Without Yield Support, The Dollar Wilts

The euro is firm, but it too is trading inside yesterday's range, which is inside Monday's range (~$1.2145-$1.2200).  There is an option for about 1.14 bln euros at $1.22 that expires today.  The market is also circumspect ahead of tomorrow's ECB meeting, for which a consensus has emerged that it will not return its bond-buying to that which prevailed before March.  We caution that knowing the ECB's bond-buying plans does not help trade the euro or European rates, both of which have risen since the ECB accelerated its buying.  Sterling, too is range-bound with last Friday's range (~$1.4085-$1.4200).  The general consolidative tone looks set to continue (FXE, FXB).  


The Bank of Canada meeting is the highlight of the North American session today.  At its last meeting in April, it announced it would slow its bond purchases and brought forward the closing of the output gap into H2 22.  Since then, Canada has reported back-to-back job losses.   The Canadian dollar (FXC) has appreciated by almost 3.4% since that April meeting.  It is the strongest of the major currencies.  A decision on whether to proceed with tapering is expected at next month's meeting, not today. Yesterday, Canada reported an unexpected trade surplus for April.  Exports and imports fell, with motor vehicle trade disrupted by the line shutdowns due to the shortage of semiconductors.  Canada's energy trade balance was in surplus by about C$6.8 bln, while the non-energy balance was in deficit by about C$6.2 bln.  Canada had a C$6.4 bln surplus with the US and a C$2.2 bln deficit with China.  

The US reports wholesale inventory data today ahead of tomorrow's May CPI.  The focus, however, is shifting to next week's FOMC meeting.  Yesterday, the US sold $58 bln 3-year notes.  Although the high yield slipped fractionally, the bid cover ticked up, as did indirect bids.  Today, the Treasury sells $38 bln 10-year notes and tomorrow $24 bln 30-year bonds.  Tomorrow's four and eight-week bill auctions may draw more attention than usual as the earlier bill auctions showed a little uptick as the market anticipates that the Fed may have to tweak the interest it pays on reserves or the zero rate on the reverse repos (demand reached a new record of almost $500 bln yesterday). Separately, the US Senate passed (68-22) the bill to boost US competitiveness, which has some elements that were in the infrastructure bill.  The bill now gets taken up by the House (SPTL, TLT).  

Mexico reports May CPI figures today.  The year-over-year pace is expected to pull back from the 6.08% pace seen in April but not sufficiently to change anything.  Moreover, the core rate is expected to quicken a little.  Through April, Mexico's core rate has risen by almost 5% at an annualized rate.  The market appears to lean toward a rate hike by the end of the year and as much as four hikes by the middle of 2022.   Brazil reports its IPCA inflation today as well.  The year-over-year pace is expected to have accelerated to nearly 8% from about 6.75% in April.  The central bank has already indicated it will raise rates next week by 75 bp, the third such move of the year.  It would lift the Selic rate above Mexico's cash target rate after having begun the year at half of it.

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Read more by Marc on his site Marc to Market.

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