broadly. Around the middle of May, the futures market had a quarter-point
cut in September nearly fully discounted. By the end of the month, it was downgraded to 60%. In mid-May, the market was still pricing in two cuts
this year. This has been downgraded to one cut and almost a 50% chance
of a second cut. While we think the US economy is gradually slowing, we suspect
the April data overstated the case and look for sequentially better economic
activity in May. At the same the May CPI will likely be a small step in the
right direction, but not sufficient to change policymakers' or investors' minds.
A 0.1% rise in May headline CPI would be the lowest monthly increase this year,
but because it also rose 0.1% in May 2023, the year-over-year print will likely
be unchanged at 3.4%. The core rate could rise by 0.3%, for the second month in
a row, after rising 0.4% each month in Q1. In May 2023, the core rate increased
by 0.4%. This suggests that year-over-year rate could tick down to 3.5% from
3.5%. The US Treasury began a buyback program where it purchases older, less
liquid issues, and replaces them later with larger new issues. The goal is improving market liquidity. Also, starting
in June, the Federal Reserve will taper its "quantitative tightening"
whereby it does not reinvestment the full amount of maturing bonds on its
balance sheet. It has been allowing as much as $60 of Treasuries a month to
roll-off. Starting in June, it will allow only $25 bln a month to mature
without being replaced. The roll-off of its Agency holdings will continue at
$35 bln a month. Although some observers have argued these two developments
will be supportive of the Treasury market, we are less sanguine and suggest that
other drivers are more important. The 10-year yield rose from about 4.30%
in mid-May but bond buyers emerged when the yield rose above 4.60% a couple of weeks later.  The yield finished the month near 4.50%. .

 

Euro: The market has more confidence
that eurozone's economic recovery is continuing and that the European Central
Bank will deliver its first rate cut on June 6. The question is what is next.
The swaps market has scaled back the extent of the ECB's easing this year. In
early May, the market had three cuts this year discounted. Now there are two
cuts fully priced in about a 25% chance of a third. Less favorable base
effects warn of upside rise to CPI and the sum of the monthly gains this year
through May is 1.8% for an annualized rate of 4.3%. For comparison, US CPI has
rose 1.4% through April for an annualized pace of 4.2%. The ECB will update its
economic forecast. It may feel more optimistic on growth, which in March was
projected at 0.6% this year. The preliminary May CPI was 2.5%, so the ECB's
March forecast of 2.3% this year implies no meaningful further progress this
year. The US two-year premium over Germany fell from above 200 bp in late April
to below 180 bp at the end of May. Last month, we suggested a target of
$1.0870-$1.0900, which was met. We also suggested a secondary target in the
$1.0935-50 area, which has not been met. The price action underscores the important of support near $1.0785.  

(As of May 31,
indicative closing prices, previous in parentheses)

Spot: $1.0850 ($1.0760) Median
Bloomberg One-month forecast: $1.0700 ($1.0830) One-month
forward: $1.0865 ($1.0800)   One-month implied vol:
5.2% (5.5%) 

 

Japanese Yen: The dollar posted
its first monthly loss of the year against the Japanese yen, but its 0.35% pullback was the least among the G10 currencies. After the material
intervention by Japanese officials to support the yen in late April and again
in early May produced an unusually large monthly range of a little below JPY152
to almost JPY158. That range was set in the first three trading days of May. Afterward
the dollar gradually climbed higher, with a notable hiccup in the middle of the
month, when the US 10-year yield dropped more 20 bp in three days after a
slight softening of US CPI. The dollar was pushing to about JPY157.70 in
late May before turning cautious. The 10-year JGB yield rose above 1.0% last for the first time since
April 2012. After contracting in Q1, a recovery is taking hold. Income tax cuts
kick-in next month, while the household energy subsidies are winding down. The
swaps market anticipates a 10 bp rate hike at the end of July BOJ meeting and
another 15 bp move in Q4. The US 10-year premium over Japan fell from about 380 bp
in late April, the year's high, to below 340 bp in mid-May before settling near
350 bp.

 

Spot: JPY157.30 (JPY153.00) Median
Bloomberg One-month forecast: JPY153.50 (JPY152.45) One-month
forward: JPY156.60 (JPY152.30) One-month implied vol: 8.3% (9.5%) 

  

  

British Pound:  Sterling's roughly 2.0% gain in May not only
snapped a four-month slide, but offset those losses in full. It is virtually unchanged since the end of last year, making it the strongest G10 currency here in 2024. The UK's Q1
growth was well above market expectations, and at 0.6% quarter-over-quarter, it
was the strongest since the end of 2021. It activity returned to levels seen prior to H2 23 contraction. This was followed by somewhat stronger than expected wage growth and
April CPI. The market flirted with the idea of a rate cut in June, but it was
not much above a 60% probability in the first part of May, and in any event, was nearly ruled
after the data. Until the CPI on May 22, the swaps market had fully
discount a cut by the end August. It is now seen as a little less than a 40% probability. The market now has the the first cut fully discounted in November. Sterling's nickel rally since the low of the year was set on April 22 stretched
daily momentum indicators. Support is seen around $1.2675. After suffering steep losses in local elections, Prime Minister Sunak
called for elections on July 4. It has not emerged as an important factor in
the foreign exchange market.

Spot: $1.2740 ($1.2545) Median
Bloomberg One-month forecast: $1.2500 ($1.2520) One-month
forward:  $1.2745 ($1.2550) One-month implied vol: 5.8% (6.3%) 

 

Canadian Dollar:  The Canadian
dollar's 1% gain in May was its best monthly performance so far this year. Among the G10 currencies, only the yen rose by less.  Often,
it seems, in a softer greenback environment, the Canadian dollar lags the other
major currencies. In April, the Bank of Canada's core measures of CPI fell into
the target range, with the rolling three-month annualized rate at its lowest
since 2021. Over the course of May, the pricing in the swaps market reflecting
a little more confidence in a quarter-point rate cut at the June 5 Bank of
Canada meeting. The market has discounted about an 80% chance of a cut, up from
around 50% at the end of April. The economy expanded by 1.7% at an
annualized rate it Q1 24, which was a little slower than expected.  Moreover, the pace of growth is likely slowing below 1% here in
Q2. While the exchange rate continues to be sensitive to the broader risk
environment (using the S&P 500 as a proxy), it is more sensitive to the
general direction of the dollar. The rolling 30- and 60-day correlation of
changes of the exchange rate and the Dollar Index are above 0.80, the highest
level in at least a decade. The US dollar established a range of roughly CAD1.36 to CAD1.3750 in May,  A break is significant.  

Spot: CAD1.3630 (CAD 1.3685) Median
Bloomberg One-month forecast: CAD1.3600 (CAD1.3635) One-month
forward: CAD1.3620 (CAD1.3680) One-month implied vol:
4.9% (4.9%) 

 

Australian Dollar: The Australian
economy appears to be growing by a steady even if not impressive 0.2%-0.3%
quarter-over-quarter. Since hiking the cash target rate last November (25 bp to
4.35%), the central bank has been content to standpat. Few seem to take very
seriously the continued reference in the minutes that a hike was discussed.
Still, since the middle of April, the swaps market has not fully discounted a
single quarter-point cut this year. At the end of May, the probability was near 10%. Improvement in the monthly CPI reading has
stalled. It reached 3.4% year-over-year in December 2023 and was 3.6% in April.  If the RBA is to cut rates sooner than the futures market is
currently pricing, it seems more likely to be prompted by weakness in the labor
market than dramatic moderation in price pressures. The Australian dollar's
recovery off the year's low, set mid-April, near $0.6365, extend to almost
$0.6715 in May, a four-month high. That met a key retracement objectives of the
decline from the peak (~$0.6870) at the very end of 2023. It pulled back and the
Aussie found support a little below $0.6600.

Spot: $0.6655 ($0.6610) Median Bloomberg
One-month forecast: $0.6600 ($0.6605) One-month forward:
$0.6660 ($0.6615)    One-month implied vol:
8.2% (8.5%)

 

Mexican Peso:  The peso continued to recover from April's flash
crash in May. It reached its best level since mid-April, with the dollar slipped a little through MXN16.53 before recovering.  Mexico's 10-year government dollar bond slightly outperformed the
dollar-bond in May. Mexican stocks, on the other hand underperformed. The Bolsa fell by about 2.5%
(after a 1.1% loss in April), leaving it down around 3.6% year-to-date. The MSCI
Emerging Market equity index rose 1.1% in May and is up almost 3.5% for the year.
The moderation of inflation appears to have slowed, and coupled with the
reassessment of the trajectory of Fed policy, buys the central bank some time
before following up the March rate. Still, the stepped-up government spending
in Q2 may mask weaker economic impulses. The swaps market leans toward two cuts
in the next six months.  Surveys suggest many asset managers are overweight Mexican exposure, and non-commercials (speculators) in the futures market have a large net long peso position.  This leaves the peso somewhat vulnerable to risk-off swings in sentiment. However, the demand for peso has seen good buying on counter-trend pullbacks.  Ironically, as Mexico has taken only one step on its monetary easing cycle, Brazil
may be done for at least several months. Brazil's central bank delivered 325 bp of cuts since last August.
After a series of 50 bp move, the cut last month was 25 bp. The swaps market
implies that the next move is more likely to be a hike. The Brazilian real was
almost flat in May (-0.20%) but snapped a four-month losing streak that tagged
it for nearly 6.5%.

Spot: MXN17.01 (MXN16.9750) Median Bloomberg One-Month
forecast: MXN17.10 (MXN17.0450) One-month forward:
MXN17.10 (MXN17.05) One-month implied vol: 10.5% (10.4%)

 

Chinese Yuan: Tension between
China and most of the rest of the world arises from three considerations. First is trade. Even
several countries in the "Global South," have taken action to protect
themselves from a deluge of Chinese products, like steel. The US announced a wide range of
tariff increases on China's EV, solar panels, and a range of other product. The
EU is expected to announce new tariffs after the new European Commission is in place. China has announced new export licensing requirements for a range of dual purpose products, including plane parts, engines, gas turbines, and bullet-proof material. In yuan terms,
China's trade balance is nearly flat in the January-April period compared with
a year ago. In dollar terms, it is slightly smaller. Second, China continues to
pursue aggressive tactics toward many of its neighbors, including Taiwan, and the
Philippines, and Japan. Beijing does not seem to understand that its actions encourage
countries to seek alliances to protect themselves. Third, US and European
officials are increasingly convinced that Beijing is providing material aid to
 in its war on e. Despite some improved communications and colorful photo opportunities, the relationship between the US/Europe and China remain strained. One difference between the US and Europe is that the latter seems more open to Chinese direct investment than the former. Meanwhile, China announced a new fund to
support the semiconductor industry and a new initiative to aid the property market. The central government will loan to banks to re-lend
to local governments to buy unsold houses to create affordable housing. Most
observers have concluded it is an important step in the right direction but too
small. Following the new measures, and based on the Q1 growth, in late May, the IMF revised up its forecast for Chinese growth to 5% this year, up 0.4% from the previous forecast a month earlier. Beijing estimates that the Chinese economy grew by 1.6%
quarter-over-quarter in Q1. Economic activity appears to have slowed here in Q2.
More economic reforms will likely be announced at July's Third Plenum
session. With the Federal Reserve policy being higher for longer, diverging
from China's monetary policy, downside pressure on the yuan remains. We
continue to see risk that dollar moves back into the previous trading range
(CNY7.25-CNY7.30).

Spot: CNY7.2420 (CNY7.2410) Median
Bloomberg One-month forecast: CNY7.2500 (CNY7.2460) One-month
forward: CNY7.1125 (CNY7.0965) One-month implied vol
4.8% (4.6%) 

Disclaimer 

The Australian dollar continues to swing sharply this week. AUD/USD is trading at 0.6641 in the North American session, down 0.71% on the day. The downswing has wiped out the Aussie's gains of 0.55% on Monday.

Australia posted weak data earlier today, which has weighed on the Australian dollar. Corporate profits declined 2.5% q/q in the first quarter after revised growth of 7.1% in the fourth quarter. This was well short of the market estimate of -0.9%. On an annualized basis, corporate profits plunged 8.6%, marking a fourth straight quarter of contraction.

Australia also posted a current account deficit of AUD 4.9 billion in the first quarter, after a revised surplus of AUD 2.7 billion in Q4 2023. This missed the market estimate of a surplus of AUD 5.9 billion. The trade surplus fell as imports rose and exports declined, as metal ore prices fell. Today's silver lining was an improvement in retail sales, which rebounded with a small gain of 0.1% m/m in April, after a -0.4% reading in March

Australian economy expected to ease to 1.2% growth

Australia's GDP is expected to fall to 1.2% y/y in the fourth quarter, compared to 1.5% in the fourth quarter of 2023. GDP is expected to show weak growth of 0.2% q/q in the first quarter, unchanged from Q4 2023. Consumer spending has been soft as consumers grapple with high interest rates and stubborn inflation.

The March GDP data is expected to indicate that Australia narrowly avoided a recession. Normally, such an economic landscape would likely result in the Reserve Bank of Australia lowering rates in order to kick-start the limping economy. However, with inflation stickier than anticipated, the RBA is likely to wait before easing up on interest rates and hasn't ruled out rate hikes in order to keep a lid on inflation. The RBA meets next on June 18th.

AUD/USD Technical

• AUD/USD is testing support at 0.6641. Below, there is support at 0.6603


• 0.6692 and 0.6730 are the next resistance lines

The Swiss franc is in positive territory on Tuesday. USD/CHF is trading at 0.8935 in the European session, down 0.24% on the day. The Swissie has posted its strongest rally of the year, with gains of 2% since May 29th and is trading at its highest level since March 21st.

Swiss inflation unchanged

Switzerland's inflation rate remained unchanged in May and the Swiss franc has shown limited movement on Tuesday. Inflation remained at 0.3% m/m, just below the market estimate of 0.4%. On an annualized basis, inflation was steady at 1.4%. The core rate, which excludes food and energy, was also unchanged in May, with a gain of 1.2%.

The May inflation reading of 1.4% matches the 2024 high and has weakened the case for a rate cut when the Swiss National Bank meets on June 20th. The SNB took the lead in March and was the first major central bank to lower interest rates.

The Swiss franc has declined around 7% against the US dollar this year SNB Chair Jordan made headlines last week when he said that the weak franc was feeding inflation and that the central bank could counteract this by intervening in the currency markets. This has triggered an impressive rally by the Swiss franc.

In the US, the ISM Manufacturing PMI slowed for a second straight month, dropping in May from 49.2 to 48.7. As well, construction activity slowed in May. These releases point to a slowdown in the US economy and have raised expectations of a rate cut. The markets have priced in a 62% probability of a September rate cut, compared to 46% just one week ago.

USD/CHF Technical

• USD/CHF is testing support at 0.8926. Below, there is support at 0.8893


• 0.8983 and 0.9016 are the next resistance lines

Reserve Bank of Australia Governor Bullock:

• 
  Labour market easing on a number of measures
• Board considers
  monetary policy is restrictive
• If inflation proves
  sticky, won't hesitate to hike
• If economy is much
  weaker, will be ready to ease

Earlier:

• Reserve Bank of Australia Governor Bullock says she expects Q1 GDP growth to be low

AUD/USD barely changed circa 0.6649

Reserve Bank of Australia Governor Bullock reading the writing on the wall for economic growth in Australia:

• Very weak Australian economic growth expectations cut even further

Reserve Bank of Australia Governor Bullock and Assistant Governor (Financial Markets) Kent appearing before the Australian parliament

• 
  before the Senate Economics Legislation Committee

Bullock:

• expect Q1 GDP growth to be quite low
• economy is weak, that is showing up in consumption
• looking for a soft landing for the economy
• underlying inflation is coming down, but only slowly

If by underlying she means core, that's rising. The latest monthly reading:

Trimmed mean: 4.1% y/y

• prior: 4.0%

More:

• demand still exceeds the economy's capacity to supply

Ugh ... demand > supply means inflation pressure

More:

• Not ruling anything in or out on policy