Without Yield Support, The Dollar Wilts

The dollar is trapped in almost a 20-pip range against the yen today in the upper end of this week's range.  It has not been above JPY109.65 so far this week nor below about JPY109.20.  There are about $1.2 bln in options in the JPY109.00-JPY109.10 area that roll-off today.  The benchmark three-month implied volatility reached almost 5.53% yesterday, its lowest level since February 2020. The Australian dollar is steady, trading inside yesterday's range, which was inside Monday's range (~$0.7725-$0.7765).  Like the dollar-yen, the Aussie is also in a 20-tick range so far today.  The Chinese yuan rose today, recouping the losses seen in the past two sessions.  The dollar reached CNY6.4120 at the end of last week but has consistently recorded lower highs and lower lows this week.  The PBOC's reference rate for the dollar was set at CNY6.3956, spot on expectations.  It is beginning to look as if official intent is more about breaking the one-way market that had appeared to develop and stabilize the yuan rather than reverse it.  Whether defending a set line, which some have suggested at CNY6.35 or not, still has to be seen (fxa, cyb, fxy).


The ink G7 finance minister agreement on the minimum corporate tax is hardly even dry, and the first exception is being sought.  The UK (and apparently the EU) want to exclude financial services from the new global tax regime.  Separately, the US and the EU will have a rapprochement that will resolve the two outstanding disputes:  The goal is to resolve the Boeing/Airbus subsidy issue by July 11 and end the steel and aluminum tariffs imposed by the Trump administration on national security grounds by the end of the year.  The US has protested but will not escalate the sanctions for the Nord Stream 2 pipeline, and the tax reform would see European countries drop their digital tax initiatives.  

Meanwhile, Europe is gradually taking a harder line against China.  The EU Parliament is not proceeding with the ratification of the EU-China trade agreement struck at the end of last year.  Italy, which was the only G7 country to sign on to the Belt Road Initiative, has blocked Chinese acquisitions under Prime Minister Draghi. Europe has endorsed the US call for new efforts to find the origins of Covid-19, even though the origins are unnecessary to combat virus and protocols to tighten security as labs during such work are necessary regardless of the precise origin.

Germany reported a 15.5 bln euro trade surplus in April, down from 20.2 bln in March.  Exports growth slowed to 0.3% after a 1.3% gain previously.  Imports fell by 1.7%, more than expected after the March series was revised to show a 7.1% gain (initially 6.5%).  The smaller trade surplus translates into a smaller current account surplus (21.3 bln euros vs. 30.0 bln in March).   Unlike what we saw yesterday with the Japanese trade and current account figures,  the German current account is driven by the trade balance.  In Japan, the current account surplus is driven by foreign earnings, interest, royalties, and licensing fees, not trade in goods and services.  

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Read more by Marc on his site Marc to Market.

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