The dollar broke to fresh post-"liberation day" lows as pressure builds on the Federal Reserve to cut rates. This pressure comes from both the Trump administration, which is making increasingly clear that it does not believe in central bank independence, and a weaker ton in economic data out of the US. On the positive side, we are not seeing a continuation of the worrisome "sell America" trade that spooked markets in April. US stocks are actually hitting fresh record highs and the Treasury market is also holding up quite well. Nevertheless, the greenback is again acting as an escape valve for trade conflicts and last week fell sharply against almost every major currency in the world. Two economic reports will be the center of attention next week. On Tuesday, the flash inflation report out of the Eurozone will help clarify how much room is there for the ECB to cut rates further, IN the US, a slate of labor reports starting on Wednesday wit JOLTs will culminate in the all important June payrolls report on Friday. Much of the recent dollar weakness is a reaction to perceived weakness in US data. The jobs report will provide definite confirmation or rejection for the thesis of a meaningful US slowdown. We expect to see meaningful currency moves in response.
AUD
We saw a fleeting move in the Aussie dollar to its strongest position on the greenback since November last week, before the AUD/USD pair edged modestly lower on Friday. News of the ceasefire in the Middle East was a clear positive development of the highly risk sensitive antipodean currencies, although clearly the rally in the AUD/USD exchange rate was almost entirely a US dollar weakness story, more so than anything else. Last week’s local business activity PMI figures were relatively upbeat, with both the services and composite indices pointing to slightly stronger, albeit still subdued, growth in the Australian economy in June. The big miss, however, came in the monthly inflation figure for May, which unexpectedly dropped to just 2.5% (from 2.4%), its lowest level since October. This should be more than enough, in our view, to convince the Reserve Bank of Australia to lower interest rates again when it convenes for its next meeting in early-July.
NZD
The USD/NZD exchange rate fell to its lowest level since October, marking a 1% rally last week due to a broadly weaker US dollar and a recovery in currencies previously affected by risk aversion. The prospect of diminishing tensions in the Middle East emerged as the primary driver of this performance, with much of the kiwi’s appreciation occurring earlier in the week. In the meantime, there was little to no information regarding New Zealand’s economy. This week is likely to mirror the last, with no major economic data releases. As a result, the RBNZ’s decision to maintain rates at the next meeting on July 8 appears increasingly likely, meaning the kiwi is unlikely to experience significant movement based on domestic developments. As is typically the case, external factors will remain the main driver for the currency in the short term.
USD
Economic data last week turned in a mixed performance. Weak housing starts and personal income and spending were offset by lower jobless claims and strong durable goods orders. Overall, the tone of the last few weeks has been soft but nowhere near enough so to be conclusive. This week's labor data should go a long way towards settling this key question. We will also be paying close attention to the fate of the budget bill in the US. Negotiations are heated, and its failure would imply a significant fiscal tightening starting next year. We regard this as a low-probability scenario, however.
CNY
The remarkable stability of the yuan continued into last week, with the currency posting modest gains against the broadly weaker US dollar. Last week brought new signals on the US-China trade front. The latest trade understanding marks a step forward after negotiations in Geneva last month. The agreement is expected to pave the way for shipping of rare earths from China, which, according to US Commerce Secretary Lutnick, will be followed by a removal of US ‘countermeasures’. Other news was less positive. May industrial profits data was disappointing, showing a year-to-date contraction (-1.1%) after increases in the previous two months. Trade concerns aside, this is another sign that demand is far from firm and highlights the deflationary pressures still plaguing the Chinese economy. Attention now turns to PMI data released throughout the week, which will provide an initial read on activity at the end of the second quarter.
JPY
The USD/JPY pair fell back below the 145 level last week, although the rally in the yen was relatively contained when compared to most other G10 currencies, in part as an easing geopolitical risk premium in the Middle East is bearish for safe-haven assets. Last week’s Tokyo CPI figures came in on the soft side, with all three of the main, core and “core core” inflation rates falling to 3.1% in June. This shouldn’t change things too much for the Bank of Japan, however, and swap markets are continuing to largely price in another 25bp hike by the end of 2025, which is currently roughly 60% priced in. BoJ governor Ueda is scheduled to speak this week, but barring any major shift in tone (which seems unlikely) focus will likely shift back to trade negotiations. Japan continues to appear near the very front of the queue to strike a deal with the US, yet with time running out, even an agreement on a ‘framework’ deal appears unlikely before the 9th July deadline.
